Tax & ATO News Australia

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In Pursuit of a Fairer System

 The Federal opposition seems to be searching hard for the glib soundbites. The latest attack is on expensive accountants, who only the uber-rich can afford, who use their superior accounting skills at high cost, to manipulate their clients’ affairs to pay no tax.


I came across a recent article in Accountants Daily which reported:


Last week, Bill Shorten delivered the opposition’s federal budget reply speech in which he proposed a cap on the amount individuals can claim as a tax deduction for the management of their tax affairs.


“In 2014-15, 48 Australians earned more than $1 million and paid no tax at all. Not even the Medicare levy. Instead, using clever tax lawyers, they deducted their income down from an average of nearly $2.5 million … to below the tax-free threshold,” Mr Shorten said.


“One of the biggest deductions claimed was the money they paid to their accountants, averaging over $1 million. That’s why a Labor government will cap the amount individuals can deduct for the management of their tax affairs at $3,000.”


The article goes on to make a point about “individuals potentially getting penalised for simply having to deal with a complex tax system and ever increasing requirements of the Tax Office”. I agree with this, and think that this policy is one of the most stupid ideas I have ever heard. Who advises these people?


I strongly doubt that anyone is paying north of $1m for annual tax advice, no matter how complex their tax affairs, or brilliant their advisor's advice.
What is much more likely is that these people have been involved in complex and aggressive audits, and have had to fight to prove their case against a huge team comprising the Commissioner of Taxation's in-house lawyers, external lawyers, junior barristers and silk.


Defending yourself in the face of this is incredibly expensive, particularly when you as a taxpayer bear the onus of proof. What most people don't realise is that barristers charge taxpayers a much higher rate than they charge the ATO. In circumstances where the ATO's audits are often little more than guesswork, debt recovery proceedings commence immediately, and the courts have continually maintained that the onus is on the taxpayer to prove their case and their correct tax position, then of course the cost of fighting the ATO is going to be huge.


To make this not tax deductible is simply ridiculous.


I will give you an example of how ridiculous and expensive audits can be: a few years ago, one of my colleagues was selected for audit. He had been doing alot of driving in a particular year, and the resultant (high) deduction triggered an audit. Fair enough. But the audit quickly blew into a full investigation of every item of income and expenditure this taxpayer had incurred. It took months. The accountant was of great assistance, and because absolutely everything was done correctly, the auditor eventually signed off without a single disallowance.


The accountant had done a huge amount of work and did it very well and efficiently. The bill was, none-the-less, eyewatering. My colleague paid happily in consideration of a job well done.


Guess what happened the following year? My colleague was again selected for an audit. Why? Because he had claimed so much the year before as a deduction for managing his tax affairs.


You would laugh if it wasn’t so frustrating.


Here's a better idea - limit the tax deduction for managing tax affairs by all means, but if the ATO starts an audit, provide the taxpayer a voucher for use on the accountant or lawyer of their choice, equivalent to the ATO's cost of the audit and any appeals (including external lawyers as well as the ATO wages and oncosts). In reality it should be much higher to factor in overheads and the Commissioner's disproportionate purchasing power, but even at only 100% of the ATO’s costs that will be a significantly higher figure than the corresponding deduction.


Or better yet, why don’t we limit the ATO budget for each auditto no more than $3,000, including overheads and a share of fixed costs.

Posted in: Tax & ATO News Australia at 23 May 17

Uber BV v The Commissioner of Taxation

Last Friday, the Federal Court held that services supplied under the uberX service constitute “taxi travel” within the meaning of s 144-5 (1) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth).

 

To give context to this dispute, following the rise in popularity of the ride sharing platform the Australian Taxation Office (ATO) announced in 2015 that Uber drivers will have to register and pay GST, regardless of turnover. The general rule regarding registration is that an enterprise with a turnover of less than $75,000 is not required to register for GST. An exception to this rule is Section 144-5(1) which requires a person who is carrying on an enterprise of supplying ‘taxi travel’ to be registered for GST regardless of turnover. Section 195-1 of the GST Act goes on to define ‘taxi travel’ as ‘travel that involves transporting passenger, by taxi or limousine, for fares’.

 

The Australian Taxation Office (ATO) took the position that the Uber platform fell within this exception. However Uber disagreed with this position and sought a declaration from the Federal Court that the services provided by UberX drivers did not constitute taxi travel.

