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

ATO Annual Report

On 1 December 2015, the ATO released its annual report for 2014-15. The report provides statistics, details and commentary on the ATO’s performance across a number of key areas. It also showcases the ATO’s reinvention and recent switch to a more commercial approach to interaction with taxpayers, with a view to achieving better and more sensible outcomes. At the outset of the report, Commissioner Chris Jordan summarises this new way of thinking in his personal review:


“With the intent of building community trust and confidence, we shifted the way we interact with clients and stakeholders to be more collaborative, more relationship-oriented, more outcome and future-focused.”


The report goes on to list significant achievements of the past year, including improvements to the ATO’s dispute resolution process with early engagement, use of independent facilitators, increased alternative dispute resolution, and new settlement guidelines. Continuing to improve results in prevention and early resolution of disputes is also listed as an ATO goal looking ahead. Indeed, this is reflected in a number of statistics made available in the report:

 

  • The ATO settled over 1,000 cases in the 2014-15 year, compared to around 390 the year before. 84% of these were settled prior to litigation, compared to 77% in the 2013-14 year.
  • Then, in litigious cases, the ATO also settled 80% of all court cases prior to any hearing.

 

This not only reflects the ATO’s new commercial approach to dispute resolution, but also a more measured approach to litigation, and the cases the ATO is prepared to contest. Critically, this saves time and money for all parties, where previously a dispute may have spiralled out of control until a Tribunal or Court decision.

We are involved in many negotiated disputes and applaud the ATO’s reinvention in this respect. However, while the ATO grapples with this transition, remnants of the old ATO mindset remain. This is particularly evident in the continuing aggressive and inappropriate use of wide debt recovery powers, and gung-ho auditors looking to make a good impression.

Ultimately, the 2014-15 annual report shows the ATO is taking steps in the right direction at the executive level, but on the front lines, there is still plenty of work to be done.

            

Posted in: Tax & ATO News Australia at 03 December 15

New Powers For ATO

I'm sure by now you have seen the recent press releases by the Tax Commissioner and the Assistant Treasurer announcing the Government's intention to provide the Commissioner with a statutory remedial power that will allow for resolution of certain unforeseen or unintended outcomes in taxation and superannuation law. If not, here is the original media release by the office of the Assistant Treasurer;

The Government is committed to providing more certainty and better outcomes for taxpayers and reducing the regulatory burden on individuals, business and community organisations. The complexity of Australia’s tax law, combined with evolving business practices, has increasingly led to unintended outcomes. Even though the Commissioner of Taxation endeavours to interpret the law to give effect to its purpose or object, there are instances where this is not possible.

To address this, the Government will provide the Commissioner with a statutory remedial power to allow for a more timely resolution of certain unforeseen or unintended outcomes in the taxation and superannuation law.This will allow the Commissioner to make a disallowable legislative instrument that will have the effect of modifying the operation of the taxation and superannuation law to ensure the law can be administered to achieve its purpose or object.

There are similar legislative instruments making powers in Commonwealth law currently granted to the Australian Prudential Regulation Authority (APRA) and also the Australian Securities and Investments Commission (ASIC). The power will be appropriately limited in its application and will only apply to the extent that it has a beneficial outcome for taxpayers. It will only be available where the modification is not inconsistent with the purpose or object of the law and has no more than a negligible revenue impact. The Commissioner will consult publicly prior to any exercise of the power. This power provides a mechanism to deal with some aspects of complexity in the tax law, and provides more certainty and better outcomes for taxpayers. Josh Frydenberg, Assistant Treasurer.


My perspective on this announcement of new powers for the ATO, and the intention to correct any deficiencies in taxation and superannuation law, is that the law is complex, as we all know, and quite often unintended loopholes operate against taxpayers.

I have been involved in a number of cases, particularly involving superannuation, where it was clear that no mischief was done, but the tax law punished the taxpayer anyway. In most of those cases, the ATO has told me that they would love to help, but their hands are tied because the legislation won’t let them assist. In all cases we worked our way through it, but it was messy and took more time than it should have.

This new legislation will give the ATO power to correct those kind of unintended consequences where the legislation falls down. There are safeguards, thankfully, which require the ATO to only exercise its power to the benefit of taxpayers.

