Moriarty and Commissioner of Taxation (Taxation)
[2016] AATA 796
•11 October 2016
Moriarty and Commissioner of Taxation (Taxation) [2016] AATA 796 (11 October 2016)
Division
TAX AND COMMERCIAL DIVISION
File Number(s)
2015/5424
Re
Leslie Moriarty
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President I R Molloy
Date 11 October 2016 Place Brisbane The Tribunal affirms the decision under review.
...........................[Sgd].............................................
Deputy President I R Molloy
CATCHWORDS
TAXATION – application for release from taxation debts – serious hardship – exercise of Commissioner’s discretion – disposal of funds or assets without making proper provision to meet tax liabilities – poor compliance – decision under review affirmed
LEGISLATION
Taxation Administration Act 1953 (Cth) Sch 1, ss 340-5, 340-10; s 14ZZK(b)(iii)
CASES
Powell v Evreniades (1989) 21 FCR 252
Commissioner of Taxation v A Taxpayer (2006) 63 ATR 450
Van Grieken v Veilands and Ors (1991) 21 ATR 1639
Re Rollason andFederal Commissioner of Taxation (2006) 64 ATR 1210SECONDARY MATERIALS
Practice Statement Law Administration 2011/17: Debt Relief
REASONS FOR DECISION
Deputy President I R Molloy
11 October 2016
INTRODUCTION
The applicant, Leslie Moriarty, applies to be released from a taxation liability pursuant to s 340-5 of Sch 1 of the Taxation Administration Act1953 (Cth) (“the Act”).
Mr Moriarty’s liability arises from the late lodgement of his income tax returns for the years ended 30 June 2007,[1] 2008,[2] 2009,[3] 2010,[4] 2012,[5] 2013[6] and 2014.[7] The liability at 11 August 2016 to which s 340-10 of Sch 1 of the Act applies stood at $437,681.55. This liability was comprised of:
·Primary tax $242,246.19
·General Interest Charge (“GIC”) $195,435.36
[1] Exhibit 2, Supplementary T-Documents, ST3.
[2] Exhibit 2, Supplementary T-Documents, ST4.
[3] Exhibit 1, T-Documents, T3.
[4] Exhibit 1, T-Documents, T4.
[5] Exhibit 1, T-Documents, T16.
[6] Exhibit 1, T-Documents, T18.
[7] Exhibit 1, T-Documents, T17.
GIC continues to accrue at the rate of 9.01% per annum.
ISSUES
Subsection 340-5(3) of Sch 1 of the Act provides that, before a person can be released from a tax liability, it must appear that he or she would otherwise suffer serious hardship.
If this requirement is satisfied there remains a discretion whether or not to grant the application.
The issues are therefore:
·Whether it appears that Mr Moriarty would suffer serious hardship if he were not released from his tax liability in whole or in part; and
·If serious hardship is shown, how the discretion should be exercised.
BACKGROUND
In November 2006 Mr Moriarty applied for, and was released from, taxation liabilities in the amount of $35,239.90 relating to the year ended 30 June 2004.
On 18 January 2012 Mr Moriarty lodged his income tax returns for the years ended 30 June 2007,[8] 2008,[9] 2009[10] and 2010.[11] On 27 January 2012 notices of assessment were issued.[12]
[8] Exhibit 2, Supplementary T-Documents, ST3.
[9] Exhibit 2, Supplementary T-Documents, ST4.
[10] Exhibit 1, T-Documents, T3.
[11] Exhibit 1, T-Documents, T4.
[12] Exhibit 2, Supplementary T-Documents, ST5-ST6; Exhibit 1, T-Documents, T5-T6.
On 21 February 2012 he applied for release for the liabilities that arose from those lodgements.[13] On 10 October 2012 the application was refused by the Commissioner of Taxation (“the Commissioner”).[14]
[13] Exhibit 1, T-Documents, T7.
[14] Exhibit 1, T-Documents, T14.
Between 19 and 23 February 2015 Mr Moriarty lodged his income tax returns for the years ended 30 June 2012,[15] 2013[16] and 2014.[17]
[15] Exhibit A, T-Documents, T16.
