Cox and Commissioner of Taxation (Taxation)
[2020] AATA 3857
•2 October 2020
Cox and Commissioner of Taxation (Taxation) [2020] AATA 3857 (2 October 2020)
Division:SMALL BUSINESS TAXATION DIVISION
File Number:2019/5707
Re:Dallas Cox
APPLICANT
Commissioner of TaxationAnd
RESPONDENT
DECISION
Tribunal:Senior Member Dr M Evans-Bonner
Date:2 October 2020
Place:Perth
The Reviewable Decision dated 31 July 2019 is set aside and substituted with the decision that the Applicant is granted a release of the full amount of his eligible taxation debt.
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Senior Member Dr M Evans-Bonner
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 – Respondent conceded that Applicant taxpayer would suffer serious hardship if he were required to satisfy his taxation liabilities – meaning of phrase “serious hardship” – income/outgoing test – assets/liabilities test – other relevant factors in deciding whether to exercise discretion to grant release from taxation liabilities – Tribunal finds it is appropriate to exercise discretion to grant Applicant taxpayer release from eligible taxation liabilities – reviewable decision set aside and substituted
LEGISLATION
Taxation Administration Act 1953 (Cth) – ss 14ZZK, Division 340 of Schedule 1, 340-1 of Schedule 1, 340-5 of Schedule 1, 340-5(3) of Schedule 1, 340-10 of Schedule 1, 340-10(1) of Schedule, 340-10(2) of Schedule 1
Income Tax Assessment Act 1936 (Cth) as repealed by Taxation Laws Amendment Act (No. 6) 2003 (Cth) – s 265
Income Tax Assessment Act 1997 (Cth) – s 4-1, 5-15
CASES
Balens and Federal Commissioner of Taxation [2014] AATA 691
Commissioner of Taxation v Milne (2006) 153 FCR 52
Corlette v Mackenzie (1996) 62 FCR 597
KNNW and Commissioner of Taxation [2014] AATA 691
Lau and Commissioner of Taxation [2016] AATA 46
PKKB and VCBQ and Commissioner of Taxation [2014] AATA 962
Re Filsell and Commissioner of Taxation [2004] AATA 1012
SECONDARY MATERIALS
Australian Taxation Office, Debt relief, waiver and write off
(PS LA 2011/17,
6 May 2020) – cls 8, 9, 10, 11, 12
REASONS FOR DECISION
Senior Member Dr M Evans-Bonner
2 October 2020
THE APPLICATION
On 11 September 2019, the Applicant filed an application for review in the Small Business Taxation Division of the Administrative Appeals Tribunal (the Tribunal) (T2/4-8), seeking review of a decision of the Deputy Commissioner of the Respondent dated 31 July 2019 (T54). This will be referred to as the Reviewable Decision.
The Reviewable Decision disallowed the Applicant’s objection dated 30 May 2019 (T53/525-529) to an earlier decision of the Deputy Commissioner of the Respondent of
26 April 2019 not to grant the Applicant a release from an eligible taxation debt (T52; T52.1).
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 debt under s 340-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA).
BACKGROUND
The Applicant was a subcontractor in the building industry during the taxation years relevant to this application. He is no longer working as a subcontractor and is currently in receipt of the Newstart allowance.
The Applicant lives in a “granny flat” on his mortgaged residential property. He started to build a house on this property in 2000 (transcript/43), but it is incomplete because he could not afford to finish it. There is a roof on the property, but no glass, and the electrical and plumbing have not been installed (transcript/21). Apart from his car (which he estimates to be valued at $5000-$6000), this is the Applicant’s only asset (transcript/41). He has no savings, shares, or superannuation (transcript/40). He has some tools of trade but is of the opinion that they are of minimal, if any, value because they are second-hand.
SERIOUS HARDSHIP
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 Schedule 1 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”.
ELIGIBLE AND INELIGIBLE TAXATION LIABILITIES
The Applicant applied for release from his eligible taxation liabilities on approximately 21 February 2019 (T50). He sought release from taxation debts totalling $131,924.14. Of this sum, $123,828.64 was eligible for release and $8,095.50 was ineligible for release (T52.1/516).
