Lipton and Commissioner of Taxation (Taxation)
[2015] AATA 754
•25 September 2015
Lipton and Commissioner of Taxation (Taxation) [2015] AATA 754 (25 September 2015)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2014/4943
Re
Laurie Lipton
APPLICANT
And
Commissioner of Taxation
RESPONDENT
File Number(s)
2014/4944
Re
Lily Lipton
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Ms G Lazanas, Senior Member
Date 25 September 2015 Place Sydney The decisions under review are affirmed.
................. ....[sgd]...................................................
Ms G Lazanas, Senior Member
CATCHWORDS
TAXATION – application for release from tax debt refused – whether applicants would suffer serious hardship if required to satisfy tax debts – whether applicants able to redraw loan facility – whether discretion to release debts in part or in full should be exercised – decisions under review affirmed
LEGISLATION
Taxation Administration Act 1953, s 14ZZK(b); Schedule 1 ss 340-5, 340-10
CASES
Corlette v MacKenzie (1996) 62 FCR 597
Federal Commissioner of Taxation v A Taxpayer (2006) 63 ATR 450
Powell v Evreniades (1989) 21 FCR 252
Re Ferguson and Federal Commissioner of Taxation [2004] AATA 779Van Grieken v Veilands (1991) 21 ATR 1639
REASONS FOR DECISION
Ms G Lazanas, Senior Member
25 September 2015
INTRODUCTION
Mr Laurie Lipton and Mrs Lily Lipton are pseudonyms for the applicants in this case to preserve confidentiality as to their private affairs.
Mr and Mrs Lipton seek review of the Commissioner’s decisions both dated 22 May 2014 to disallow their respective objections against the Commissioner’s decisions to refuse to release them from certain tax liabilities pursuant to s 340-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA).
As at 23 January 2015, Mr and Mrs Lipton owe the following taxation debts which are eligible for release pursuant to s 340-5(3) of Schedule 1 to the TAA, also referred to as the relevant tax debts in this decision:
Income Year Amount – Mr Lipton Amount – Mrs Lipton 2010 - $0.65 2011 $13,685.63 $1,457.35 2012 $9,430.75 $427.02 General Interest Charge - - Total $23,116.38 $1,885.02
In June 2013, Mr and Mrs Lipton applied to the Commissioner of Taxation to be released from the relevant tax debts on the basis that they would suffer serious hardship if they were required to pay the debts. They argued that the Commissioner should exercise his discretion to release them in whole or part from paying the relevant tax debts because their financial position was due to “serious family difficulties and problems”.
They explained that the start of their fiscal predicament was a serious accident which happened to Mrs Lipton in April 2011 which led to her being unable to work and which also distracted them from attending to their taxation returns. This was compounded by their accountant at the time failing to prepare their tax returns for the years ended 30 June 2010 and 2011 until very late. They explained that they had a series of personal events and family difficulties, described in detail below. This was followed by a period of “ongoing delays and confusion” with regards to their tax compliance as they were “under the mistaken impression that [they] had been paying tax instalments regarding the 2011 year as well as 2012 but this apparently was not the case due to [their] tax lodgements being so far behind”.
In November 2013, following the receipt of further information from the taxpayers, the Commissioner decided not to grant them release from payment of the relevant tax debts.
In January 2014, Mr and Mrs Lipton lodged objections to the Commissioner’s decisions and in May 2014, the objections were disallowed by the Commissioner.
On 21 September 2014, Mr and Mrs Lipton applied to the Tribunal for review of the Commissioner’s objection decisions. The onus is on them to show that the taxation decisions concerned, namely, the Commissioner’s refusal to provide debt relief, should not have been made or should have been made differently (s 14ZZK(b)(ii) of the TAA).
THE ISSUES BEFORE THE TRIBUNAL
The two issues before the Tribunal are as follows. First, would Mr and Mrs Lipton suffer serious hardship if they were required to pay the relevant tax debts? Secondly, if they would suffer serious hardship, should the Commissioner exercise his discretion to release them, in whole or in part, from that tax liability?
THE LEGISLATIVE FRAMEWORK AND PRINCIPLES
Section 340-5 of Schedule 1 to TAA relevantly provides as follows:
340-5 Release from particular liabilities in cases of serious hardship
Applying for release
(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.
(2) The application must be in the * approved form.
(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.
