Burns and Commissioner of Taxation (Taxation)
[2019] AATA 3860
•24 September 2019
Burns and Commissioner of Taxation (Taxation) [2019] AATA 3860 (24 September 2019)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2018/7172
Re:Grant Burns
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member Dr M Evans
Date:24 September 2019
Place:Perth
The Reviewable Decision dated 26 October 2018 is affirmed.
..................................[sgd]......................................
Senior Member Dr M Evans
Catchwords
TAXATION – application for release from taxation liability – eligible and non-eligible taxation liabilities – Taxation Administration Act 1953 (Cth) – s 340-5 of Schedule 1 – whether taxpayer would suffer serious hardship if he were required to satisfy his taxation liabilities – meaning of phrase “serious hardship” – income/outgoing test – meaning of “reasonable timeframe” in income/outgoing test – assets/liabilities test – other relevant factors in deciding whether to exercise discretion to grant release from taxation liabilities – no serious financial hardship found – poor compliance history – impact of personal circumstances on poor compliance history – reviewable decision affirmed
Legislation
Income Tax Assessment Act 1936 (Cth) – s 265 (superseded)
Income Tax Assessment Act 1997 (Cth) – s 4-1
Taxation Administration Act 1953 (Cth) – ss 14ZZK, 14ZZK(a), 14ZZK(b)(ii), Division 340 of Schedule 1, Division 340(1) of Schedule 1, 340-5 of Schedule 1, 340-5(3) of Schedule 1, 340-10 of Schedule 1, s 340-10(1) of Schedule 1, 340-10(2) of Schedule 1
Cases
Commissioner of Taxation v Milne [2006] 153 FCR 52
Corlette and Corlette v Makenzie & Ors [1996] FCA 1482
Lau and Commissioner of Taxation [2016] AATA 46
Re Filsell and Commissioner of Taxation [2004] AATA 1012
Schweitzer and Commissioner of Taxation [2019] AATA 1100
Van Grieken v Veilands & Ors (1991) 21 ATR 1639
Secondary Materials
Practice Statement Law Administration 2011/17: Debt relief, waiver and write off – cl 5, 6, 7, 8
Practice Statement Law Administration 2011/20: Payment and Credit Allocation - cl 3, 5, Attachment C (point (vi)), Attachment C (point (xxi)).
REASONS FOR DECISION
Senior Member Dr M Evans
24 September 2019
THE APPLICATION
The Applicant seeks review of a decision of the Deputy Commissioner of the Respondent dated 26 October 2018 (T7, page 46; T2, page 4). This will be referred to as the Reviewable Decision.
The Reviewable Decision disallowed the Applicant’s objection dated 14 August 2018 (T5, page 21) to an earlier decision of the Deputy Commissioner of the Respondent, not to grant the Applicant a release from the payment of an eligible taxation debt (T4, page 19).
On 7 December 2018, the Applicant filed an application for review of the Reviewable Decision in the Taxation & Commercial Division of the Administrative Appeals Tribunal (the Tribunal) (T1, pages 1-3).
BACKGROUND
The Applicant is a sole trader, who is self-employed as a flooring installer and sub-contractor. The Applicant is 34 years of age as of the date of this decision (Exhibit A1, page 2).
The Applicant lives in rented accommodation with his de facto partner. Neither the Applicant nor his de facto partner have any children or dependents (Exhibit A1, page 2).
The Respondent’s reasons for decision state that the Applicant’s “[taxation] liabilities arose due to unpaid Income taxes, PAYGI, GST plus associated Penalties for failure to lodge a document on time, plus associated General Interest Charges” (Exhibit R1, page 8, paragraph [34]) in the 2014, 2015 and 2017 financial years.
In the Applicant’s application for release, under the Question, “Why didn’t you pay your tax by the due date”? the following explanation was given by the Applicant’s taxation practitioner (T3, page 16; see also T5, page 25 and T6, page 29-30):
GST incorrect advice:
· Client is a sole trader - flooring installer. He has been contracting with various providers over a number of years. As part of the contracting arrangements he was paid for jobs completed including a GST component.
· Client initially was unaware of his GST remittance obligations as previously he was an employee and not subject to the GST regime
· Client initially sought tax advice from another tax agent and was advised he didn’t need to do anything as his annual contracting income was expected to be less than $75,000 PA and as such he was not required to register for GST.