[16] Exhibit 1, T-Documents, T18.
[17] Exhibit 1, T-Documents, T17.
On 23 February 2015, after lodgement of the outstanding income tax returns, Mr Moriarty made a second application for release for income tax liabilities totalling $391,229.76 for the years ended 30 June 2007, 2008, 2009 and 2010, and for 2012, 2013 and 2014.[18] On 15 May 2015 the second application for release was refused.[19]
[18] Exhibit 1, T-Documents, T19.
[19] Exhibit 1, T-Documents, T23.
On 30 June 2015 Mr Moriarty objected to that decision.[20] In the objection he contended that he had an outstanding compliance history that was not properly considered and that his current circumstances were a result of a catastrophic financial event in 2005. He also contended that he was still experiencing hardship and unable to meet even basic living necessities.[21]
[20] Exhibit 1, T-Documents, T24.
[21] Ibid.
On 19 August 2015 the Commissioner disallowed the objection in full.[22] On 16 October 2015 Mr Moriarty lodged an application for review with the Tribunal.[23]
[22] Exhibit 1, T-Documents, T25.
[23] Exhibit 1, T-Documents, T1.
Serious Hardship
The term serious hardship should be given its ordinary meaning. The description may be satisfied by something less than destitution.[24] The issue calls for consideration of Mr Moriarty’s individual circumstances by reference to normal community standards.[25]
[24] Powell v Evreniades (1989) 21 FCR 252, 260.
[25] Commissioner of Taxation v A Taxpayer (2006) 63 ATR 450 at 461.
Whether payment of a tax liability would entail serious hardship therefore involves a consideration of the applicant’s financial affairs, in particular, his current income and expenses, and his assets and liabilities. A taxpayer’s financial circumstances will include financial relations with other members (if any) of the taxpayer’s household.[26]
[26] Van Grieken v Veilands and Ors (1991) 21 ATR 1639 at 1646.
The enquiry is not limited to consideration of the applicant’s financial situation at the time of the application but may include the position of the applicant at the time of the hearing and evidence concerning the applicant’s probable future financial position.
Mr Moriarty is 55 years of age. He is divorced with no dependants. He has been employed since January 2015 as a salesperson with a real estate agency based at the Sunshine Coast. He was initially paid a salary and received a commission or bonus for sales. Since September 2015 he has worked for commission only which he says is to his advantage. He also conducts auctions for outside agents typically for a fee of $550. His total income for the period November 2014 to January 2016 (15 months) was $92,412.01.[27] A summary of his 2016 tax return discloses income in excess of $100,000 for the financial year.[28]
[27] Exhibit 8: Applicant’s summary of bank statements between October 2014 and January 2016.
[28] Exhibit 4, Email correspondence of applicant to the Tribunal dated 13 July 2016 with attachments.
The Commissioner points to what is said to be Mr Moriarty’s unusually high level of discretionary spending, including on holidays, dining out, and entertainment, which could be reduced. Unsurprisingly, Mr Moriarty does not agree with the Commissioner’s description, pointing out, amongst other things, that he has only taken two holidays in seven years.[29]
[29] Exhibit 3, Applicant’s response to the respondent’s statement of issues, facts and contentions lodged 31 May 2016 at pp. 5-6.
The Commissioner also points out that until relatively recently Mr Moriarty had been paying $730 per week on rent for a five bedroom home for himself alone. Mr Moriarty said that reflected the rental market at the time. For the last few months, he said, he has been living with a friend, where he does not pay any rent, only contributing about $250 per week towards the household expenses. He said he was planning to move into a two-bedroom furnished apartment where the rent was $480 per week.
Mr Moriarty does not have any assets except an eleven year old Toyota Camry motor vehicle for which he says he would be lucky to get $4,000. He has a number of debts but none, he says, that he cannot manage, except of course his tax liability. It is clear that Mr Moriarty’s idea of management does not involve repayment. Other creditors, it seems, have given up, for the time being at least.[30]
[30] Ibid at p. 5.