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 include income tax under s 4-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), general interest charges (GIC), 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 debts started to accumulate on 23 February 2004 when he lodged his 2001, 2002 and 2003 income taxation returns (T51/502). His income taxation liability as at 30 June 2018 was $27,701.95. This comprised outstanding amounts of income tax for the 2003, 2004, 2006, 2007, 2009, 2014, 2016 and 2018 income taxation years (R2/3[16]). His running balance account debt (“CAC debt”) started to accumulate on 11 May 2004 when he lodged his March 2004 Business Activity Statements (T51/502). The bulk of the Applicant’s taxation debt comprises an accumulation of GIC and other interest charges and legal costs.
The hearing of this application was on 27 August 2020. At the hearing, the representative for the Respondent, Ms McClurkin, confirmed that as at the day before the hearing the amount of the Applicant’s taxation debts had increased to $142,398.31. This sum is comprised of an eligible debt of $134,302.81 and an ineligible debt of $8,095.50.
TWO-STAGE APPROACH
The determination of whether an applicant should be released from their eligible taxation liability ordinarily involves a two-stage approach. The first consideration is whether the applicant will suffer serious hardship if they were required to satisfy their taxation liability (see Item 2 of the Table under s 340-5(3) of the TAA). If the answer to that question is “yes”, the Tribunal will consider whether the discretion to release the applicant from that liability should be exercised. It is a matter of discretion for the Tribunal and not a matter of right (see Wilcox J in Corlette v Mackenzie (1996) 62 FCR 597, 598 [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).
This approach was described by Deputy President McDermott in Lau and Commissioner of Taxation [2016] AATA 46 (Lau) 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)
153 FCR 52.
CONCESSION THAT THE APPLICANT IS SUFFERING SERIOUS HARDSHIP
The Australian Taxation Office has issued the Practice Statement Law Administration 2011/17: Debt relief, waiver and non-pursuit (PSLA) to assist decision-makers. The latest version of the PSLA was published on 6 May 2020. The PSLA sets out, amongst other things, the tests to be applied to determine the merits of a serious hardship application. These are the income/outgoings test, and the assets/liabilities test (defined in cl 9 and cl 10 of the PSLA respectively).
At the hearing, the Respondent cross-examined the Applicant about his income/outgoings and assets/liabilities. However, during this cross-examination and following questions from the Tribunal, the Respondent conceded that the Applicant was suffering serious hardship (transcript/49 and 60). The Respondent confirmed that this involved a concession that the income/outgoing test and the assets/liabilities test should be resolved in the Applicant’s favour. The Tribunal agrees that an application of both tests shows that the Applicant is suffering serious hardship.
Consequently, the remaining question for determination by the Tribunal is whether the Tribunal should exercise discretion to release the Applicant in full or in part from his eligible taxation liabilities.
SHOULD THE TRIBUNAL RELEASE THE APPLICANT IN WHOLE OR PART FROM HIS ELIGIBLE TAXATION LIABILITIES?
Clause 11 of the PSLA sets out other relevant factors which may be considered in deciding whether to exercise the discretion to grant a taxpayer who is suffering serious hardship release from their eligible taxation liabilities. The opening sentence refers to the discretionary nature of the decision:
We are not bound to grant release even if a taxpayer can demonstrate serious hardship may be caused by payment of their liability. However we are obliged to act reasonably and not arbitrarily.
Examples of situations in which we 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
·a taxpayer appears to have disposed of funds or assets without giving consideration to their tax liability
·release would not alleviate hardship, such as where the person has other liabilities or creditors
·a taxpayer has paid other debts (either business or private), in preference to their tax debt
·the taxpayer, without good reason, has not pursued debts owed to them
·serious hardship is likely only to be short term
·the taxpayer has a poor compliance history
·the taxpayer is unable to show that they have planned for future debts
·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)
·the taxpayer has delayed lodgement of returns resulting in the accumulation of a large debt that they are unable to pay.
(Footnotes omitted.)
The Respondent argued that despite the Applicant suffering serious hardship, the Tribunal should not exercise the discretion to release the Applicant in whole or in part from his eligible taxation liabilities.
Specifically, the Respondent made the following submissions in closing (transcript/60):
So, we submit that the tribunal should not exercise its discretion to release the applicant in whole or in part from his taxation liabilities as there are policy reasons to refuse the release which are all set out in the PSLA at paragraph A.
