Robert Richards explains why using tricks instead of the law won't wash with the Tax Office; and looks at a case of assessed debt.
Departure issues
The Tax Office has the power to prevent people leaving Australia if it thinks they owe tax. It does this by issuing a 'departure prohibition order', which it is allowed to do under section 14R of the Taxation Administration Act 1953. However, it cannot issue an order just to stop someone leaving Australia. Rather, it must reasonably believe if it did not do so 'the recovery of tax would or might thereby be impaired' (Troughton v DC of T, Federal Court, 18 January 2008).
A departure prohibition order may be revoked (section 14T of the Act). If the Tax Office refuses to revoke a departure prohibition order the taxpayer might either appeal to the Administrative Appeals Tribunal, or a court as allowed by the Taxation Administration Act, or else seek an order under the Administrative Decisions (Judicial Review) Act 1997.
In the Troughton case, the taxpayer sought the latter.
That case involved a taxpayer who was assessed (it would seem as part of the Project Wickenby investigation) as owing $5,616,712.30. The taxpayer paid all but $112,303. The Tax Office had made a departure prohibition order in respect of that taxpayer. The taxpayer sought to have that order revoked.
The Tax Office refused to do so. This led to the taxpayer seeking an order under the Administrative Decisions (Judicial Review) Act 1997.
The problem with that Act is that it does not allow a court to substitute its own opinion for that of the Tax Office. And what is not clear here is why the taxpayer sought an order under the Administrative Decisions (Judicial Review) Act rather than appealing to a court or the Administrative Appeals Tribunal, as allowed by the Taxation Administration Act.
Rather, to succeed under the Administrative Decisions (Judicial Review) Act, the taxpayer here sought to show that the Tax Office, in making its decision not to revoke the departure prohibition order, had taken irrelevant rather than relevant considerations into account. Also, the taxpayer argued the decision not to revoke the order was an improper exercise of its statutory power. It argued that the power was exercised for a purpose other than that for which it had been conferred; and the decision not to revoke the order involved a question of law.
The taxpayer was unable to prove any of arguments. In fact, I felt that they were rather weak. He emphasised per-sonal factors. While he effectively argued that his departure from Australia would not harm the Tax Office, the court held that the Tax Office was not obliged to take into account those factors relied on by the taxpayer (such as the fact that he had cooperated with the Tax Office).
I find it particularly interesting that the attempts by taxpayers to show that the Tax Office is acting improperly in-evitably fail. In this case the taxpayer claimed that the Tax Office's real purpose in refusing to revoke the depar-ture prohibition order was to place such duress upon him as would cause other members of his family, or people close to him, or trusts with which he was associated in some way, to pay the tax on his behalf.
In other words, the taxpayer was effectively saying that the Tax Office, in refusing to revoke the order, was resorting to a form of blackmail.
The court rejected this argument. The reason why claims such as this interest me is that I have practised tax long enough to know that neither taxpayers nor the Tax Office are always perfect, and that both sides often seek to win a case by means of tactics rather than a proper application of the law. This is particularly true in litigation, where despite the Tax Office's claims to be a model litigant, some of its (most respected counsel would rather resort to tricks to win a case than suffer the ignominy of defeat. I know this from harsh experience. There is a real world out there.
However, attacks such as made in this case are doomed to be unsuccessful, and will do a taxpayer more harm than good. A taxpayer can only prove that the Tax Office has acted improperly if he has documentary evidence from the Tax Office and this won't happen.
So in the end the taxpayer lost not on merits but because he could not satisfy the Administrative Decisions (Judicial Review) Act. I do not normally like going to the Administrative Ap-peals Tribunal. However, this is one case where I think this would have been the preferable alternative.
When a debt should be paid
The theory is that if the Tax Office assesses you it can collect the tax unless you can show that the assessment was improper.
Regarding income tax this is because section 204 of the Income Tax Assessment Act 1936 says (broadly speaking) that tax becomes due and payable 21 days after the due date for lodgement of a return or, if a return has been lodged earlier than that date, 21 days after notice of the assessment is given to the taxpayer.
The Taxation Administration Act 1953 gives the Tax Office power to sue for recovery of that debt. Paragraph 255-5 of Schedule 1 to that Act states that 'The Commissioner or a Deputy Commissioner may sue in his or her official name to recover an amount of a tax-related liability that remains unpaid after it has become due and pay-able.'