· Client subsequently became aware he was required to be registered and remit GST
Personal injuries:
· Client suffered a slipped disc in his back (L4/L5) in October 2015. He was subsequently unable to work for six weeks whilst he undertook treatment and recuperation
· This result [sic] in ongoing issues and required further period [sic] where he was not able to work: February 2016 was unable to work for 4 weeks, September 2016 for 4 weeks, and August 2017 for 3 weeks.
· The client has advised he required extensive physiotherapy during these periods of incapacitation to help him recover. He also requires regular and ongoing treatment to keep the issue manageable.
· As he is self-employed he was not earning any income during the periods he was off work.
Personal issues:
· As a result of the injuries detailed above the client developed a reliance on alcohol which eventually caused him further issues with his ability to work
· It also led to him recording a drink driving conviction which resulted in fines and the loss of his license for 7 months during the 2016 calendar year.
· As he is self-employed he was [not] able to commute to all of his work and as such his income decreased significantly from the 2015 financial year
· During this time the client’s relationship with his partner broke down further exacerbating his reliance on alcohol, further time off work and additional financial hardship in finding separate accommodation.
· The client’s cousin and grandmother passed away passed away [sic] in May 2016. They both played an integral part in his life and their passing was emotionally devastating and effecting [sic] his ability to work
· During the period is detailed above he was unable to deal with his business requirements (including working), his financial and taxation obligations
As noted in the Applicant’s Statement of Facts, Issues and Contentions (SFIC) (Exhibit A1, page 10), the Applicant engaged a tax agent who brought his personal tax and business activity statement (BAS) lodgements up-to-date. However, the SFIC does not state when this occurred. Additionally, between 14 July 2015 and 14 March 2018, the Applicant made payments totalling $44,595 towards his taxation debts (see also T6, page 30).
The Applicant’s SFIC further states that his tax agents have assisted the Applicant to take steps to better manage his current and future tax obligations through “monthly cash flow forecasting, profit reporting, tax estimates, management of PAYE instalments and submitting BAS reports in a timely manner” (Exhibit A1, page 10). However, the relevant timeframe was not stated. Additionally, the SFIC states that the Applicant has separate business bank accounts and is aiming to use “Xero cloud” computing software to record his business income and expenses (Exhibit A1, page 10).
THE PROCEEDINGS
The hearing of this application took place on 12 June 2019.
The Applicant appeared in person and was represented by his taxation practitioner,
Mr Neary.
Mr Slater appeared as counsel for the Respondent, assisted by his instructing solicitor
Mr Hotger.
The matter proceeded on the basis of submissions, with the Applicant not being called to give evidence.
The Tribunal admitted the following documents into evidence at the hearing:
(a)Applicant’s SFIC dated February 2019 (Exhibit A1);
(b)document titled “Submissions for Grant Burns for a Hearing on 12 June 2019” dated 10 June 2019 (Exhibit A2);
(c)section 37 documents (T-Documents) filed with the Tribunal on 1 May 2019 (Exhibit R1);
(d)Supplementary s 37 documents (Supplementary T-Documents) filed with the Tribunal on 1 May 2019 (Exhibit R2);
(e)Respondent’s SFIC dated 21 March 2019 (Exhibit R3); and
(f)document titled “Submissions for Commissioner of Taxation for a Hearing on
12 June 2019” dated 5 June 2019 (Exhibit R4).ISSUE
The central question that requires determination by the Tribunal is whether the Applicant should be released from all or part of his eligible taxation liabilities under s 340-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA).
In the Applicant’s application to the Tribunal for a review of the Reviewable Decision, he stated the following reasons for bringing the application (T1, page 2):
The Commissioner’s decision is incorrect because:
· The decision incorrectly implies that Mr Burn’s [sic] de-facto partner is either willing to pay or is jointly liable for Mr Burn’s [sic] debt.
· The Commissioner failed to properly apply the income/outgoings test by concluding that the tax debt would be paid within a reasonable time without defining what constitutes a reasonable time.
· The reasons for decision completely ignores or Mr Burns [sic] reasons in terms of illness and misadventure. As such, the decision-maker failed to consider Other Relevant Factors as required by PS LA 2011/17.
The applicant contends that the Commissioner’s decision under Division 340 would have been partly or wholly in the taxpayer’s favour have the decision not been adversely impacted by the above.