 

Applicant Submissions:


The applicant made submissions on the construction of ‘taxi travel’ claiming:

 

  • ‘Taxi Travel’ was intended to apply only to the taxi industry as the legislature did not seek to deal with this issue in any other industry.

  • The statutory context suggests that the words “taxi” and “limousine” bear a trade or non-legal meaning. Alternatively the ordinary meaning of the words “taxi” and “limousine” was heavily influenced by the underlying regulatory regime.
  • The disjunctive “taxi or limousine” in the definition of s195-1 provides that “taxi” and “limousine” have different meanings.

 

Using the above mentioned arguments on statutory construction, the applicant put forward factual arguments distinguishing Uber from Taxis. The applicant contended that Uber services did not display the essential operational features of a taxi, on the basis that Uber vehicles do not show markings, the access is limited to Uber licensees (App Users), payment systems and calculations differ and Uber drivers are not required to display a fare meter.

 

Respondent Submissions:


The respondent’s made submissions that:

 

  • “Taxi travel” is to be construed as a whole and connotes the transport, by a person driving a private vehicle, for a fare irrespective of whether the fare is calculated by reference to a taximeter.

  • The services supplied by Uber demonstrate the essential features of transport “by taxi” and “by limousine”.
  • The applicant incorrectly relied on the regulatory regimes applying to the taxi industry.

 

The Commissioner in support of its submission on the construction of ‘taxi travel’ used dictionary definitions to help identify the key features of a ‘taxi’ in ordinary understanding.

 

Furthermore the Commissioner made submissions that the difference between a limousine and a taxi was that a limousine is not calculated by reference to a taximeter and will need to be pre-booked. Therefore, “limousine” could apply to any hire car.

 

Decision:


Justice Griffiths “accepted the Commissioner’s submission that the word “taxi” is a vehicle available for hire by the public and which transports a passenger at his or her direction for the payment of a fare that will often, but not always, be calculated by reference to a taximeter”. In reaching this decision, consideration was placed on principles of statutory interpretation. Further to this the dictionary definitions the Commissioner relied upon provided the court with a supporting context of this interpretation.

 

However, Griffiths J rejected the Commissioner’s position that limousine was not confined to luxury cars. Instead the ordinary meaning of limousine “was a private luxurious motor vehicle which is made available for public hire and which transports a passenger at his or her direction for the payment of a fare”. Although the present matter involved a Honda Civic which did not meet this definition, Griffiths J recognised this position may be different in cases of other UberX drivers who do use luxury cars.


Ultimately this decision will impose huge compliance burdens on Uber and its drivers. Particularly Uber drivers will now have to register both an Australian Business Number and register for GST, charge an additional 10%, lodge Business Activity Statements and claim Input Tax Credits.

 

With this being another win for the Commissioner, it can be expected that there will be a crackdown in tax compliance within the ride sharing industry. 

Co-authored with Ben Caratti

Posted in: Tax & ATO News Australia at 09 March 17

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

External Scrutiny Into the ATO

The house of representatives committee on taxation is currently accepting submissions into the external scrutiny of the ATO. This is after recent comments from the Commissioner of Taxation, Chis Jordan that there is too much scrutiny of the ATO. 

Encouragingly, Liberal Senator, Bronwyn Bishop, has resisted this call, saying that given the ATO’s role is to collect money and this has the potential to effect peoples’ lives, parliamentary scrutiny should remain.

More critically, the power that the ATO has to collect money is virtually unlimited, as I have written about before. This power, coupled with a culture that oscillates between rabidly aggressive (at worst) to uncompromising (at best), means that there is always a real risk that an individual ATO officer will go too far and destroy someone’s life in the meantime. This has happened, and I have personally been involved in many such cases, including cases that are deserving of compensation, so badly has the ATO behaved.

The Inspector General of Taxation, Mr Ali Naroozi, does an excellent job of scrutinizing the ATO, with limited resources. Mr Naroozi is a sensible and appropriately skeptical watchdog and needs more scope to review what the ATO does, not less. It would be an absolute disaster if the parliament was convinced that the ATO should be unsupervised.

If parliament agreed with the Commissioner of Taxation in this regard, the result will only be worse for taxpayers, including in particular those many taxpayers who are ultimately showed to have done nothing wrong. There must be consequences if the Commissioner’s actions cause an individual who has not avoided tax at all to lose their business, their house or worse. This has happened, and must not happen again.
 