There will be legal purists who will quibble about providing the ATO with powers to make laws, even when those laws are beneficial to taxpayers, as arguable breaching the doctrine of separation of powers between the executive and the legislative arms of government. Overall, however, I think this is a sensible approach and as long as it is closely watched, should only be beneficial to taxpayers. 

Posted in: Tax & ATO News Australia at 04 May 15

ATO Settlements, Part of the restructure?

 As mentioned in a previous article the Commissioner of Taxation announced major changes to the ATO which include a new focus on early resolution of disputes through settlement as an alternative to stressful litigation.

I have recently been involved in a number of significant settlements with the ATO – all of which achieved great outcomes for my clients and reduced their tax bills enormously. Further, the outcomes have avoided the need for us to take the ATO to court which would have been stressful and time consuming for my clients, even if we won.

I enjoy settling my clients’ tax disputes with the ATO without litigation, as it provides far greater certainty, less cost and is an overall better process.

But one issue that definitely needs to be addressed as part of this new process is the interaction between debt recovery and taxation disputes.

Most people do not realize that the ATO treats the resolution of taxation disputes in a completely different department from debt collection and that the processes are entirely unrelated.

The ATO has not yet worked out that to a taxpayer, knowing whether they can afford the repayment of tax debts is of far more importance to the total amount of the debt. Taxpayers, or at least those who are not fabulously wealthy, need time to pay large debts, and without the imposition of high interest rates.

Taxpayers will have no choice but to fight the assessment of unfair tax if the immediate payment of even a reduced tax bill will cripple them financially anyway.

It is critical to the success of the settlement process that the ATO negotiator be authorized to settle the payment terms of any compromise tax position. This is just common sense and hopefully the ATO will see it. 

Posted in: Tax & ATO News Australia at 24 March 15

Reinventing the ATO

The Commissioner of Taxation, Mr Chris Jordan, announced today at the Tax Institute National Convention, that he wishes to reinvent the ATO. Before you roll your eyes and pass this off as a publicity gimmick, take a look at what he has said.

In his words:

"We’re looking to reinvent the ATO, to transform how we go about our cure business, and make the ATO a contemporary and service-oriented organization – to be a leading agency, relevant and response to the expectations of the community and the government.”

Although this sounds like fairly bland, bureaucrat-ese, I have been given the opportunity of some insider perspective through my interactions with the ATO at recent round-table consultations, which has led me to believe that there is a genuine attempt to change the culture, at least at the higher levels of the ATO. Whether (and when) this filters to the level of ATO officers that most commonly deals with my SME and affluent family group clients remains to be seen.

 

The Commissioner, however, must be applauded for these mooted changes, and if it comes off, text books about organizational cultural change will be written on this for years to come.

 

"Everybody has accepted by now that change is unavoidable. But that still implies that change is like death and taxes — it should be postponed as long as possible and no change would be vastly preferable. But in a period of upheaval, such as the one we are living in, change is the norm."
— Peter Drucker, Management Challenges for the 21st Century 

 

In the meantime, however, the most we can safely say is that there has at least been a recognition that the culture at the moment is perceived as:

• Hierarchical
• Siloed
• Bureaucratic
• Risk adverse

Sound familiar? Anyone who has had any interaction with the ATO over the last fifteen years will be nodding in agreement. That the ATO has recognized this is, by itself, a fantastic step in the right direction.

One practical issue that the ATO seems to be firmly embracing is the need for a better settlement process. In the past the ATO has allowed positions to become entrenched resulting in costly and stressful litigation. As our experience shows, the ATO has often got it wrong in the past and we have taken them to court on behalf of our clients on many occasions to prove it.

 

While beating the ATO in court is satisfying at one level, I personally prefer getting practical and worthwhile outcomes for my clients through early settlement. Fortunately the ATO now appears to be recognizing the value in this and has embraced early settlement – at least in principle. I have been involved in many recent settlements with the ATO (one recent one went until 11.00pm at night) and have achieved fantastic results for my clients, without the need to go to Court. Perhaps the ATO is capable of the change it so obviously needs within its cultural mindset, only time will tell but I certainly hope this proposed change in the ATO is genuine and that we can look forward to a lot more early settlements.
 

Posted in: Tax & ATO News Australia at 20 March 15

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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