Mr Neary also submitted that there were other inconsistencies and contradictions in the Reviewable Decision that were an indication that the Commissioner acted unreasonably. For example, that “the objection decision simultaneously finds that he [the Applicant] both can and can’t pay the debt” (Exhibit A1, page 7-8; see also transcript, page 11). However, these grounds were not stated in the Applicant’s taxation objection, and s 14ZZK(a) of the TAA provides that “the applicant is, unless the Tribunal orders otherwise, limited to the grounds stated in the taxation objection to which the decision relates”. The Tribunal has not ordered otherwise and therefore these grounds are not before the Tribunal. However, the Tribunal makes the general observation that when considering a number of tests or factors in deciding whether to exercise a discretion, some tests (depending on their focus) may result in a conclusion in favour of an applicant, and others will result in a conclusion against an applicant. Consequently, it is the role of the decision-maker (in this case the Tribunal), to evaluate each test, and to determine the weight to be applied to each test in the overall exercise of its discretion.
As noted by the Respondent (in Exhibit R4, paragraph [43]), there is substantial agreement between the parties regarding the facts. However the parties disagree about whether, in the Reviewable Decision, the Respondent erred with respect to its consideration of the income of the Applicant’s de facto partner; what constitutes a reasonable timeframe with respect to the income/outgoings test; and Mr Burns’ “illness and misadventure” (as set out in paragraph [16] above).
LEGISLATIVE OVERVIEW
The Applicant has the burden of proving that the Respondent’s decision to refuse to release him from his eligible taxation liability should have been made differently
(s 14ZZK(b)(ii) of the TAA). In this case, the Applicant has the burden of proving that the Respondent should have released him in whole or in part from the eligible taxation liability.
Division 340 of Schedule 1 to the TAA is titled, “Commissioner’s power in cases of hardship”. Section 340-1 outlines “What this Division is about” and states:
The Commissioner may release you from a particular liability that you have incurred if you are an individual, or a trustee of the estate of a deceased person, and satisfying the liability would cause serious hardship.
Section 340-5 of Schedule 1 of the TAA provides, in part, that:
(1) You may apply to the Commissioner to release you, in whole or in part, from a liability of yours if section 340-10 applies to the liability.
…
(3) The Commissioner may release you, in whole or in part, from the liability if you are an entity specified in the column headed "Entity" of the following table and the condition specified in the column headed "Condition" of the table is satisfied.
The Table under s 340-5(3) of the TAA specifies that the condition that needs to be satisfied for an individual is whether “you [the Applicant] would suffer serious hardship if you were required to satisfy the liability”.
The determination of whether the Applicant should be released from his eligible taxation liability involves a two stage process. This process was described by Deputy President McDermott in Lau and Commissioner of Taxation [2016] AATA 46 at paragraph [65]:
65. The Tribunal in Re Filsell and Commissioner of Taxation provided that a two stage approach should be applied determining whether the discretion to release should be exercised:
“In the Tribunal’s opinion, the language of the legislation requires a two stage approach. First, the decision-maker must decide whether the settlement of the liability will result in serious hardship. If that decision is favourable to the applicant, the discretion offered by sub-section 340-5(3) then falls for consideration. In reaching the decision to release in whole or part, the question to be addressed is whether, in all circumstances, it is just and proper to provide the requested relief. Matters pertaining to the incidence and consequence of the tax and the effect of its exaction upon the affairs of the person will bear upon the issue of whether the relief is just and proper...”
(Footnotes omitted.)
The above approach from Re Filsell and Commissioner of Taxation [2004] AATA 1012 was cited and applied by the Federal Court in Commissioner of Taxation v Milne [2006] [2006] 153 FCR 52.
In summary, it is first necessary for the Tribunal to determine whether the Applicant will suffer serious hardship if he were required to satisfy his taxation liability. If the answer to this question is “yes”, the Tribunal will then consider whether the discretion to release him from that liability should be exercised in his favour. It is a matter of discretion for the Tribunal and not a matter of right (see Wilcox J in Corlette and Corlette v Makenzie & Ors [1996] FCA 1482 at [5] in the context of s 265 of the Income Tax Assessment Act 1936 (Cth), which was the precursor to s 340-5 of Schedule 1 of the TAA).
Section 340-10 of Schedule 1 to the TAA sets out the taxation liabilities to which s 340-5(3) applies. The taxation liabilities that are eligible for release includes tax under s 4-1 of the Income Tax Assessment Act 1997 (Cth), general interest charges, additional tax and certain administrative penalties (see the Table under s 340-10(2) of Schedule 1 to the TAA). Goods and Services Tax (GST) and penalties for failure to lodge on time are not listed in s 340-10(1), or in the Table under s 340-10(2) and are ineligible for release.