Posted in: Tax & ATO News Australia at 22 March 16

ATO Wiretaps

The Federal Government is seriously considering giving the ATO wiretap powers, or more accurately, powers to access metadata, including stored phone calls, emails and SMSs.

A Government committee has argued that these powers are necessary to protect against serious crime, such as tax fraud, and noted that “Al Capone was caught through the tax system.” I kid you not.

I will leave the critique of an argument that leads from the premise of Al Capone to the conclusion of ATO needing more power to the logicians. My primary concern is that it is absolutely crazy to give the ATO more power when the Inspector General of Taxation and other Federal Government committees have already concluded that the ATO is abusing its current powers.

I have described them as monkeys with machine guns. This will potentially give the monkeys a surface to air missile.

It may surprise people that the ATO does not currently have the power to intercept telecommunications. There is a very good reason for this – the ATO currently must pass on the role of criminal investigation and prosecution to the crime authorities, specifically the Australian Crime Commission and the Australian Federal Police. Those authorities of course have the power to investigate all Federal crimes (including tax fraud), and can access telecommunication to do so.

However, there is a critical oversight role in that any warrant must be approved by a Federal Court judge. While this is quite easy to do in practice, it forces the bodies involved to turn their attention to the existence and seriousness of potential crime.

It is well established that the ATO can use its own significant investigative powers for the purposes of auditing and amending assessments. These powers can be (and are) used without any suspicion of wrongdoing – simply as a fishing expedition. The logic is that this is acceptable as far as it goes, because the ATO is simply raising assessments (although I have huge problems with this power being abused as well).

What happens when the ATO’s wide reaching powers are merged with the kind of powers usually reserved for criminal investigation and then only with the oversight of the courts? The power will be enormous, and the potential for abuse of that power will be correspondingly frightening.

I am genuinely concerned about the impact of these proposed changes on the rights of small businesses and individuals. As always with such measures, it is not the criminals who will be affected – there are already significant powers that can be used appropriately to catch the crooks. The people who will be affected are the kind of people I act for: people who do nothing wrong and are targeted by the ATO because of a data matching computer’s algorithm which no-one truly understands.

This is scary stuff.


  

Posted in: Tax & ATO News Australia at 28 September 15

Recent Federal Court Decision on ATO Objection Review Process

Federal Court decides an ATO objection review need not re-consider decisions made by an auditor

Yesterday, Justice Collier in the Qld registry of the Federal Court handed down a decision in Hii v Commissioner of Taxation [2015] FCA 375.

This case adds another chapter in the now considerable body of law on the application of s39B of the Judiciary Act to tax cases, following the High Court’s decision in Commissioner of Taxation v Futuris Corp Ltd (2008) CLR 146. Justice Collier essentially agreed with a line of Federal Court authorities that Futuris limits the grounds for challenging an assessment under s39B to either conscious maladministration (also referred to as bad faith), or assessments that are tentative or provisional.

While the parts of the judgment that relate to s39B are long and largely uncontroversial (if disappointing), the judgment also contains one conclusion that I think will surprise alot of people: when an ATO officer reviews during an objection the decision of an auditor, the ATO officer need not decide the issue again. While an alternative conclusion would not have changed the outcome for the taxpayer in this case because of the conclusion in relation to s39B, this point does raise question marks about the role of an ATO officer when determining objections.

Facts

Very briefly, the facts of this case involve large assessments over a number of tax years against a taxpayer who claimed to be a non-resident. The ATO during an audit concluded the taxpayer was a resident of Australia for a variety of reasons.

Furthermore because the assessments would otherwise have been outside the four year period normally allowed for the ATO to make amendments, the audit officer had to decide that there had been an avoidance of tax due to evasion in order to make the amendments. The auditor did so, and based this decision primarily on the fact that the taxpayer had put as his residential address on his tax return a foreign business address.

The taxpayer objected, including in relation to the evasion decision. An ATO officer then determined the objection, reducing some of the tax payable, but critically on the question of evasion, the ATO objections officer did not form his own conclusion at all. Instead the objections officer simply confirmed that the original auditor had the appropriate level of authority to make that decision, and then adopted the auditor’s decision.

Proceedings before Justice Collier in the Federal Court

The proceedings and arguments were complex and defy quick summary. Much of the case involved a consideration of whether the cases of review under s39B were closed to the two categories mentioned Futuris and referred to above. Once her Honour determined that they were, this essentially determined the outcome of this case in favour of the ATO.

