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

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

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

Taxpayer to sue the ATO for damages

The ATO is under fire again for not adequately compensating taxpayers whose lives it has turned into turmoil by the overzealous pursuit of them by its officers.

 

Gary Kurzer is one such taxpayer who, after being subjected to a five year tax audit lost not only his wealth but his health and marriage too, is now suing the ATO for a substantial amount in damages.
 
My client, Ron Pattenden, another taxpayer who fought the ATO six times over 10 years and won each and every time, which ordeal at the hands of the ATO has seen his health deteriorate tremendously is also considering such action.
 
An interesting article about both these taxpayers and the call for taxpayers’ rights to be enshrined in law was recently written by Chris Seage for Crikey.
 

Posted in: Tax & ATO News Australia at 25 July 13

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Tax & ATO News Australia

Author: David Hughes

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