The Applicant’s taxation liabilities total approximately $98,000. These liabilities comprise $47,102.54 in income tax, plus associated general interest charges; and $51,331.15 in GST and penalties for failure to lodge on time (T2, page 6). The debt of $47,102.54 is eligible for relief. However the $51,331.15 debt for GST and penalties for failure to lodge on time are not eligible for release because these debts are not listed in s 340-10(1) or in the Table under s 340-10(2) of Schedule 1 of the TAA as being eligible for release. The Applicant does not contest the amounts of these taxation liabilities (transcript, page 8-9).
“Serious hardship” is not defined in Division 340 of Schedule 1 to the TAA. Nor does the Division set out any guiding factors or principles that may be relevant in assessing serious hardship. The Commissioner has, however, issued Practice Statement Law Administration 2011/17: Debt relief, waiver and write off (the PSLA) which defines “serious hardship” in
cl 5, as follows:
‘Serious hardship’ is given its ordinary meaning. We consider serious hardship to exist where the payment of a tax liability would result in a person being left without the means to afford basics such as food, clothing, medical supplies, accommodation, or education.
Tests are applied to determine whether serious hardship exists. The object of the tests is to determine whether the consequences of paying the tax would be so burdensome that the person would be deprived of what are considered necessities according to normal community standards.
Three tests are used to determine the merits of a serious hardship application:
·the income/outgoing test
·the asset/liabilities test, and
·other relevant factors.
The definition of “serious hardship” has also been discussed in Court and Tribunal decisions. These were usefully summarised by Deputy President Forgie in Schweitzer and Commissioner of Taxation [2019] AATA 1100 at paragraph [101] as follows:
101. The expression “serious hardship” has been considered both in this context and in others. The principles that can be drawn from them include:
(1) Provisions in s 265(1) of ITAA36 “... assume the existence of the tax liability and provide for relief on special grounds beyond those considered in the process of assessment.”: Van Grieken v Veilands per Gummow J.
(2) The expression “serious hardship” is an ordinary English expression but one influenced by its context:
“... The context in which the words appear makes it clear that the Relief Board is to consider whether the exaction of the full amount of tax would involve the dependants of a deceased taxpayer in financial difficulty which in all the circumstances can be said to be serious. The financial difficulty will be such that the dependants will be in significant need warranting action by the Relief Board to relieve their condition.”: Powell v Evreniades per Hill J.
(3) “... Clearly, there is a distinction between, on the one hand hardship which is serious, and on the other hand, hardship which may be said to be extreme although it is obvious enough that what will constitute either will depend upon the circumstances of a given case.
... Clearly there would be severe financial hardship if the dependants of a deceased person were left destitute without any means of support. That is not to say that in any particular case something less than that will not constitute serious hardship.”: Powell v Evreniades per Hill J.
(a) “... In Evreniades, Hill J gave such an example when he recognised that there would be ‘severe financial hardship’ if persons were left ‘destitute without any means of support’. The Taxation Ruling gives a similar example when it says that there would be serious hardship if a taxpayer were left ‘without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements’. I do not see any inconsistency in these examples. Effect must be given to the qualification of ‘reasonable’ in the Taxation Ruling and, consistently with the reasoning of Hill J, these examples do not exclude the possibility that something less than destitution will constitute serious hardship. Whether this is so depends on the particular circumstances of each case.”: Commissioner of Taxation v A Taxpayer per Stone J.
(4) “... ‘serious hardship’ is itself the test that has to be applied to an applicant’s circumstances to decide if that applicant is eligible for relief from a tax debt. There is no other test, although there may be issues about which factors, in the particular circumstances, are or are not relevant to this determination. It is because the assessment is based so squarely on the individual circumstances that Hill J in Evreniades [Powell v Evreniades] thought it was inappropriate to try and identify, in the abstract, the circumstances that would give rise to serious hardship.”: Commissioner of Taxation v A Taxpayer per Stone J.
(5) The task lies in “... assessing the ... [taxpayer’s] individual circumstances by reference to normal community standards”: Commissioner of Taxation v A Taxpayer per Stone J.
(a) What amounts to “reasonable acquisitions” of relevant necessities is assessed by reference to what is “... not excessive or unreasonable in all the circumstances...”: Commissioner of Taxation v A Taxpayer per Stone J.
(b) Those matters can be assessed by the decision-maker “... from its own knowledge and experience, determine what were and what were not reasonable living costs...”: Powell v Evreniades per Hill J.
(c) The expression “normal community standards” is not a term used in item 1 of s 340-5(3) or in Division 340 generally. The principles that can be drawn from cases that have considered the expression in other areas of the law suggest that community standards relate to a variety of matters and cannot be the subject of evidence. The decision-maker, be it a jury, a magistrate or an administrative decision-maker is expected to draw on its own collective knowledge of such things.