So the first point I will make is granting relief would not reduce Mr Cox’s hardship. He has stated today the deficit that he has on a fortnightly basis - and that’s without even making any contribution to his outstanding tax liability. The second point I will make is the applicant has made no provision for his taxation obligations at a time when he reasonably ought to have known that such taxation liabilities existed or would exist.
The third point, the applicant refinanced to retain his property at a time when these amounts could have been paid against his tax liability. The next point I will make is the applicant has a history of failing to make payments towards his outstanding tax debt. His compliance history is poor over an extended period of time.
Further, we’ve heard the applicant has used available funds to discharge debt due to other private creditors in preference to debts due to the respondent. Further, the applicant has failed to address his tax debt including when he borrowed funds to retain ownership of his property in 2013. He has then expended funds building a house on the property which we have heard his evidence about today.
The applicant has other debt including the taxation debt which is ineligible for relief and he has not made any provisions for those liabilities and it is conceivable that he may be bankrupt in relation to these amounts even if he is granted release from his eligible tax debt.
He owes money to his ex-wife, his brother, his sister. Now, Senior Member, I submit there is nothing in the applicant’s circumstances that would warrant him being treated preferentially to any other taxpayer.
The Tribunal agrees that there are some circumstances which are not favourable to the Applicant and which tend to suggest that the Tribunal should not relieve him in whole or in part from his eligible taxation debt. He has a poor history of compliance, as indicated by the fact that his income taxation debts accrued over numerous taxation years. Although the Applicant’s evidence was that his wages had not increased with the cost of living expenses increasing (transcript/58), his net income did increase over the years. Looking at the relevant taxation years where the Applicant accrued a debt, in 2003, his net income was $26,491 (T3/10); in 2004 it was $32,441 (T4/27); in 2006 it was $38,569 (T6/63); in 2007 it was $31,833 (T7/82); in 2009 it was $44,268 (T9/120), in 2014 it was $61,769 (T14/225), in 2016 it was $66,385 (T16/275) and in 2018 it was $75,483 (T18/337). This may be because, as the Applicant suggested, he may have worked more hours in the years when his income increased (transcript/56). The Applicant also stated that he has “struggled with the ABN system from day one of it being introduced” (T53/533). However, working additional hours, and having difficulty navigating the taxation system does not absolve the Applicant from the responsibility to pay his income tax. Additionally, the amounts of net income that the Applicant earnt over these years does suggest that he should have been able to, but did not, put enough monies aside to pay his income tax. Although the amount of income tax owed by the Applicant for the relevant taxation years equates to a sum of $27,701.95, a substantial amount of GIC and other charges have accrued on this amount, compounding over a period of nearly 17 years and contributing to the Applicant being in a position of serious hardship.
To the Applicant’s credit, the Applicant has acknowledged “his lack of understanding of appropriate tax keeping and recording practices”, and submitted that he has now engaged the services of a specified accounting firm “so that in the future he will be able to fulfill his Taxation obligations on time and in full” (Applicant’s submissions dated 24 September 2020). The Tribunal accepts these submissions, noting that his engagement of the accounting firm is likely to assist the Applicant with future compliance with his taxation obligations.
The Tribunal also accepts the Applicant’s evidence that he did try to pay his taxation debt when he had spare money in his bank account (transcript/52-53). This evidence is, in part, supported by the Applicant’s statement of account (showing transactions from 1 July 2000 to 12 November 2019) (T36) which shows numerous electronic payments by the Applicant in 2017 and 2018 towards his taxation debt. However, unfortunately, at this time the GIC and other charges had compounded to such an extent that any payments by the Applicant were only likely to make minimal, if any, difference to reducing the total debt.
The Respondent submitted that granting relief is unlikely to relieve the Applicant of serious hardship because he is likely to go bankrupt anyway. The Tribunal heard evidence at the hearing that the Applicant is, to put it colloquially, going backwards, because his fortnightly expenses exceed his fortnightly income. The Applicant’s evidence was that he covered the deficit in his expenses by frequently applying to defer payment of bills due to financial hardship, and through obtaining a loan from his brother (of approximately $5,000 for repairs, maintenance and a new motor in his car, of which he still owes $4,000), for which there appears to be no regular payment arrangement. He also obtained a loan from his sister (of approximately $19,000 to pay a child support debt) which he is paying back $50 per fortnight. He also owes approximately $7,400 to his former wife as part of a property settlement following their separation, which he is also paying back $50 per fortnight. In addition, at the time of the hearing the Applicant was receiving a higher rate of the Newstart allowance as part of the Federal government’s COVID-19 relief measures. The Tribunal agrees that the Applicant will still owe these monies if he is relieved of his eligible taxation debts, however these debts are likely to be more manageable if he is granted relief.