Justice Collier then went on to determine the question of whether the ATO objections officer needed to form his own opinion on the question of evasion and concluded he did not. The relevant passage is at paragraph [108] of the judgment:

In reviewing the amended assessments in light of a taxpayer’s objection in order to determine if it was correct or should be allowed in whole or in part, it is not necessary for the Commissioner to redetermine, ab initio, all issues relevant to that decision. I accept the submission of the Commissioner that, in deciding the correctness of the original decision, it would be contrary to the concept of a “review” if every decision and consideration previously made by the Commissioner in relation to a taxpayer’s assessable income in any particular year was required to be discarded and made afresh. This absurdity is highlighted in the circumstance where an assessment is affirmed by the Commissioner, either wholly or in part. Certainly, the ITAA 36 does not specify that this procedure must be followed.

With the utmost respect, her Honour is completely correct in that the tax legislation is silent on what an ATO objections officer must do when reviewing an objection. This unfortunately creates a great deal of doubt and uncertainty.

Personally, I do not think it is satisfactory for an ATO officer when hearing a taxpayer’s objection to simply adopt the decision of the auditor, without any critical thought or review. What is the purpose of an objection process if the officers deciding the objection can simply rubber stamp the decisions of the auditor? The whole process has the potential then to be a complete waste of time and money. Further, I doubt anyone is arguing that the objection officer (or indeed the AAT on appeal) has to effectively re-audit a taxpayer. The taxpayer would be aggrieved, however, if the ATO objection officer or the AAT did not redetermine issues that were raised in the taxpayer’s objection – such as whether there was tax evasion, as in this case.

The House of Representative report into the ATO’s conduct of taxation disputes which I have previously commented on was scathing about examples where the objection officer simply rubber stamped the auditor’s decision. Recommendations were made about separating the audit function from the objection process, including housing the objection and appeals function in a separate appeals division of the ATO under a new second commissioner.

In order to give proper legislative effect to this functional change, and in light of the decision in Hii it is critical that parliament spell out clearly that the role of an ATO officer when deciding an objection is to redetermine afresh those issues that are raised in the taxpayer’s objection.

  

Posted in: Tax & ATO News Australia at 28 April 15

TAXPAYERS STRIKE BACK

Federal Government slams the ATO approach to tax disputes.

The Federal Government yesterday published a bi-partisan report into the ATO’s conduct of tax disputes. I gave evidence to the House of Representatives committee on this issue last year, much of which was extensively quoted in the report. The report is damning of the ATO’s conduct in tax disputes. Unsurprisingly, I whole heartedly agree, and also I agree with the recommendations.

As any of you who have followed my rantings (sorry, my blog) over the years will know I have been banging on about this forever, for those of you who haven’t, strap yourselves in, it’s a pretty wild ride!

Currently Australia has a reverse onus of proof in tax matters. The ATO just has to say “we think you owe $1m in tax” and then the taxpayer has the job to prove that’s wrong. Actually, it’s even harder than that, it’s also the taxpayers’ job to prove what the right income is, not just that the ATO was wrong. So taxpayers are guilty until they prove themselves innocent. Yes, you read that right, we live in a country where you are guilty until proven innocent (at least as far as tax disputes go). Surely I am not alone in feeling incensed by this disregard of one of our most fundamental principles of law.

This has all kind of ramifications, when you consider the cost of litigation to prove yourself in court, which significantly favours the ATO (who have huge litigation budgets, and full time staff to do nothing else, who aren’t likely to be personally ruined by the outcome). But the cost is not just monetary, the time and stress of this process takes its toll too.

In the words of Bert van Manen MP* “The committee received evidence that taxpayers suffer enormous emotional stress. Disputes can contribute to marriages breaking-up,”

Add into this the fact that the ATO can, and does, commence debt recovery proceedings to take people’s property, bankrupt them, stop them travelling overseas and seize their bank accounts as soon as the assessment is raised, and before the matter is proved in court. Many of my clients have had problems with this, which I’ve blogged about over the years.

Worse still are allegations of evasion.

This is all about how long the ATO has to review your assessment. Generally, the ATO has four years (for SME type taxpayers) to amend an assessment – once you are outside that four year period, you are safe. But the ATO has an out – if they say that there has been fraud or evasion (ie deliberate action by the taxpayer to understate their taxable income), then the ATO can amend at any time going back well beyond four years.