Entity and condition
Item
Entity
Condition
1
an individual
you would suffer serious hardship if you were required to satisfy the liability
Section 340-10 of Schedule 1 to the TAA sets out the liabilities to which s 340-5 applies. Significantly, the list does not include taxation liabilities due to GST, general interest charges and penalties. Relevantly, Mr and Mrs Lipton also have a joint and severable liability for a GST debt of $11,469.28 that is not eligible for release. That GST debt relates to their partnership which trades in the building industry and in which Mr and Mrs Lipton are partners.
As evident from the terms of Item 1 of s 340-5(3), the Commissioner’s decision to provide discretionary relief relevantly rests on an individual taxpayer showing that the payment of the tax would result in the individual taxpayer suffering serious hardship. The phrase “serious hardship” is not defined and has its ordinary meaning: Federal Commissioner of Taxation v A Taxpayer (2006) 63 ATR 450 at [13]-14] per Stone J (quoting with approval Powell v Evreniades (1989) 21 FCR 252 at 258, 259 per Hill J). The case of Powell v Evreniades concerned the operation of the former s 265 of the Income Tax Assessment Act 1936 which involved a similar test to the “serious hardship” test. Hill J explained as follows, at 258:
There is no definition in s 265 of what is meant by "serious hardship" nor would one expect there to be. Each of the words in the phrase is an ordinary English word having a well understood meaning. 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.
Furthermore, Hill J stated at 259 that:
it is inappropriate to endeavour in the abstract to state tests of what will and what will not constitute serious hardship ...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.
It is clear from the authorities that in considering the meaning of “serious hardship”, the concern is as to the taxpayer’s financial difficulties if the taxpayer were required to pay the tax debt. Also, those financial difficulties have to be serious, in the sense of quite demanding, although not necessarily at the level of destitution. Determination of the issue of serious hardship also entails a consideration of the financial affairs of the taxpayer, including his or her financial relations with other members of his household: Van Grieken v Veilands (1991) 21 ATR 1639 at 1646 per Gummow J.
Whether serious hardship is established in a particular case is, moreover, gauged by reference to normal community standards, rather than the individual taxpayer’s personal circumstances. This was made clear in Re Ferguson and Ferguson v Commissioner of Taxation [2004] AATA 779 where the Tribunal analysed whether there was “hardship of a significant kind in terms of normal community standards.”
A conclusion that there is “serious hardship” does not determine the matter because, as explained by Stone J in Federal Commissioner of Taxation v A Taxpayer (at [58]), there are two steps, and the second step involves the appropriate exercise of the discretion of whether or not to grant relief even if satisfied of the threshold serious hardship point. This is because, relevantly, the legislative provision states that the Commissioner “may” release an individual from a relevant tax liability if that individual “would suffer serious hardship” if they were required to satisfy the liability (s 340-5(3) of Sch 1 to the TAA). The discretion reflects the well established position that a taxpayer ought not to be entitled as a matter of right to the release of a tax liability on the grounds that they would suffer serious hardship. The considerations that may be relevant to the exercise of the discretion include an examination of the circumstances out of which the hardship arose: Corlette v MacKenzie (1996) 62 FCR 597 at 598.
THE FACTUAL BACKGROUND AND THE EVIDENCE
The following findings of fact are based on the evidence of Mr and Mrs Lipton, including their oral evidence at the hearing, the T-Documents, the supplementary T-Documents, as well as additional documents tendered by them and by the Commissioner at the hearing. For example, a key document tendered at the hearing was the probate of the will of Mrs Lipton’s mother. Most of the evidence was not in dispute, however, there was some disagreement as to whether Mr and Mrs Lipton were able to redraw their loans, and the precise amount of the surplus of income over expenditure, to which I will come shortly.
Mr Lipton is a building supervisor and 54 years of age. He is in a partnership with Mrs Lipton which provides building services. Mrs Lipton is a part-time receptionist and administrative assistant and 59 years of age. She is a casual employee of a medical centre and also a partner with Mr Lipton in their partnership which carries on building works. They live with their adult son in a 3 bedroom apartment in a seaside location in Sydney (the Property). They purchased the Property in about 1990. Its current market value, as conservatively estimated by Mr and Mrs Lipton, is $750,000. Their son is studying at university on a sports scholarship and is also an elite sportsperson.
Mr and Mrs Lipton explained that their tax payment problems began in April 2011 when Mrs Lipton broke her neck in an accidental fall at home. She underwent spinal surgery and extensive rehabilitation to regain use of her limbs and was unable to work or drive a vehicle or undertake her usual duties for several months. Mrs Lipton returned to work in or about July 2011, as a receptionist, initially working half days.