On 18 September 2020, the Tribunal requested further submissions from the parties. These were: whether GIC, or any other charges, would continue to accrue on the outstanding debt if the Tribunal were to grant a partial release; and if so, whether the Tribunal could take this into account in considering whether to exercise the discretion to grant the Applicant relief in part or in full from his eligible taxation debt. The Respondent confirmed that GIC would continue to accrue, by operation of s 5-15 of the ITAA 1997 and s 45-80 of Schedule 1 of the TAA, and also that other interest charges, for example post-judgment interest, would continue to accrue on the Applicant’s outstanding balance according to law (para [5], Respondent’s supplementary submissions dated 23 September 2020). In summary, the Respondent submitted that even if the Applicant were to be partially released from his eligible taxation debt, it would not alleviate his serious hardship because GIC would continue to accrue and “it would act to continue his serious hardship” (para [6] Respondent’s supplementary submissions dated 23 September 2020). In support, the Respondent cited Tribunal decisions where the discretion to grant relief was not exercised because, even with a release from their taxation debts, the applicants would have continued to suffer serious hardship. These decisions were: PKKB and VCBQ and Commissioner of Taxation [2014] AATA 962, at [36]; Balens and Commissioner of Taxation [2013] AATA 203 at [35]; and KNNW and Commissioner of Taxation [2014] AATA 691 at [58].
The Tribunal agrees, in part, with the Respondent’s submission. If the Tribunal were to grant a partial release of the Applicant’s eligible taxation debt by, for example, releasing him from the GIC and other interest charges but not from the actual amount of income taxation he owes ($27,701.95), interest would continue to accrue on that outstanding debt. Considering the deficit in the Applicant’s fortnightly expenditure, any payments he could make (which are likely to be minimal) towards this $27,701.95 would likely be cancelled out or minimised by the continued accrual of interest, which may continue his being in serious hardship. However, this, in the Tribunal’s submission, lends weight to the Tribunal exercising discretion to relieve the Applicant of the whole of his eligible taxation debt.
Relief from the whole of his eligible taxation debt is, in the Tribunal’s opinion, likely to relieve the Applicant of hardship. This is because relief from his eligible taxation debt will significantly reduce the Applicant’s total debt, from in excess of $140,000 to only $8,095.50. This would make it entirely possible for the Applicant repay the $8,095.50 within a reasonable time. However, if the Applicant is not relieved of his eligible taxation debt, interest and charges will continue to compound. He is likely to face long-term hardship and the Tribunal cannot foresee that he will be able to repay his taxation debts in his lifetime if no release is granted, or even if a partial release is granted.
The Applicant has arranged to re-pay his private debts, instead of applying all his available money to his taxation debts. This is somewhat understandable as these are smaller debts owed to family members that can foreseeably reduce by the small fortnightly amounts the Applicant is paying. However, making small repayments to his taxation debts is unlikely to reduce them, given the amount of interest that is compounding. Unfortunately for the Applicant, this factor weighs against the exercise of discretion to grant him relief because the payment of taxation debts should be prioritised over other debts.
The Tribunal does not agree with the submission that the Applicant “refinanced to retain his property at a time when these amounts could have been paid against his tax liability”. The Tribunal accepts the Applicant’s evidence that his bank was about to sell his home and that the Applicant was required to refinance at a high interest rate (because he had difficulty obtaining finance) to obtain the funds to save his home (see Supreme Court Order dated 23 October 2012 giving possession of his residential property to the bank at T53/535-537). The Tribunal finds that the Applicant refinanced his property to save his home and it was not reasonable or possible for those funds to be accessed to pay his taxation liabilities.
The Tribunal also did not agree with a question from the Respondent’s representative suggesting that the Applicant should have accepted a deferral of his mortgage repayments as part of the COVID-19 relief offered by his lender so that he could service his taxation debt. As the Applicant correctly observed (transcript/39):
I need a house to live in. Well I need a house to live in…Is that too much to ask? Is that way too much to ask to have a house to live in?
