Tax & ATO News Australia

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Analysing the Systemic Issues Within the ATO

Those of you who have read my rants (blog) know by now my thoughts on the systemic problems within the ATO, but in light of the recent reports by ABC News and Fairfax Media about alleged abusive practices by the ATO, I thought it might be a good time to reiterate.

The alleged abusive practices that are currently in the spot light are not a universal problem, but it is definitely cultural, not an isolated occurrence. There are many officers in the ATO who are reasonable, understanding and work tirelessly to ensure the correct amount of tax is levied and collected. Unfortunately, there are also a significant number of ATO officers who have an institutional bias against tax payers, calling them crooks and cheats, and assuming facts before they are proved.

Regrettably, over many years, I have seen that once a preliminary view is formed, the ATO do not have good systems for reversing that view. The true separation of objection officers from auditors has been successful, in my view, but regrettably debt collection is an entirely separate issue. I have had many matters, including very recent matters, where aggressive debt collection has proceeded (including departure prohibition orders, supreme court proceedings and garnishees) despite there being clear and undisputed evidence that the debt being chased was well in excess of what was genuinely owed.

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.

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 statement made in the Sydney Morning Herald article, that the ATO targets small businesses more than larger ones because the latter have more money to fight back, certainly has a grain of truth to it. There is no doubt that big business has a greater ability to negotiate favourable payment terms compared with small business. The ATO is open about this – they identify the risk of recovery as being a major factor in aggressively pursuing debt collection. The difficultly is that when combined with the conclusive presumption that an assessment is correct, notwithstanding there being genuine grounds to dispute it, a perceived risk of recovery of an incorrect assessment means that small business taxpayers are frequently pursued for debts that are ultimately proved to be wrong. This does not happen at the big end of town.

When analysing the systemic problems at the ATO, there seems to be two things that can be done to set things right;

  • (1) no debt should be pursued while there is a genuine challenge to the validity of the debt; and
  • (2) if a taxpayer incurs costs in setting the record straight because of ATO errors, 100% of the taxpayer’s costs must be reimbursed.

Taxpayers by and large try to do the right thing. Australians are not tax cheats. Tax laws are horrible complex and even the ATO frequently changes its position on issues. Too easily differences in opinion, or even reliance on old ATO’s views, are considered to be ‘tax avoidance’. By all means the ATO should chase those who deliberately flout tax laws with the full force of the law, but don’t call small business owners tax cheats when they are trying their best to interpret on the fly laws which are neither simple nor well explained. If a mistake occurs, or there is a difference in interpretation, give small business owners the benefit of the doubt and the opportunity to sort through the issues without the threat of aggressive debt collection and financial destruction. 

Posted in: Tax & ATO News Australia at 10 April 18

Retrospective Changes to Small Business Concessions

 My last rant measured expression of my opinion was only one small voice amongst many people criticising the Federal Opposition attach on franking credit refunds. Now it is time to show I have no political bias and turn the same criticism on the Federal Government for their proposed small business changes, which are arguably far worse, particular for individual small business owners who have just sold their business, or are about to do so.


Every so often something arises that has a less obvious impact but potentially poses far greater damage for individuals. That is currently demonstrated as the proposed changes to small business concessions which were announced in February.


The issue is that for a number of years various generous concessions for selling small businesses have been available as compensation for business owners not having been able to save for their retirement. To qualify (and this is grossly over-simplifying) they must have net assets of less than $6mil or turnover under $2mil.


In May 2017 the govt announced it would be cracking down on aggressive strategies with an integrity measure to ensure the small business concessions were appropriately applied. However, the February 2018 draft legislation proposed retrospective measures that went far beyond the scope of the previous announcement. These issues will affect future and past business sales in ways no ever realised and we sincerely hope it won’t become legislation. The restrospectivity of these changes means that they operate for businesses that were sold after 1 July 2017 – some 9 months before the legislation was drafted.


The proposed legislation includes 4 new criteria to be satisfied, the draft legislation repeals s 152-10(2) of the Income Tax Assessment Act 1997 (the ITAA 1997). In substitution, it inserts a new s 152-10(2). The conditions of the new subsection are:

 

  1. a stricter active asset test
  2. if a taxpayer relies on the CGT small business entity test to qualify for the SB concessions, they must be carrying on a business just before the relevant CGT event
  3. the company or trust in which the shares or units are being sold (the object entity) must be carrying on a business just before the CGT event, and
  4. the object entity must itself either satisfy the CGT small business entity test or a modified $6m maximum net asset value test.


Whilst some of the changes are sensible, such as preventing a person from using the small business concessions to shield a capital gain on shares or units by becoming a CGT small business entity (ie by starting a new, unrelated business) later in that income year. Others are very concerning, in particular the changes that will have retrospective application to periods prior to 1 July 2017, by virtue of the application of the modified active asset test (which looks back at the history of ownership of the relevant shares or units).


In circumstances where the ATO can, and has, applied Part IVA to the real mischief that this proposed legislation targets, it really is unclear why it was needed, and why it went so far, and why it applies retrospectively.


Both Vincees of Government must do better than this. It leads to far too much uncertainty and a serious lack of confidence.

 


 

Posted in: Tax & ATO News Australia at 20 March 18

Franking Credit Proposed Changes

Politicians just cannot help mucking around with tax laws. I am not the first person to talk about this, and right now I am obviously not the only person, as the Federal Opposition’s latest thought bubble on refunding franking credits is roundly and rightly criticised.