In late August 2011 Mr and Mrs Lipton accompanied their son, then 15 years old, to a sports competition in Poland.
They said that that it was about September 2011 when they became aware that their tax returns had not been lodged for the year ended 30 June 2010 even though the paperwork had been provided to their former accountant in November 2010. The tax returns for 30 June 2010 were then lodged in September 2011.
In November and December 2011, Mr Lipton’s mother, who lived in New Zealand started experiencing a number of serious health issues. Mr and Mrs Lipton decided to go to New Zealand with their son to spend time with Mr Lipton’s mother and extended family for Christmas. Mr and Mrs Lipton said that the airfares had been paid for by Mr Lipton’s mother as a gift.
At about the same time, Mrs Lipton discovered that her mother, who lived in Queensland, had been put into a nursing home by her sister for the Christmas period. Mrs Lipton was distressed by the situation as her sister had hidden this from her and also the fact of her mother suffering early dementia.
In January 2012, after returning from the family trip to New Zealand, Mrs Lipton then travelled to Queensland to look after her mother. Mrs Lipton said that she found her mother to be in a deteriorated state of health both physically and mentally and accordingly made arrangements for emergency respite nursing home care. Mrs Lipton said that she also became embroiled in a high conflict situation with her sister who “behaved very aggressively and verbally abused” her and their mother.
In the ensuing period, and especially from May to June 2012, Mrs Lipton attended numerous hearings and mediations at the Queensland Civil and Administrative Tribunal in relation to her application for the appointment of a guardian and an administrator in relation to her mother and her mother’s financial affairs. She also visited her mother in Queensland frequently to check up on her. The confrontations with her sister continued throughout this period and caused Mrs Lipton and her family a lot of nervous stress. Mrs Lipton’s doctor provided a brief medical report that was in evidence that corroborated this stressful situation.
In August 2012, Mr and Mrs Lipton’s son was once again selected to compete in an elite competition, this time in Hungary. Mr and Mrs Lipton decided to again join him and to also have a three week family holiday in Europe afterwards.
When they returned from overseas in or about September 2012, Mr Lipton found out that the company he had been working for had “gone broke unexpectedly”. He received no notice or severance payout. He also said it was difficult in the lead up to Christmas and the New Year to find any work and he remained unemployed for approximately five months which put the family under considerable financial stress. Although Mrs Lipton had returned to work as a casual receptionist, she was working less hours because of a slow down in her employer’s business and, therefore, earning less income. She was also spending more time visiting and looking after her mother in Queensland.
Mr and Mrs Lipton said that it was in early 2013 when they found out about their outstanding tax liabilities. This is consistent with the fact that their tax returns for the year ended 30 June 2011 were lodged late, in March 2013, by which time Mr Lipton was able to secure new work and they had changed their accountant. Their tax returns for the year ended 30 June 2012 were also lodged late in mid 2013.
Mrs Lipton’s mother passed away in April 2013. A period of bereavement and stress followed. Mrs Lipton also suffered depression which was exacerbated by continuing conflict between Mrs Lipton and her sister to do with the funeral and other financial arrangements regarding their mother’s estate.
The Commissioner tendered documents at the hearing which show that probate of the will of Mrs Lipton’s mother was granted in September 2013 and that Mrs Lipton is a named beneficiary (as well as her son as one of the grandchildren). Mrs Lipton also gave evidence at the hearing that her mother’s home had been sold during 2014 and that she was still waiting for resolution of the dispute with her sister before the amounts could be distributed. She agreed, under cross-examination, that she will inherit approximately $200,000.
It is clear from the above factual background that Mr and Mrs Lipton suffered from serious unfortunate accidents and unforseen events, including personal injuries and stressful family situations. It is also plain that the events distracted Mr and Mrs Lipton from meeting their obligations regarding taxation compliance and payment of taxes. The Commissioner acknowledged as much by already remitting the failure to lodge penalties and certain general interest charges.
The issue for determination by the Tribunal is whether Mr and Mrs Lipton would suffer serious hardship of a financial kind if they were required to pay the relevant tax debts. It will be recalled that Mr Lipton’s relevant tax debt is $23,116.38 while Mrs Lipton’s relevant tax debt is $1,885.02. Mr Lipton’s tax debt relates to income from bank interest and amounts distributed to him by the partnership. Mrs Lipton’s tax debt relates to income from bank interest, wages and amounts distributed to her from their partnership.
