Tax & ATO News Australia

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Freezing Orders and Disputed Debts: The Least of All Evils

Tax is a notoriously perplexing area of law.

However, few things are more perplexing than the inconsistent administration of the ATO’s disputed debt recovery policies.

Strictly speaking, the Commissioner is free to take whatever steps whenever he pleases, regardless of the existence of a dispute – in fact, sections 14ZZM and 14ZZR of the Taxation Administration Act 1953 are explicit that liability to pay assessed tax is not suspended because of pending reviews or appeals. This means, once assessments are issued, the Commissioner is entitled to do what is necessary to recover. This is what makes PS LA 2011/4 so important – taxpayers need certainty on what they can expect when an assessment is issued and have a genuine dispute, because the ATO does get it wrong, often with disastrous results.

The ATO’s practice statement PS LA 2011/4 attempts, with very limited success, to define and clarify the circumstances in which the ATO will seek to collect and recover disputed debts. Relevantly, paragraph 43 of PS LA 2011/4 provides the Commissioner of Taxation will agree to deferral of recovery action where the Commissioner considers that a genuine dispute exists in regard to the assessability of an amount, but it is unclear on what terms the Commissioner will agree to do so. The practice statement talks variously about 50/50 arrangements (payments of 50% of the underlying debt) and security, but does not make clear the circumstances in which these will be considered.

Regrettably, I have been involved in many cases where a taxpayer has a genuine dispute, and is later exonerated at the conclusion of legal proceedings, but the Commissioner nevertheless proceeds with one of the many debt recovery options available to him in the interim. These include, for example:

  • Bankruptcy. This ultimately achieves little in the way of recovering revenue, and can be fatal to a taxpayer’s legal challenge to the assessments the Commissioner relies upon to bankrupt the taxpayer, as the taxpayer’s rights to seek review typically vest with the trustee, or liquidator or administrator of a corporate taxpayer.
  • Garnishee notices. These are issued by the Commissioner to third party debtors of the taxpayer, which require the debtors to make payments directly to the Commissioner in lieu of the taxpayer to discharge the taxpayer’s debt. Notices can be issued to a myriad of third parties, including banks and companies. This can severely impact the taxpayer by diverting business profits, proceeds from the sale of real estate, and any number of other debts a taxpayer may rely on for their business and personal use.
  • Departure Prohibition Orders (or DPOs), which prohibit a tax debtor from leaving Australia, regardless of whether or not they intend to return, and can be issued where the Commissioner holds a belief on reasonable grounds that it is desirable to do so.

Of course, all are inevitably hotly contested by the taxpayers involved. This simply creates ancillary and costly legal proceedings that can cripple a taxpayer without contributing to the resolution of the underlying dispute. Wasting scarce resources on contested debt recovery proceedings is not in the interest of the Commonwealth or taxpayers.

If the ATO’s true concern is that the debt may not be recovered at all, and that objection proceedings are just delaying the inevitable, then surely the ATO must accept that something that preserves the status quo addresses all of their concerns. Freezing orders are a way of achieving this.

In my view, rather than bankruptcy, garnishee notices, DPOs, or other such irreversible actions, freezing orders are a far better way of addressing the ATO’s concerns that assets may be dissipated, while still allowing the taxpayer to prosecute their case. Instead of depleting the taxpayer’s assets and depriving them of their means to contest their tax liabilities, freezing orders simply preserve the status quo for a period defined by the court to mitigate the dissipation of assets pending a final determination and judgment. Such orders were employed in the recent case of Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd [2016] FCA 653, as well as a sequence of related proceedings in Deputy Commissioner of Taxation v Chemical Trustee Limited (No 4) [2012] FCA 1064 and Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014.

Ultimately though, within the current scheme of the tax law, we rely on the good graces of the Commissioner in such matters, and much of the way a matter progresses through review and court processes depends on the attitude of the Commissioner of the day.

My view is that PS LA 2011/4 would benefit enormously from a safe harbour approach, and in my respectful suggestion, the taxpayer should always be within that safe harbour wherever there was a genuine dispute. Such an approach would reflect the ATO’s reinvention, as perhaps would an overarching statement that the purpose of debt recovery is to collect the correct amount of revenue - and, more often than not, reasonable minds will differ as to what that correct amount is.

Written in collaboration with Nicholas Dodds.

Posted in: Tax & ATO News Australia at 08 June 16

New Commissioner of Taxation flags changes to the appeal process

Chris Jordan has only been in the top job at the ATO since 1 January 2013 and he has already identified that the current tax appeal process is not independent and needs to be fixed.
 
Tax appeals are currently heard in first instance by ATO officers and this process must be exhausted before an independent body (such as the Administrative Appeals Tribunal or the Federal Court) can hear a tax appeal.  This can take months (even years) and cost the taxpayer enormous amounts of money. There has been significant criticism of this process as it is not independent. There are examples of ATO officers who hear the tax appeal simply rubber stamping the work of the auditor. Worse, there have been allegations that the ATO has benchmarks for this process that require ATO officers to knock back 80% of appeals, rather than judge them on their merits.
 
The current system is clearly broken and needs to be fixed. The new Commissioner has taken a step in the right direction by moving towards an independent division, although it appears that this division will still be within the ATO.  It will be interesting to see whether this new appeals division really will be independent.
 
Small business taxpayers, many of whom I have acted for against the ATO, will rightly point out that this is all very interesting from an administrative law perspective, but how will things change for those taxpayers who have been subjected to the delays, cost and institutional biases of the current system?  Now that the new Commissioner has acknowledged that the current tax appeal process is broken, will there be meaningful compensation paid to those taxpayers whose lives have been financially devastated by it?
 
I am calling on the new Commissioner to relook at all such taxpayers and make it a key priority of his tenure. The only way that confidence in Australia’s tax system can be restored is by ensuring accountability for ATO officers and that means that the ATO must pay adequate compensation to those taxpayers who have unfairly suffered at the hands of the ATO.
 

Posted in: Tax & ATO News Australia at 13 March 13

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Tax & ATO News Australia

Author: David Hughes

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