The problem with this is that the onus is still on the taxpayer to prove their position – now how do you prove that you did not deliberately understate your tax? And bear in mind that you only have to keep records for five years, what happens when the ATO wants to go back ten years? How do you prove your position then?

Example;

The ATO says,“you received this $100k into your bank account in 2001 we’re going to call that your income and because you deliberately failed to disclose it in your tax return, we will assess you and now you owe us (with plus penalties and interest), $300k””

You reply, “But it was given to me by my grandmother just before she died”

They say, “Prove it”.

If you can’t prove it – because there’s no paperwork – then you are in serious trouble.

The issue as I put it to the Committee is that,

“there are still too many ATO officers whom I would describe as zealots and who seem to approach their duties as auditors or objection officers or debt collectors as though all self-employed people or business owners are tax cheats and should not be believed.
…In too many cases that I see, an ATO auditor will form a very early conclusion about the bona fides of a taxpayer. After that view is formed, no amount of evidence or legal submissions can convince some auditors that amended assessments should not issue to increase the amount of tax payable.”

Not surprisingly some of the claims made by others during the inquiry were that ATO auditors exhibited ‘digging-in’ or intransigence, becoming emotionally invested, not being prepared to accept that a taxpayer could be right on a matter of fact and bringing up trivial issues late in an audit after the taxpayer rebuts the initial ATO position.

The issue that doesn’t get spoken about enough is the toll this takes on a person’s mental and emotional health, there was evidence given during the inquiry that was quite frankly heart-breaking.

“Mr Pilgrim, a retired builder, stated that the dispute had a substantial negative effect on both his marriage and his business:
We went from 2007 through to 2010. The whole of our life was put on hold. My business suffered because I did not know from one day to the next whether I was going to be in business–I didn’t know if the ATO was going to send me bankrupt. It cost me my business and also my marriage, that part of it… I spent months backwards and forwards with the ATO, disputing the facts with my figures. That is why they reduced it back to that amount of money.

Ms Judy Sullivan from PricewaterhouseCoopers (PwC) advised that taxpayers have committed suicide at the conclusion of a tax dispute:

I am sure you will be hearing from a number of taxpayers about the emotional toll of these sorts of things. I have had clients in the past who have committed suicide after coming out the other end of an audit for a very serious allegation that was in fact settled. There is stress on families because of the length of time and things like that. You see a lot of marriage break-ups and emotional stress from these sorts of allegations.”

In response to this evidence, Commissioner Chris Jordan stated, ‘We do know that delays in dispute resolution have real, physical and sometimes paralysing impacts for business and individuals.’ And Second Commissioner Andrew Mills had this to say, ‘For those who have been adversely affected by our poor handling of their disputes, I would like to extend my sincere apologies.

It’s a great start, and I do appreciate the recent improvement in the ATO’s handling of tax disputes but it has to translate to all ATO employees. There are still far too many recalcitrants from the old school of zealotry, and until these zealots are forced to embrace the new ATO approach, lives will still be destroyed.

Legislative change is needed. With the release of the Tax Disputes Report, finally, the government recognises this need. Amongst its 20 recommendations, one of the proposed changes is a recommendation to reverse the burden of proof position, so the responsibility is on the ATO, forcing it to prove that you committed tax evasion – that is, that you deliberately did something to reduce your income.

“Recommendation 7
The Committee recommends that the Government introduce legislation to place the burden of proof on the Australian Taxation Office in relation to allegations of fraud and evasion after a certain period has elapsed. The change should be harmonised with the record keeping requirements. These periods could be extended, subject to concerns of regulatory costs on business and individuals.”
This is a massive step in the right direction as it will make the ATO actually look for real evidence of wrong-doing, rather than just make the assessment and leave it to the taxpayer to prove.

In the report you will be able to read the evidence I gave during the inquiry, stating my belief that “under current laws and systems, it is too easy for the ATO’s powers to be misapplied”. This is obviously something that I feel very strongly about, and I will be pursuing this over the coming months, and I hope you will bear with me as I rant about it in future articles.

I sincerely hope that these recommendations are quickly adopted by parliament and legislation is quickly introduced and passed.