I turn now to an analysis of the financial situation of Mr and Mrs Lipton including the terms of the loan from their bank and make findings as set out below.
According to information provided by Mr and Mrs Lipton in January 2015, Mr Lipton’s fortnightly income as a distribution from the partnership (after business expenses and before tax) was $2,595 whereas the Commissioner calculated his fortnightly income to be approximately $3,190. (Also, the after tax amount according to the Commissioner was $2,410). In other words, there was a discrepancy of about $600 between Mr Lipton’s gross income and the Commissioner’s gross income figures. I prefer the calculations of the Commissioner as these were based on the deposits to the bank account of the partnership and the business expenses for the period July 2014 to October 2014. Mr Lipton did not argue that the figures for the period in January 2015 would be any different to the figures in mid to late 2014.
Mrs Lipton stated that her fortnightly income before tax was approximately $1,227. The Commissioner calculated her fortnightly income to be approximately $1,936 comprised of $874 from wages and $1,063 as a partnership distribution. (Also, the after tax amount according to the Commissioner was $1,594). There was a discrepancy of about $700 between Mrs Lipton’s gross income and the Commissioner’s gross income figures. The Commissioner accepted Mrs Lipton’s wages estimate but there was a difference as to the distribution from the partnership. It follows from my conclusion in [34] above in relation to the partnership that the Commissioner’s estimate of Mrs Lipton’s fortnightly income is also to be preferred.
Mr and Mrs Lipton estimated their household expenses, as reported to the Commissioner in January 2015, to total approximately $3,255 for both of them per fortnight (or $1,627.50 for each). Their combined expenses were as follows: mortgage payments ($1,400), food ($510), medical expenses ($325), school fees ($182), house repairs and maintenance ($25), utilities ($77), telephone ($62), internet ($18), rates ($85), vehicle registration and insurance ($104), vehicle repairs and maintenance ($30), petrol ($20), fares ($10), clothing ($5), household insurance ($31), life insurance ($20), loan repayments ($50), body corporate ($125), sport ($168) and entertainment ($8). The Commissioner did not challenge the household expenditure of Mr and Mrs Lipton to any significant extent except with respect to the mortgage repayments, and their expenditure on sport and other discretionary items which I deal with briefly below.
The Commissioner demonstrated, by reference to the bank’s statements, that Mr and Mrs Lipton were not required to make the level of mortgage repayments that they were making and that the minimum monthly repayment for the Home Loan is $265. Furthermore, the Equity Loan is an interest only loan and does not have any minimum repayment except the interest applied each month which was approximately $1,000. Accordingly, instead of Mr and Mrs Lipton being required to pay $1,400 per fortnight, as they contended, the Commissioner calculated that they could pay approximately $630 in total per fortnight. In response, Mr and Mrs Lipton stated that they always chose to pay more due to the uncertainty surrounding Mr Lipton’s work and so as to not risk being in default. I find that the Commissioner is correct in his analysis of the minimum fortnightly mortgage repayments.
As to their expenditure on sport, Mr and Mrs Lipton explained that they supported their son in his sporting endeavours. The Commissioner’s position was that as the son had approximately $12,600 in his own bank accounts, he could pay for some of the expenses associated with his university and sporting activities. Additionally, it emerged at the hearing from the oral evidence of Mr and Mrs Lipton that their son had recently gained part-time employment and may be able to pay for some of his own expenditure.
The Commissioner highlighted, by reference to some of the credit card statements of Mr and Mrs Lipton that were in evidence that there were also several items of “discretionary spending”, including frequent purchases of alcohol and pet care expenses.
Adopting the minimum mortgage repayments amount referred to in [37] above, Mr and Mrs Lipton’s combined fortnightly expenditure was $2,485 (or $1,243 each). When this amount of combined fortnightly expenditure is deducted from their combined fortnightly income after tax of $4,004 (see [34] and [35] above), Mr and Mrs Lipton are left with an additional amount of $1,520 per fortnight. If the sums are worked out for each of Mr Lipton and Mrs Lipton, the position is also a surplus. This is because Mr Lipton’s income after tax of $2,410 less expenses of $1,243 leaves him with an additional amount of $1,167 per fortnight and Mrs Lipton’s income after tax of $1,594 less expenses of $1,243 leaves her with an additional of $351 per fortnight.
