Tax & ATO News Australia

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

Budget Announcements: Super contributions from a small business standpoint.

Super contributions from a small business standpoint.

Scott Morrison’s budget has been received with mixed reactions, but what effect does it have on small business and super?

The small business capital gains concessions in Division 152 of the Income Tax Assessment Act 1997 can be a fruitful tool for those involved in small business that are looking to add a little spice to their super. Whilst these concessions can be a real boon when properly utilized, there is no comment so far on whether their effectiveness will be impeached by Morrison’s new, slightly stingier, super rules.

 A key aspect of the budget was the introduction of a lifetime non-concessional contributions cap of $500,000. The lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7:30pm on 3 May 2016. The purpose of this cap, according to the ‘Tax and Super’ Budget overview is to:

“Limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Less than 1% of superannuation fund members have made contributions above this cap since 2007.”

It is important to note that contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings and is estimated to have a gain to revenue or $550 million over the forward estimates period.

Other relevant Budgetary Measures:

• From 1 July 2017 a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts will be introduced.
• Will require those with combines incomes and superannuation contributions greater than $250,000 to pay 30% tax on their concessional contributions, up from 15%.
• From 1 July 2017, the superannuation concessional contributions cap will be lowered to $25,000 per annum.
• The government will also introduce catch-up concessional superannuation spending by allowing unused concessional caps to be carried forward on a rolling basis for up to 5 years for those account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular paying capacity to make ‘catch-up’ payments to boost their superannuation savings.
• From 2016-17, the unincorporated small business tax discount will be available to businesses with an annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8%.

Do the new budgetary measures alter the effectiveness of div 152 and small business CGT concessions?

S 292.90 (1) ITAA 1997 states that your non-concessional contributions for a financial year are the sum of:

(a) each contribution under subsection (2)

Subsection (2): a contribution is covered under this subsection if:

(c) it is not any of the following:

(iii) a contribution covered under s 292-100 (certain CGT payments), to the extent that it does not exceed your CGT cap amount when it is made.

Therefore, if the small business CGT concessions are included in section 292.100, they are not covered as a non-concessional contribution, as per the rules of 292.90.

S 292.100 (1) states that a contribution is covered under this subsection if:

(b) the requirement under subsection (2) is met

Subsection (2)(a) the requirement of this subsection is met if the contribution is equal to all or part of the *capital proceeds from a * CGT event for which you can disregard and * capital gain under s152 (or would be able to do so, assuming that a capital gain arose from the event.)

As such it is clear that div 152 small business CGT concessions are not included in the definition of a non concessional contribution, and as such it seems unlikely that they will be included in the $500,000 cap.

There is nothing to suggest that the definition for non concessional contributions will be changed to include div 152 small business capital gain exceptions. We think that these SBC continue to present themselves as a valuable method for those hoping to continue to invest in their super.
 

Posted in: Tax & ATO News Australia at 18 May 16

Section 264 notices

I have blogged previously about the ATO’s powers to force taxpayers to hand over documents and give evidence*. Recently I have applied the very narrow limitations imposed by the ANZ case in a number of s264 notices.

Posted in: Tax & ATO News Australia at 22 March 13