(d) “... There can be no doubt that the jury would have understood, from the general directions given by her Honour, that they were to assess any injury to the plaintiff’s reputation resulting from the imputations and they were to undertake that assessment from the point of view of ordinary reasonable decent members of the community. ... In that regard they had been told that the question was whether ordinary reasonable members of the community would think less of the plaintiff. ...”: Radio 2UE Sydney Pty Ltd v Chesterton per French CJ, Gummow, Kiefel and Bell JJ.
(e) “In Reader’s Digest [Reader’s Digest Services Pty Ltd v Lamb] Brennan J emphasised that any standard to be applied must be one common to society, rather than one which reflects an attitude of a section of it...” Radio 2UE Sydney Pty Ltd v Chesterton per French CJ, Gummow, Kiefel and Bell JJ
(6) In assessing serious hardship, an individual’s potential bankruptcy may be relevant in assessing his or her capacity to work and so to generate income: Corlette and Another v Mackenzie and Others per Wilcox, Einfeld, Foster and Einfeld JJ.
(a) An example is found in Commissioner of Taxation v A Taxpayer in which Stone J decided that the Tribunal’s decision that serious hardship was very likely to follow should the individual be made bankrupt was a reasonable decision. It was reasonable even though the applicant’s income was substantial when reference was made to community standards. His circumstances, though, were not usual when assessed by those same standards for he faced complications arising from his wife’s illness if his income were jeopardised by his being made bankrupt. Those complications centred on his wife’s illness and the costs associated with her illness, domestic support and educating his children. The costs themselves are assessed by reference to what would be regarded as reasonable according to community standards.
(Footnotes omitted.)
WOULD THE APPLICANT SUFFER SERIOUS HARDSHIP IF HE IS REQUIRED TO PAY HIS TAXATION DEBT?
As noted in paragraph [28] above, the PSLA identifies three tests that assist in determining the merits of a serious hardship application. These are the income/outgoing test, the assets/liabilities test, and other relevant factors.
Income/outgoing test
The income/outgoing test is defined in cl 6 of the PSLA as:
The purpose of the income/outgoing test is to assess a taxpayer's capacity to meet their tax liability from their current income. It is necessary to identify and consider individuals who are dependent on the taxpayer and the degree of responsibility, together with the taxpayer's partner. In particular, the following factors are considered relevant:
·the taxpayer's capacity to pay in a reasonable timeframe on the basis of their income and outgoings
·scope for the taxpayer to increase their income
·whether all expenditure could be considered reasonable and consideration of any discretionary components, and
·whether the taxpayer has made attempts to defer or reschedule other financial commitments.
(Footnotes omitted.)
The Applicant argued that the Respondent’s application of this test was flawed because it included 100% of the Applicant’s de facto partner’s income. The Applicant further argued that his de facto partner should be regarded as contributing in proportion to her income (transcript, page 6). The source of this contention was the following statement from paragraph [21] of the Respondent’s reasons for decision (T2, page 6):
As per the information that you provided in your application for release, your monthly income is $6,845 and your expenditure is $4,050. On this basis you were left with a monthly surplus of $2,795.
(Original emphasis.)
Mr Neary submitted that the correct calculation of the Applicant’s monthly surplus should be as follows (Exhibit A1, page 6):
A modern couple in their late 20s / early 30s might reasonably be expected to share household expenses in proportion to their income. Applying that to the taxpayer’s circumstances, his monthly after-tax income of $4,645 is 51.4% of the combined monthly income of $9,045. As such it is contended that Mr Burns [sic] income of $4,645 should be reduced by a 51.4% of the combined monthly expenses of $4,050, leaving the taxpayer with a monthly surplus of $2,579.