It is necessary to add some further details about the loans arrangements. Mr and Mrs Lipton have a “Combination loan” with one of the major Australian banks comprised of two different kinds of loans which are secured against their Property. The first loan, referred to as the “Home Loan”, had an original loan amount of $50,000 which commenced in December 2001 and which matures in December 2031. The second loan, referred to as the “Equity Loan”, had an original loan amount of $250,000 which also commenced in December 2001 and matures in December 2031. While the current loan limit of the Equity Loan had remained at $250,000, the current loan limit of the Home Loan had been reduced to $35,256. The original purpose of both loans was refinancing in order to fund repairs to the concrete cancer and body corporate special levies in relation to the Property where Mr and Mrs Lipton resided.
According to a bank statement, as at 12 December 2014, the loan account balances were as follows:
(a)Home Loan - $20,383.92
(b)Equity Loan - $240,604.80
The following amounts were listed next to “Current available funds” in the same bank statement:
(c)Home Loan - $14,872.11; and
(d)Equity Loan - $9,395.20
A footnote in one of the bank’s statements (statement number 159) clarified that “[a]vailable Funds are amounts that you have built up by making additional repayments in excess of your scheduled repayments on your loan account. These funds may be available for redraw subject to the terms and conditions of your loan”. This was consistent with the loan offer document dated 30 November 2001 which was also in evidence and which together with the bank statements confirmed that the Home Loan had a redraw facility on it and that it had been activated but that there was no redraw on the Equity Loan. In other words, Mr and Mrs Lipton could redraw on their Home Loan which had a current loan limit in December 2014 of approximately $35,000. In December 2014, the amount that was available on the Home Loan for redraw was $14,872. In February 2015, the amount available was $16,742.
WOULD THE APPLICANTS SUFFER SERIOUS HARDSHIP?
Mr and Mrs Lipton did not satisfy me that they would suffer serious hardship if they were required to pay the relevant tax debts. On my calculations of their fortnightly income and expenditure which adopt the correct total minimum fortnightly mortgage repayments, Mr and Mrs Lipton have an additional amount of approximately $1,520 per fortnight available to them or, if examined individually, Mr Lipton has a surplus of $1,167 and Mrs Lipton has a surplus of $351, per fortnight. Mr and Mrs Lipton may also draw down their Home Loan to pay some of their relevant tax debts (or the non releasable tax debts). As at February 2015, the amount available for redraw was $16,742. They may also enter into appropriate payment arrangements with the Commissioner. In this regard, the Commissioner had previously indicated his willingness to do so. The payment by Mr and Mrs Lipton of their relevant tax debts may be financially inconvenient for them, especially as they are seeking to repay more than the minimum required mortgage repayments each month, but it is not serious financial hardship. Mr and Mrs Lipton have access to the necessities of life.
SHOULD THE DISCRETION TO RELEASE THE APPLICANTS BE EXERCISED?
As I have concluded that Mr and Mrs Lipton did not satisfy the onus of proof in relation to establishing that they would suffer serious hardship, it is unnecessary for me to consider the exercise of the discretion. However, for completeness, I note that if I had found that Mr and Mrs Lipton (or either of them) would suffer serious hardship if they had to pay the relevant tax debts, I would have concluded that these cases are not appropriate ones to grant discretionary relief. The factors that I considered to be most relevant in relation to the exercise of the discretion are as follows:
(e)Mrs Lipton is a beneficiary in the estate of her mother and stands to receive approximately $200,000;
(f)Mr and Mrs Lipton are able to work and, therefore, able to continue to earn income; and
(g)Mr and Mrs Lipton’s son is becoming less financially dependent on them.
CONCLUSION
Mr and Mrs Lipton have not discharged the onus of proof necessary to establish that they would suffer serious hardship if they were required to pay the relevant tax debts. Accordingly, I have decided that the Commissioner’s taxation decisions should be affirmed. Even if they had established that they would suffer serious hardship, these are not cases, in my view, where the discretion should be appropriately exercised to release the relevant tax debts.
I affirm the decisions under review.
I certify that the preceding 48 (forty -eight) paragraphs are a true copy of the reasons for the decision herein of Ms G Lazanas, Senior Member ...................................[sgd].....................................
Associate
Dated 25 September 2015
Date(s) of hearing 30 March 2015 Applicants In person Counsel for the Respondent Chris Peadon Solicitors for the Respondent ATO Review and Dispute Resolution
Key Legal Topics
Areas of Law
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Taxation Law
Legal Concepts
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Serious Hardship
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Discretionary Relief
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Constitutional Validity
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