I agree with the Commissioner’s description of Mr Moriarty’s discretionary spending. I also think that what he was previously paying by way of rent was unreasonable. The Commissioner concedes, however, that even if Mr Moriarty were to curb excessive expenditure, he could still not satisfy his taxation liability within a reasonable timeframe. The Commissioner acknowledges that if Mr Moriarty were required to meet that liability he would most likely be placed in serious hardship.
Discretion
Whilst the Commissioner concedes that Mr Moriarty would be in serious hardship if required to pay his taxation liability it does not automatically flow that he should be released from that liability.[31]
[31] Powell v Evreniades (1989) 21 FCR 252 at 262–264; Re Rollason andFederal Commissioner of Taxation (2006) 64 ATR 1210 at 1228.
Practice Statement Law Administration PS LA 2011/17 – Debt Relief provides the following non-exhaustive list of circumstances that may indicate that it is inappropriate to release a taxation liability:[32]
(a)where it appears that the applicant has, questionably or otherwise, disposed of funds or assets without making proper provision to meet tax liabilities;
(b)where the granting of release would not result in reduction of hardship, such as where the person has other liabilities or creditors to such an extent that release from the tax debt will not relieve hardship;
(c)where the person has used available funds to discharge debts due to other private creditors in preference to debts due to the ATO;
(d)where the person has used available funds to discharge debts due to other business creditors where those payments are not considered reasonably necessary to maintain the viability of the business and could be considered as unfair preference payments to the detriment of the ATO;
(e)where the person, without good reason, has failed to pursue debts due to them, or to seek possible contributions from insurers, or persons with joint responsibility for debts;
(f)where serious hardship is associated with a single event or short term outcome, such as might be encountered in the more speculative or seasonable business undertakings where the effects are likely to be only short term;
(g)where the person has a poor compliance history; and
(h)where the person is unable to demonstrate that they have made provision for future debts.
[32] Practice Statement Law Administration PS LA 2011/17 – Debt Relief at [8].
The Commissioner submits that Mr Moriarty disposed of assets whilst knowing he had outstanding income tax lodgements for the 2007 to 2011 income years and without making proper provision for the taxation liabilities that were likely to arise as a result of those lodgements.
The Commissioner points out that after Mr Moriarty was granted release from his tax liabilities in November 2006, he borrowed funds and purchased the first of two properties in March 2007 for $230,000 which he sold in March 2011 for $601,000.[33] The second property was purchased in January 2011 for $492,000 and subsequently sold for $397,500 in May 2013.[34]
[33] Exhibit 2, Supplementary T-Documents, ST19 at p. 615.
[34] Exhibit 2, Supplementary T-Documents, ST20 at p. 619.
Mr Moriarty says that he and his former spouse purchased the first property, vacant land at Newport, using borrowed funds. The price, as I have said, was $230,000. Property prices, he says, rose rapidly during 2007. They were able to borrow money to construct a house on the land in late 2007 due to increased equity in the land. Mr Moriarty says the construction was paid for entirely from borrowed funds at a total cost of $350,000. He says he lived there with his family from March 2008 until February 2011 when the property was sold because he could no longer afford the mortgage repayments.[35]
[35] Exhibit 3, Applicant’s response to the respondent’s statement of issues, facts and contentions lodged 31 May 2016 at pp. 4-5.
Mr Moriarty says “there was little if any money left over from the sale”.[36] However he was able to “transport” the loan to another, less expensive property, at Clontarf.[37] He says there was no cash put into the deal. He says that he received “a notice to quit” that property in August 2011 due to mortgage arrears. He says he was able to obtain some relief “due to financial hardship provisions”.[38] However, he was in a “dire financial situation” in 2013 which required him to sell the property. He says the property was sold in May 2013 but he and his former wife did not receive any proceeds from the sale.[39]
[36] Ibid at p. 5.
[37] Ibid.
[38] Ibid.
[39] Ibid.