Clause 10 of the PSLA provides that a taxpayer should not be required to surrender a residential property that is the taxpayer’s home in order to pay a taxation debt. In the Tribunal’s opinion, it also follows that the taxpayer should not be required to defer mortgage payments on their residential home in order to pay a taxation debt. This is particularly when the circumstances are that the debt and associated interest and penalties would continue to accrue and possibly culminate in the taxpayer’s residential home being in jeopardy at a later stage.
The Applicant is now living on his residential property in a granny flat with an unfinished house on it because he cannot afford to finish it. This is likely to make selling the property difficult. It is also unclear how much the property is worth with an unfinished dwelling on it, or in general, because no property valuation report was before the Tribunal. However, as noted above, the PSLA provides that taxpayers are not required to surrender ownership of a residential property which is the taxpayer’s home to pay a taxation debt. The same can be said of the Applicant’s other assets which are also contemplated in the PSLA as assets that are not required to be surrendered to repay a taxation debt. These include the Applicant’s tools and motor vehicle.
The Tribunal is also concerned that the Applicant’s taxation liabilities are having an impact on his mental health to a greater extent than would ordinarily be the case in these types of proceedings. In a letter dated 28 May 2019, the Applicant stated, “I am extremely concerned for my future, my mental wellbeing and what may come next” (see T53/532). At the hearing, the Applicant commented that his mental health and living standards are “very very low” (transcript/63), that he was suffering from “depression” and that the weight of his taxation debts “affects me so badly that sometimes I cannot even operate” (transcript/30). In his submissions dated 24 September 2020, the Applicant further stated that he has been suffering from depression and anxiety and has received counselling over the past ten years. He stated that he believes his ongoing taxation debts have been the major contributing factor to his mental health issues. To summarise, in these submissions, the Applicant further stated that if his taxation debts and the impact on his mental health were relieved, that he would be able to return to full-time work. The Tribunal accepts that there is no medical evidence to confirm the Applicant’s mental health issues. However, the Tribunal found the Applicant to be credible in this regard, and his agitated demeanour throughout the hearing adds further weight to the Tribunal’s concerns about the Applicant’s mental health.
In summary, the Applicant is a person who is suffering serious hardship. The factors which weigh in favour of granting a release include that his only assets are those that would not need to be surrendered under the PSLA in order to pay a taxation debt. He is 61 years of age and his only income is the Newstart Allowance. He is living in a granny flat on his property because he has been unable to afford to finish the unbuilt house on the property. It is the Tribunal’s opinion that it would not be possible for the Applicant to repay his full taxation debts in his lifetime and that if he were required to do so he would suffer substantial and long-term serious hardship. The weight of his taxation debt is also likely to be causing some detriment to his mental health.
According to the PSLA, the Tribunal, standing in the shoes of the Commissioner, is obliged to act reasonably and not arbitrarily. In other words, “[i]n 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” (Re Filsell and Commissioner of Taxation [2004] AATA 1012 quoted by the Deputy President McDermott in Lau at [65]). Some of the factors in the PSLA weigh against granting a release to the Applicant. These include the Applicant’s poor compliance record over numerous years and his failure to prioritise the payment of his taxation debts over other debts. However, after weighing the factors for and against the exercise of discretion, the Tribunal finds that discretion should be exercised in favour of the Applicant. In other words, in the Applicant’s circumstances the Tribunal finds that the Applicant has established that the Reviewable Decision should be set aside and substituted with a new decision that the Applicant should be granted a release. Accordingly, the Tribunal finds the Applicant has discharged his onus under s 14ZZK of the TAA.
With respect to whether the release should be in part, or in full (cl 12 PSLA), the Tribunal finds that, for the reasons outlined above, a full release would be reasonable, just and proper in the circumstances of the Applicant’s case. The Applicant must, however, pay the amount of his ineligible debt, which is not able to be released.
DECISION
The Reviewable Decision dated 31 July 2019 is set aside and substituted with the decision that the Applicant is granted a release of the full amount of his eligible taxation debt.
I certify that the preceding 38 (thirty-eight) paragraphs are a true copy of the reasons for the decision herein of Senior Member D M Evans-Bonner
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Associate
Dated: 2 October 2020
Date of hearing: 27 August 2020 Applicant: Self-represented Respondent: Ms K McClurkin, Australian Taxation Office
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