The Tribunal agrees that the income of the Applicant’s de facto partner is relevant to consider. Her income was incorrectly stated in the Applicant’s application for release as $2,200 per month, instead of $4,400 per month (transcript, page 14-15). The monthly surplus of $2,579 put forward by Mr Neary in paragraph [33] above corrects this mistake. In Van Grieken v Veilands & Ors (1991) 21 ATR 1639 (Van Grieken), the taxpayer sought judicial review of a decision of the Taxation Relief Board not to grant him relief from a tax debt on the basis of serious hardship under s 265 of the previous Income Tax Assessment Act 1936 (Cth) (which preceded s 340-5 of Schedule 1 of the TAA). The taxpayer’s grounds of review included that the Taxation Relief Board had taken into account irrelevant considerations by considering evidence of the financial position of other members of the household. This argument was rejected in Van Grieken by Gummow J at 1646:
It was also asserted (para 2 of the application) that the decision was an improper exercise of power, because the Board had, in the sense of para 5(1)(e) and para 5(2)(a) of the ADJR Act, taken into account irrelevant considerations. Particulars were given of various subparagraphs in para (1) of the statement of reasons. Some of these referred to the rearrangement of the taxpayer's financial affairs in 1987, and to his intentions as to the sale of his house and acquisition of other accommodation. Other particulars related to the financial relationship between the taxpayer and a son living at home, the taxpayer's wife, and a company of which he is Director and which carries on its operations from the taxpayer's house. But the determination of whether the exaction of the full amount of the tax would entail serious hardship properly involves a consideration of the financial affairs of the taxpayer, including his financial relations with the other members of his household, and with any family company. I accept the submissions to that effect by counsel for the respondents.
(Emphasis added.)
Taking into consideration the above passage from Van Grieken, the Tribunal agrees that the income of the Applicant’s de facto partner is relevant to consider, and that it is reasonable to expect her to contribute to household expenses in proportion to her income, as submitted by Mr Neary. The Applicant’s monthly surplus of $2,579, whilst slightly less than the $2,795 stated by the Respondent in its reasons for decision, does suggest that the Applicant can first afford to meet his reasonable living costs. These would include basic necessities such as food, clothing, medical supplies, and accommodation, with the monthly surplus being left over to service his taxation debts.
A further contention of the Applicant was what constituted a “reasonable timeframe” in the context of the “taxpayer's capacity to pay in a reasonable timeframe on the basis of their income and outgoings”. Mr Neary submitted (Exhibit A1, page 7; see also T6, page 39):
· Page 4 of the ATO document entitled “Tax Agent/Lawyer/Solicitor Recommendation Template” implies that 2 to 3 years is a reasonable timeframe for repayment.
· Using a simple loan repayment spreadsheet and continuing to apply general interest charge (GIC) at 8.96%, Mr Burns surplus of $2579 per month is sufficient to repay the debt in 46 months.
· Should the commissioners discretion be exercised to grant a full remission on the eligible debt, the total debt would decrease from $98,434.02 $51,331. Using the same criteria as above. This would allow the debt to be repaid within 22 months.
· Using the above, it is observed that the present monthly surplus is insufficient repay the debt within the 2 to 3 year timeframe noted in the Recommendation Template. If all remission were granted, the debt would be repaid slightly under the prescribed period.
(Footnotes omitted.)
In summary, by Mr Neary’s calculations, if full remission of the eligible debt was granted, the remaining ineligible debt could be paid by the Applicant within 22 months. If no remission was granted, all of the debt (comprising the eligible and ineligible debts) would be paid off over 46 months (approximately 3.8 years). This timing was not contested by the Respondent. However the Respondent asserted that these periods were reasonable.
The following question is contained in an ATO document titled “Tax Agent/Lawyer/Solicitor Recommendation Template”: “Is the excess income sufficient to allow payment of the liability within two to three years?” (T6, page 33). As noted in the first submission in paragraph [36] above, Mr Neary submitted that this question implies that a reasonable period is two to three years. However, it is unclear to the Tribunal as to why there is a reference to the ability for the tax liability to be paid within two to three years in this ATO form. This is particularly when cl 6 of the PSLA expressly states (in the relevant footnote) that: “A ‘reasonable timeframe’ depends on the size of the debt and other relevant circumstances in each case”. The Applicant is a relatively young man with a de facto partner and no dependents, and a total taxation debt of approximately $98,000. The Tribunal acknowledges that using his surplus of $2,579 to repay his eligible and ineligible debts may delay the Applicant from getting ahead financially during that time (for example, by delaying the purchase of a house). However, the Tribunal is of the view that it would not be unreasonable for the Applicant to apply his monthly surplus towards repaying his the eligible and ineligible debts within a period of 3.8 years.