In practice the Tax Office is not so strict. It has a 'receivables policy' and will not normally seek to enforce recov-ery of an assessed debt where there is an objection against the assessment until it determines the objection. Of course, it will not do this if it thinks that this action will place the revenue at risk. Then if the taxpayer appeals against the Tax Office's disallowance of an objection it will not normally seek to collect the debt until that appeal is determined, if the taxpayer makes a payment of 50 per cent of the disputed debt.
Sometimes taxpayers want to pay all of a disputed debt, out of caution. They are concerned that if they are unsuc-cessful in their appeal they will be liable for interest (the current interest rate on debts due to the Tax Office is 10.15 per cent). They are, however, also concerned that if they pay the debt the Tax Office might think they are not confident and this would place them at a technical disadvantage. However, this should not be of concern to taxpayers. Someone deciding an appeal normally would not know if tax had been paid or not.
However, the mere suing of a taxpayer and the obtaining of a judgement order, or the making of a statutory de-mand against a taxpayer (the first stage in the recovery of a debt) is not enough. The Tax Office then has to en-force that judgement order or statutory demand.
This is done, if the taxpayer is an individual, by seeking to cause the bankruptcy of the taxpayer. If the taxpayer is a corporation this is achieved by causing the liquidation of that corporation.
However, as the recent decision in Zolsan v DC of T (Supreme Court of New South Wales, 21 November 2007) shows, the Tax Office should not always be confident that it can always do this without difficulty.
It is almost impossible to fathom from the decision the facts of that case. It was said that the Tax Office was dis-satisfied 'with the valuation taken by the plaintiff of its trading stock land', and that the Tax Office 'concluded that the plaintiff had been in breach of the relevant legislation and imposed penalty tax in addition to billing additional GST'.
Assessments and a 'penalty notice' were issued by the Tax Office but an objection was only lodged against the penalty notice. That objection was disallowed 'and nothing further happened following the disallowance', al-though a statutory demand appears to have been issued against the taxpayer.
The plaintiff admitted that it did not challenge the notices of assessment, but said that this was because the controller of the company was very ill (the controller has since died).
Statutory demands are made under the Corporations Act 2001 and not under tax law. Sections 459H and 459J of the Corporations Act allow the setting aside of a statutory demand where there is a genuine dispute as to the exis-tence of a debt, there is a defect in the demand that would cause injustice or 'there is some other reason why the demand should be set aside'.
Here the court concluded (at para 89): 'However, as we are dealing with GST and with a liability that dehors [not within the scope of] an assessment; the chances of the debt being successfully challenged at law is not in the class of being feeble or non-existent'. And (at para 90):
'It follows that either under s459H or s459J of the Corporations Act, the statutory demand must be set aside.'
I find this conclusion, given that it appears that assessments were involved, hard to understand.
Yet it may be much more difficult for a taxpayer to resist bankruptcy, this is shown by another recent decision (Cumins v DC of T, Full Federal Court, 24 December 2007).
However, the Zolsan decision does illustrate an important point: just because a judgement order has been made against a taxpayer or a statutory demand has been issued against a taxpayer, it does not necessarily mean all is over. The taxpayer might still have another day. Certainly this should be the case where there remains a genuine dispute.
An Australian secret service?
The Tax Office has new Sydney offices; not advertised but in downtown Goulburn St far removed from city prac-titioners. Is this evidence of the Tax Office's real attitude towards taxpayers?
Not that one would know it. It appears that the Tax Office sees itself as an Australian secret service. There are no signs on the building indicating its existence. So if you are like me and can never remember an address you have to walk up and down the street hoping to stumble across it. Not only that, but there is not even a sign behind its reception desk indicting who is there.
The Tax Office will most probably plead that this is for security reasons. This a rather lame excuse given how easy it is, if one is really determined, to discover its various offices. Given the way civil liberties continue to be eroded in this country I expect it is only a matter of time before merely admitting that you know where the Tax Office is becomes an indictable offence.
It is even worse once you get inside. The Tax Office now has large intimidating recording devices, which it gleefully points out can also be used for video recording. It claims it has the implied right to use these devices, not-withstanding that the general rule is that various sections it relies on (in the tax legislation) to support that assertion are of the type that should be construed strictly.
I write these notes on an Australia Day weekend. Am I alone in thinking that there is something unAustralian about all of this?
Robert Richards CPA is a solicitor specialising in tax matters.