*Committee Chair of The House of Representatives Standing Committee on Tax and Revenue

Posted in: Tax & ATO News Australia at 27 March 15

ATO’s Changes Out Of The Ashes Of The Phoenix

 By now, most of us have heard the term Phoenix Company, described by Nick Sherry1, as being “Similar to the mythical creature from which it takes its name, phoenix activity in its basic form involves the winding up of a company and the subsequent continuation of that business in a new ‘risen’ company.”

 

The great difficulty I have with terms like “phoenix” is that while they fit neatly into politicians’ soundbites and press releases, their real life application is much harder for the ATO to adequately define. This in turn means that taxpayers are left in the terrifying position of not knowing whom the laws are targeting.

 

In a 2012 report by PwC in conjunction with the Fair Work Ombudsman (Phoenix Activity Report), Phoenix activity was finally defined as; “the deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to: 

• avoid tax and other liabilities, such as employee entitlements
• continue the operation and profit taking of the business through another trading entity.”

There is no doubt, that the worst of these activities often leave a lasting legacy with unpaid wages, super, outstanding invoices to suppliers and other debts. The cost of which has been estimated at almost $2 billion by the ATO.

 

The key words in the PwC definition are “deliberate”, “systematic” and “fraudulent”. Where directors have engaged in such behaviour to avoid paying employee entitlements, then the full force of the law should be used. But what of the company that through no fault of the directors is left in a position where debts have mounted and the company cannot continue to operate? Should the same strict rules apply?

 

The great difficulty in administering tax law through emotive sound bites, is that it has the potential to lead ATO officers to think that acting tough should replace acting fairly. It is all too easy for an ATO officer to conclude that because a company has been liquidated, that the elements of fraud and deliberation must automatically be present. The cost and stress to taxpayers who are innocent of such charges is immeasurable.

 

The Federal Government has recently announced that it will establish two taskforces run jointly by the ATO and other governmental organisations (see below for full list of involvement), one of which will confront phoenix activity. Whilst this strategy by the ATO shows very clearly that it is willing to be very tough on the worst and most blatant offenders, I can’t help but also be concerned at the effect this may have on the vast majority of taxpayers who try to do the right thing. Don’t get me wrong, I encourage a tough approach by the ATO for those that deliberately flout the law, if at the same time, there is a more reasonable approach for the taxpayers who try to do the right thing, and inadvertently get something wrong. Worse yet is the potential for the nightmare scenario for taxpayers of being accused by the ATO of something that is just completely false.


I have seen too much time, energy and money wasted in the past, when the ATO directs its resources at the wrong people (as confirmed in the Inspector General of Taxation’s very recent report. It is not an exaggeration to say that the ATO has wrongfully destroyed people’s lives and businesses with misdirected efforts or at worst ill-intentioned or uninformed objectives.


So yes, by all means, I heartedly applaud the ATO for going after the crooks, but let the rest of the SME community get on with business without unfair and wrongful interference. I would like very much to see this become law, in a way that is balanced and fair.


Fortunately, the ATO is making changes and we, here at SMH, have had great results with recent settlements for taxpayers. The concern, again identified by the IGT, is that these changes depend on the commissioner of the day being a benevolent dictator.

 

1.   former Minister for Superannuation and Corporate Law

*The Trusts Taskforce is made up of the ATO, Australian Federal Police (AFP), Australian Crime Commission (ACC), Commonwealth Director of Public Prosecutions, Australian Securities and Investments Commission (ASIC), Australian Government Solicitor (AGS), Attorney-General's Department (AGD), AUSTRAC, Australian Competition and Consumer Commission, Australian Business Register (ABR) and Australian Prudential Regulation Authority.
The Phoenix Taskforce is made up of the ATO, ASIC, AFP, ACC, ABR, the Fair Work Ombudsman, Fair Work Building and Construction, the Department of Environment, the Department of Employment, the Department of Immigration and Border Protection and the NSW and Victorian Offices of State Revenue.
 

Posted in: Tax & ATO News Australia at 16 March 15

Inspector General of Taxation criticises ATO competence

The Federal Assistant Treasurer has released a long awaited report from Ali Noroozi, Inspector General of Taxation, into the conduct of audit officers in the ATO. Unsurprisingly, the report is highly critical of the ATO.

Susannah Moran, of The Australian, reports:

Assistant Treasurer David Bradbury yesterday released a December report by Inspector General of Taxation Ali Noroozi into issues surrounding the audits of small and medium enterprises (SME) and high wealth individuals (HWI).