Although not noted in the Applicant’s objection decision, with respect to reasonableness Mr Neary also submitted that the application of Practice Statement Law Administration 2011/20: Payment and Credit Allocation (the PSLA 2011/20) meant that the Commissioner would prioritise the payment of the ineligible debt over the repayment of the eligible debt (see PSLA 2011/20, Attachment C, point (vi) and (xxi)). The PSLA 2011/20 gives broad discretion to the Commissioner to decide how to allocate payments to specific debts. It also contemplates that the taxpayer can nominate which debt the payment applies to, although the Commissioner does not have to follow that instruction (see generally, cl 3 and 5 of PSLA 2011/20). The Applicant’s submission was that the statement in paragraph [26] of the Respondent’s SFIC that, “Applying $2579 would result in the eligible tax debt of less than $50,000 being repaid in under three years” was a “misrepresentation by omission” (Exhibit A2, page 5). This was because the application of PSLA 2011/20 would be that the eligible debt would in fact not be repaid in 22 months because it would be the ineligible debt that would be repaid first. However, the Tribunal concurs with Mr Slater’s submission that the allocation of the payments is of no real consequence. This is because both debts are incurring the same interest charge at the same rate, and so regardless of whether the Applicant’s payments are allocated to one debt or the other, the overall debt will reduce, with both debts able to be repaid in approximately 3.8 years if the monthly surplus is applied to them (transcript, page 19).
Taking into account the above discussion, the Tribunal is of the view that the income/expenditure test is not satisfied because it is not unreasonable for the Applicant to use his monthly surplus to pay his tax liability. Therefore this test weighs against the Applicant.
Assets/liabilities test
The assets/liabilities test is defined in cl 7 of the PSLA as:
The purpose of the asset/liabilities test is to assess a taxpayer's equity in, or access to, assets which may be indicative of their capacity to pay. Consideration is given to any property owned wholly or jointly by the taxpayer and their partner, privately or within a business structure.
There are several types of assets which are regarded as normal and reasonable possessions. These would not be expected to be surrendered in order to pay a tax debt, provided they are of a modest nature and include:
·ownership of, or equity in, a residential property which is the taxpayer's home
·a motor vehicle
·furniture and household goods
·tools of trade
·cash on hand or bank balances sufficient to meet immediate day-to-day living expenses, and
·funds put aside by aged persons to cover funeral expenses.
All other significant assets need to be scrutinised to determine capacity to pay (either by sale or used as security for a loan). These assets include other real estate, luxury motor vehicles or boats, life insurance or annuity entitlements, shares and other investments, and collections for trading, investment or hobby purposes.
The parties agree that the Applicant has insufficient assets to pay his taxation debts, and consequently this test has been satisfied. As stated in his application for release, the Applicant is the owner of two motor vehicles with an approximate total value of $7,500 (T3, page 14; but stated as $8,500 in the Commissioner’s decision which includes the vehicle of the Applicant’s de facto partner valued at $1,000) and monies in various bank accounts totalling approximately $1,500. Regardless of whether the Applicant’s assets total $9,000 or $10,000, it is clear to the Tribunal that the Applicant’s debts greatly exceed his available assets. Inclusive of the Applicant’s taxation debts of approximately $98,000, the Applicant will consequently have net assets of either approximately negative $89,000 or negative $88,000. The Tribunal therefore agrees that the Applicant satisfies the assets/liabilities test, as the Applicant’s debts greatly exceed his available assets. Therefore this test weighs in favour of the Applicant.
Other relevant factors
Clause 8 of the PSLA sets out other relevant factors which may be considered in deciding whether to exercise the discretion to grant release from taxation liabilities. The opening sentence refers to the discretionary nature of the decision:
The Commissioner is not bound to grant release even though a taxpayer may demonstrate serious hardship. However the Commissioner is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. Examples of situations in which the Commissioner may decide against granting release, even though implications of serious hardship may be drawn are:
·where a taxpayer appears to have unreasonably acquired assets ahead of meeting their tax liabilities
·where a taxpayer appears to have disposed of funds or assets without giving consideration to their tax liability
·where release would not result in reduction of hardship, such as where the person has other liabilities or creditors
·where a taxpayer has paid other debts (either business or private), in preference to their tax debt
·where the taxpayer, without good reason, has not pursued debts owed to them
·where serious hardship is likely only to be short term
·where the taxpayer has a poor compliance history
·where the taxpayer is unable to show that they have planned for future debts
·where the taxpayer has structured their affairs to place themselves in a position of hardship (for example, placing all assets in trusts or related entities over which they have control), and
·where the taxpayer has delayed lodgement of returns resulting in the accumulation of a large debt that they are unable to pay.
(Footnotes omitted.)
The above example most applicable to the Applicant’s situation is the instance where the taxpayer has a poor compliance history. This was a factor that was taken into account by the Respondent in its reasons for decision. The reasons for decision set out that the Applicant was late lodging his income taxation returns for the financial years 2010 through to 2016. He was also late in his BAS lodgements between September 2015 and December 2017.