In the interests of fairness and balance, I want to talk about another ill-thought out and retrospective proposed change which the current Federal Government is planning to make to small business concessions. But before I do that, just one quick comment in relation to the Opposition’s franking credit problem that I have not seen anyone make. Bear with me – this is a bit mathsy:


The Opposition’s proposal is that the government will stop drawing cheques to people who receive franking credits in excess of their taxable income. Practically, as has dominated the press in recent days, this targets self funded retirees who received franked dividends from companies, but do not have large taxable incomes because they are receiving tax-free superannuation pensions. The theory apparently being, well hey, they are not going to vote ALP anyway. So far, so cynical. And to someone who doesn’t understand how franking credits work, it kind of makes sense: why should the Government be sending out cheques to all of these wealthy old people?


But here’s the rub – there is absolutely zero difference to the budget bottom line whether a rebate is represented by a payment from the government or a reduction in tax payable by a tax payer. In either case, this is money that government does not have.


To give you the example, take two people: Vince a self funded retiree with a self managed superannuation fund with $1,000,000 of Australian blue chip shares in it, and a Federal Politician with a randomly selected salary of $375,588 per annum and the same number of shares. We’ll call him Bill. Let’s ignore Bill’s perks and any other tax breaks – I have never acted for a Federal politician in a tax matter, and frankly I’m happy to keep it that way.


Vince receives fully franked dividends of $50,000 per annum. The way franking credits work is that is cash of $35,000 and franking credits of $15,000. Vince therefore has pension income of $50,000, from which he is exempt from tax. Under the current system the franking credits are refunded to him, so he gets $15,000 from the Federal Govt. This is what the Opposition wants to stop.


Bill on the otherhand is on the top marginal tax rate. He pays lots of tax – if you ignore his fully franked dividend of $50,000 (same as Vince’s) he pays $142,246.60 in tax (before medicare levy). But watch how Bill’s full franked dividend of $50,000 is treated. He gets the same amount of cash - $35,000. But as a result of the franking credit, his tax bill only increases to $149,746.60. If he didn’t get the franking credit, his tax would have been $164,746.60.


In other words, Bill gets the full use of the Franking Credit, because he pays $15,000 less tax than he otherwise would, whereas Vince misses out on the benefit completely. Put in reverse, the Federal coffers pick up $15,000 from Vince, the pensioner on $35k per annum, but don’t get the $15,000 from Bill, the politician on $275,746, after tax.

 

Not very fair is it?


My good intentions of providing balance must be sacrificed on the altar of brevity. I have already gone on too long. I will criticise the Government in Part 2.
 

Posted in: Tax & ATO News Australia at 19 March 18

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

The Simple Solution to Solve the Budget

I have had an epiphany.

I can solve the budget shortfall for the Federal Government by showing the Treasurer how to raise unlimited revenue. My plan is simple. The legislation is already in place and the Courts and the AAT have shown us that it is possible.

We are going to tax dead people.

I am not talking about an estate tax, or death duty. That would be politically unpopular.

No, what I am proposing is that the ATO issue default assessments under s167 of the ITAA 36 to every single person who has died in Australia since 1936. How can the Government do this, you wonder? That’s the beautiful part of my plan – all the ATO has to do is to make a determination under s170 that every deceased tax payer avoided tax due to fraud or evasion. Then the ATO can go as far back as it likes and raise new assessments.

The Courts have said time and again in cases like Rigoli and Futuris that the ATO does not even need to try very hard to come up with a figure. They just need to have a bit of an educated guess and then it’s up to the taxpayer to prove that this figure is wrong.

So each deceased taxpayer can get a tax assessment for, say, $10m. Section 177 means that’s proof they owe the tax. And the proof of tax evasion? Well, the ATO doesn’t need to prove that either. That’s up to the taxpayer too. If a figleaf of justification was required (and it’s not, according to the Courts) the ATO will say what it always does in such cases – any taxpayer who owed such a large amount of money must have known they had more tax to pay. Ergo they deliberately understated their taxable income, ergo tax evasion.

Cheating non-taxpaying bastards. We’d lock them up if they weren’t already dead. On the otherhand, fortunately for the Government, being dead makes it hard for the taxpayer to prove their case. If there is a material witness to a question of fact, Jones v Dunkel says you have to produce them to give that evidence or risk an adverse factual finding. And no-one is more material to a question of tax evasion by a taxpayer than the taxpayer him or herself.

The plan is foolproof. Naturally it’s extremely unlikely any money will be collected from estates that have already been distributed and finalised, but quite alot of people will probably cough up a couple of million each to save the cost and expense of having to fight a losing battle against the ATO, with their unlimited litigation budgets.

This was right in front of our eyes the whole time. The Courts and the AAT have already sanctioned it, as recently as last week. Check out this if you don’t believe me.

Well, that’s that problem solved. I’m off to the middle east next to solve that little pickle by introducing effective Workplace Health and Safety Laws.
  

Posted in: Tax & ATO News Australia at 09 July 15

Bullying by the ATO

And so the battle continues ...  ordinary Australians having to self fund their fight with the ATO losing almost everything they have worked hard for on the way, not to mention the breakdown of their relationships and the toll on their health.  Last night's 7.30 Report covered the story of more victims of bullying by the ATO - http://www.abc.net.au/news/2012-11-01/draconian-ato-accused-of-bullying-taxpayers/4344720

Posted in: Tax & ATO News Australia at 02 November 12

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Tax & ATO News Australia

Author: David Hughes

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