Mr Moriarty contends that he and his former spouse did not invest any of their own equity into the properties but instead used borrowed funds and therefore there was no money that could have been used to meet his taxation liability.[40] He also contends that throughout this period he was continually affected by catastrophic financial events of 2005, which led to the release in November 2006, leaving him constantly stressed and anxious.[41]
[40] Ibid at pp. 4-5.
[41] Ibid at p. 1.
In my opinion, Mr Moriarty misses the point with his claim that there was no money in any of the real property transactions that could have been used to meet his tax liabilities. I agree with the Commissioner’s submission that Mr Moriarty, apparently with insufficient cash or other assets to address his tax liabilities, and in the context of having recently obtained a release, gave priority to obtaining finance to purchase a property, to borrow more money to carry out improvements to that property when its value rose, and to continue his borrowing against a second property.
I agree with the submission of the Commissioner that Mr Moriarty made deliberate choices, including applying funds to what seemed to him more desirous purposes, rather than dealing with his outstanding lodgements and liabilities. I fail to see how any of his conduct is explained or excused by events of 2005.
The Commissioner also relies on Mr Moriarty illegally accessing his superannuation benefits in both the years ended 30 June 2007 and 2008. In those financial years he accessed $16,497 and $147,600.[42] Mr Moriarty contends that these funds were accessed after his family could not receive any benefits from Centrelink and that the funds were used to provide for the family.[43] This may be true but it also appears to overlap the time when he and his former wife purchased and developed the land at Newport with borrowed funds. Whatever the circumstances, Mr Moriarty accessed these funds apparently without thought to his outstanding taxation lodgements and subsequent liabilities that would arise. Mr Moriarty has only ever repaid $88,238 to the self-managed super fund.[44]
[42] Exhibit 1, T-Documents, T13.
[43] Exhibit 3, Applicant’s response to the respondent’s statement of issues, facts and contentions lodged 31 May 2016 at p. 4.
[44] Exhibit 1, T-Documents, T13.
Mr Moriarty has a poor compliance history. He was granted a release on 2 November 2006 on an understanding that all future obligations would be met.[45] His income tax returns for the years ended 30 June 2007 to 2010 were lodged on 18 January 2012, and his returns for 2012 to 2014 were lodged between 19 and 23 February 2015. His poor compliance history extends, of course, to his self-managed super fund. Illegal access of funds in the self-managed super fund was detected by audit.[46] Mr Moriarty was subject to prosecution action in November 2011 for lodgement of the fund’s income tax return for the year ended 30 June 2009. The return was eventually lodged on 18 January 2012.[47]
[45] Exhibit 2, Supplementary T-Documents, ST1.
[46] Exhibit 1, T-Documents, T13.
[47] Ibid at p. 152.
Mr Moriarty says he had a “perfect taxation record” prior to the events of 2005.[48] That may be so. I do not accept his claim that his poor compliance from 2005 onwards was the result of a catastrophic financial event in the first half of that year. The evidence convinces me that he simply gave priority to other matters and ignored his tax obligations.
[48] Exhibit 3, Applicant’s response to the respondent’s statement of issues, facts and contentions lodged 31 May 2016 at p. 1.
Mr Moriarty says that if he is not released from liability, then he is likely, eventually, to be made bankrupt. He says this will affect his ability to earn an income.[49] The Commissioner submits that the implications of bankruptcy will not prevent Mr Moriarty from obtaining employment in the real estate industry.
[49] Ibid at p. 6.
I am not satisfied that bankruptcy, if it were to occur, would prevent Mr Moriarty working, as he does, as an employed real estate salesperson in Queensland, although it may well prevent him from operating as an auctioneer.
In any event, in all the circumstances, I do not consider the discretion should be exercised in favour of granting a release.
CONCLUSION
The decision under review is affirmed.
I certify that the preceding 37 (thirty -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy .........................[Sgd]..............................................
Dated 11 October 2016
Date of hearing 25 August 2016 Applicant In person Solicitors for the Respondent Ms A Roberson, Australian Taxation Office
Key Legal Topics
Areas of Law
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Tax Law
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Administrative Law
Legal Concepts
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Judicial Review
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Remedies
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Procedural Fairness
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Statutory Construction
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