"This review was carried out in response to concerns that larger SMEs and HWIs may be unfairly treated and subject to unnecessary compliance costs, delays and inappropriate conduct as well as lack of commercial awareness and technical knowledge of ATO staff," Mr Noroozi said. (The full story is behind The Australian’s paywall)

It is curious that an unfavourable report given to the Federal Government in December is only released by the Assistant Treasurer the day before Anzac Day.  “Putting out the trash”, I think that is called if I remember my Politics 101 lessons correctly (ok, West Wing).
 
The report includes the following conclusion:

“...the level of disputation, weight of objections upheld and the proportion of liability reversed on review indicate a high incidence of unsustainable initial ATO compliance positions," the report says. "In a number of situations this is imposing very significant compliance costs on taxpayers for tax positions that on a more considered view should not have been raised.” (Read the full report on the Inspector General of Taxation website here)

This is not news to the large number of Australian taxpayers who are at the receiving end of “unsustainable initial ATO compliance positions”. The worst thing is that when the ATO gets it wrong, it’s you as the taxpayer, who has to prove your case.  You are guilty until you prove yourself innocent.
 
As much as I respect Mr Noroozi, the phrase “very significant compliance costs” does not begin to cover the financial, emotional and time pressures of having to prove yourself against the combined resources of 22,000 ATO employees.
 
And that does not even begin to touch on the reputational damage people suffer when going through an ATO dispute.
 
One client said to me recently that he is desperate for people to hear his story (because he has been treated appallingly at the hands of the ATO), but he does not want people to think he is a tax cheat. He has paid his taxes for decades, always followed the advice of his accountant, and never done the slightest thing wrong, but because he does not meet the ATO benchmarks for his industry, he has been hit with a huge default assessment, which he has to disprove. In the meantime, the ATO can, and has, issued garnishee notices against his bank accounts and forced him to sell up property.
 
If you, or your clients, are faced with an audit, even if you think there should be nothing to worry about, it pays to get someone like us at SMH Tax Lawyers to have a second look at the matter early - before you are faced with a massive, incorrect tax bill that you then have to fight.
 

Posted in: Tax & ATO News Australia at 26 April 12

This report doesn't come as a surprise to us either. The ATO and their benchmark analysis is totally inadequate and it is a situation of guilty until proven innocent. The main issue in these matters is their lack of understanding of how business operates. They just have no experience at all when it comes to everyday business transactions. Look forward to more comments on this topic in the future
Comment by Michelle Gargar lodged 26 April 12

I fully understand the plight of Ms Michelle Gargar. I have been in a two year battle with the ATO after an audit. I have number of points that I would like to raise. I informed the ATO at the time of the audit that I was deploying to Middle East on operations for three months and and it would be difficult to communicate with me. The auditor continued to Email me and question me through out the first two months of my deployment. I regularly informed her I did not have my documents and all information was to the best of my knowledge. With this she proceeded to made the her assessment and enforced a fine of $7700. Four months later she admitted that she had made an error but I had to go through the lengthy process of submitting an Objection. Secondly as a member of the Defence Force, I am exempt from Medicare as my wife pays the 1.5% out of her lower pay for the remainder of the family. It was during the objection process that I informed another auditor and her supervisor of this case but they still added it to my ever increasing bill. My overall assessment of the situation is that the ATO auditors make a quick assessment impose the penalty and are forever passing on the buck.
Comment by Anonymous lodged 27 May 12

ATO staff member backs claims of undue heavy handling by ATO

Not only are taxpayers outraged by the abuse of powers by ATO officers, now its own staff members are speaking out.  See one staff members story here.  She is even suing the ATO for bullying.  What chance does the ordinary taxpayer have when the ATO is prepared to treat one of its own staff members this way?

Call me if you feel you have also been mistreated by officers of the ATO and lets see if there is something we can do together to stop this injustice.

Posted in: Tax & ATO News Australia at 19 April 12

David You need to check out Serene's open letter to the Taxation Commissioner http://apsozloop.ning.com/profiles/blogs/silence-is-consent

Additional posts
http://apsozloop.ning.com/profiles/blogs/australian-taxation-office-an-abusive-sub-culture
http://apsozloop.ning.com/profiles/blogs/australian-taxation-office-ugly-managerial-culture-revealed
http://apsozloop.ning.com/profiles/blogs/managerial-mobbing-and-the-perversion-of-human-resources
Comment by Steve lodged 15 May 12

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Tax & ATO News Australia

Author: David Hughes

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