In summary, Mr Neary submitted that the Respondent did not adequately consider the impact of the Applicant’s personal circumstances on his ability to comply with his taxation obligations. This was because the only reference to the Applicant’s personal circumstances within the reasons for decision was in paragraph [29] of the conclusion (and not under the relevant test of “other relevant factors”). The paragraph stated (T2, page 8):
We acknowledge your personal circumstances as stated in your objection; however release decisions are solely based on the stringent yet balanced requirements of serious hardship, so as to substantiate differential treatment to those taxpayers who, despite the struggle, pay their taxes.
As noted above, these personal circumstances included (see above, para [7]):
·the Applicant’s back injury, which required physiotherapy and time taken off work for multiple weeks in order to recover;
·difficulties in his relationship with his de facto partner;
·the passing of his grandmother and cousin;
·his dependence on alcohol; and
·the loss of his driving license due to a drink driving conviction.
Mr Neary made the following submission on behalf of the Applicant at the hearing (transcript, page 9):
…In our view in the real world, the Commissioner’s submissions are essentially he had a poor compliance record and so can’t be considered effectively. In our view, when the wheels fall of in someone’s life, they all fall off. The compliance as well as the cashflow to meet it and certainly the compliance is back up to date. He is currently meeting his tax obligations but struggling to pay the debt – the historic debt. So in our view that’s an unfair leaning that you would expect somebody who is in trouble – going through trouble in his life and a smaller tax payer relatively new to business in terms of being a subcontractor when most of his peers are probably employs at other places. So it’s a – he’s got a high level of thresholds to jump through in terms of GST compliance, managing his own pay as you go tax and those sorts of issues. So clearly the wheels fell off. In our view, when the wheels fall off, they all fall off. So tardy compliance is part of that.
The Tribunal accepts that the Applicant’s personal circumstances and injury were likely to have contributed to his poor compliance history in the 2014, 2015 and 2017 financial years, particularly with respect to the lateness with his BAS lodgements which corresponded with these financial years. However, the Applicant had a poor compliance history prior to this time, with late lodgements of income taxation returns in the financial years 2010 through to 2013.
Mr Slater submitted that these personal circumstances may well entitle a taxpayer to seek an extension of time to lodge a relevant document, or to seek remission of a penalty, depending on the timing of these events. However, they would be unlikely to entitle the taxpayer to a reduction of his eligible debts (transcript, page 20). The Tribunal accepts this submission, being of the view that it would not be proportionate to release the Applicant from his eligible taxation liability based on these unfortunate circumstances. The Tribunal notes that although these circumstances would likely have been distressing for the Applicant and would have been challenging for him, they are circumstances that many people face while still being capable of complying with their taxation obligations. In the Tribunal’s opinion, the Applicant’s poor compliance history is somewhat mitigated, but not cancelled out entirely, by these unfortunate personal circumstances.
CONCLUSION
In summary, the Tribunal has found that the Applicant:
(a)does not satisfy the income/outgoings test;
(b)satisfies the assets/liabilities test; and
(c)with respect to the other relevant factors test, had poor compliance in the 2010 through to 2013 financial years. However, in the 2014, 2015 and 2017 financial years the Applicant’s compliance with his taxation obligations was impacted to some degree by his personal circumstances.
Overall, after weighing each of these tests the Tribunal is not satisfied that the Applicant would suffer serious hardship if he was required to satisfy the whole of his eligible taxation debt. The Applicant’s monthly surplus means that he has the means to meet his reasonable living expenses. This includes being able to afford basics such as food, clothing, medical supplies, and accommodation, with a monthly surplus remaining to satisfy his taxation debts. He would not be deprived of necessities and would still be able to meet his reasonable living costs if he is required to meet both his eligible and ineligible taxation liabilities. For the same reasons, the Tribunal is also not satisfied that a partial release should be granted. The Tribunal further finds that although the Applicant experienced difficult personal circumstances in the 2014, 2015, and 2017 financial years, on balance, these are not sufficient to entitle him to a whole or partial release from his eligible debt.
The Applicant has not established that the Reviewable Decision should not have been made, or should have been made differently.
DECISION
For the reasons outlined above, the correct or preferable decision is to affirm the Reviewable Decision dated 26 October 2018.
I certify that the preceding 53 (fifty-three) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr M Evans
...................................[sgd].....................................
Associate
Dated: 24 September 2019
Date(s) of hearing: 12 June 2019 Representative for the Applicant: Mr S Neary, Neary Consulting Tax Specialists Counsel for the Respondent: Mr C Slater Solicitor for the Respondent: Mr S Hotger, Australian Taxation Office
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