Smith and Commissioner of Taxation (Taxation)
[2021] AATA 1851
•14 May 2021
Smith and Commissioner of Taxation (Taxation) [2021] AATA 1851 (14 May 2021)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2019/0798 & 2019/1772
Re:Garry James Smith
and
Glenda Ann Smith
APPLICANTS
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:The Hon. Matthew Groom, Senior Member
Date:14 May 2021
Place:Melbourne
The decisions under review are set aside and in substitution it is decided that the applicants tax debt in respect of the 2015, 2016 and 2017 income years (including general interest charges) be reduced to a total amount of $21,000 (being $10,500 each).
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The Hon. Matthew Groom, Senior Member
CATCHWORDS
TAXATION – taxation liability – release from liability – whether payment of tax liability would cause serious hardship – consideration of factors relevant to exercise of discretion – decision under review set aside and substituted
LEGISLATION
Income Tax Assessment Act 1997 (Cth)
Taxation Administration Act 1953 (Cth)
CASES
Corlette v Mackenzie (1996) 62 FCR 597
Minister for Immigration and Ethnic Affairs v Pochi (1980) 44 FLR 41
Powell v Evreniades (1989) 21 FCR 252
Spicer and Commissioner of Taxation [2004] AATA 960.
Van Grieken v Veilands (1991) 21 ATR 1639
SECONDARY MATERIALS
Practice Statement Law Administration 2011/17
REASONS FOR DECISION
The Hon. Matthew Groom, Senior Member
14 May 2021
Introduction
This matter involves an application for review of two decisions made by the respondent on 17 December 2018 to not release the applicants from certain taxation liabilities incurred in respect of the 2015, 2016 and 2017 income years.
On 30 June 2016 the respondent issued each of the applicants with a notice of assessment setting out a tax liability in respect of the 2015 income year for Mrs Smith of $13,642.90 and for Mr Smith of $13,656.65.
On 22 December 2017 the respondent issued each of the applicants with a notice of assessment setting out a tax liability in respect of the:
(a)2016 income year for Mrs Smith of $38,993.50 and for Mr Smith of $38,987.05; and
(b)2017 income year for Mrs Smith of $2447.95 and for Mr Smith of $2550.70.
(collectively the applicants’ total taxation liabilities in respect of the 2015, 2016 and 2017 income years including general interest charges are the “tax debt”)
On 24 January 2018 the applicants lodged an application with the respondent for the release of their tax debt on the basis of serious hardship (the “first release application”).
On 21 February 2018 the respondent wrote to the applicants advising that their first release application was refused.
On 7 March 2018 the applicants lodged a further application for release of the tax debt again on the basis of serious hardship (the “second release application”).
On 26 June 2018 the respondent wrote to the applicants advising that their second release application was refused.
On 20 August 2018 the applicants lodged an objection to the respondent’s decisions to refuse to release the applicants from their tax debt.
On 17 December 2018 the respondent notified the applicants that their objection to the respondent’s decisions had been disallowed.
On 12 February 2019 the applicants applied to the Administrative Appeals Tribunal for review of the respondent’s objection decisions which is the matter presently before this Tribunal.
At the hearing the respondent confirmed that the total outstanding tax debt including general interest charges was $106,576.99.
Relevant law and issues
Section 340-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (“TAA”) provides the respondent with a discretionary power to release a taxpayer, in whole or in part, from certain taxation liabilities, if the respondent is satisfied that the applicant would suffer serious hardship if required to satisfy the liability. The taxation liabilities captured by the section include income tax on certain penalties and interest charges associated with a tax debt. The Tribunal is satisfied that the applicants tax debt falls within the taxation liabilities captured by the section.
Relevant sections of the TAA:
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 2 a trustee of the estate of a deceased individual the dependants of the deceased individual would suffer serious hardship if you were required to satisfy the liability Effect of the Commissioner’s decision
(4) If the Commissioner:
(a) refuses to release you in whole from the liability; or
(b) releases you in part from the liability;
nothing in this section prevents you from making a further application or applications under subsection (1) in relation to the liability.
Notification of the Commissioner’s decision
(5) The Commissioner must notify you in writing of the Commissioner’s decision within 28 days after making the decision.
(6) A failure to comply with subsection (5) does not affect the validity of the Commissioner’s decision.
Objections against the Commissioner’s decision
(7) If you are dissatisfied with the Commissioner’s decision, you may object against the decision in the manner set out in Part IVC.
340‑10 Liabilities to which this section applies
(1) This section applies to a liability if it is a liability of the following kind:
(a) fringe benefits tax;
(b) an instalment of fringe benefits tax;
(c) *Medicare levy;
(d) *Medicare levy (fringe benefits) surcharge;
(e) a *PAYG instalment.
(2) This section also applies to a liability if it is a liability that is specified in the column headed “Liabilities” of the following table and the liability is a liability under a provision or provisions of an Act specified in the column headed “Provision(s)” of the table:
Liabilities and provision(s) Item Liabilities Provision(s) 1 additional tax (a) section 93 or 112B of the Fringe Benefits Tax Assessment Act 1986; or
(b) former section 163B or subsection 221YDB(1), (1AAA), (1AA) or (1ABA) or Part VII of the Income Tax Assessment Act 1936
2 administrative penalty in relation to fringe benefits tax or *tax Part 4‑25 in this Schedule 3 general interest charge (a) former section 163AA, former section 170AA, former subsection 204(3) or former subsection 221AZMAA(1), 221AZP(1), 221YD(3) or 221YDB(3) of the Income Tax Assessment Act 1936; or
(aa) section 5‑15 in the Income Tax Assessment Act 1997; or
(b) section 45‑80 or 45‑620 or subsection 45‑230(2), 45‑232(2), 45‑235(2) or 45‑235(3) in this Schedule
3A shortfall interest charge Division 280 in this Schedule 4 interest section 102AAM of the Income Tax Assessment Act 1936 5 penalty former section 163A of the Income Tax Assessment Act 1936 6 *tax (a) section 128B of the Income Tax Assessment Act 1936; or
(b) section 128V of the Income Tax Assessment Act 1936; or
(c) section 4‑1 of the Income Tax Assessment Act 1997; or
(d) section 840‑805 of the Income Tax Assessment Act 1997; or
(da) section 840‑905 of the Income Tax Assessment Act 1997; or
(e) section 840‑805 of the Income Tax (Transitional Provisions) Act 1997
Relevant sections of the Income Tax Assessment Act 1997 (Cth):
4‑1 Who must pay income tax
Income tax is payable by each individual and company, and by some other entities.
Note: The actual amount of income tax payable may be nil.
For a list of the entities that must pay income tax,
see Division 9, starting at section 9‑1.There is well-established authority for applying a two-step process in giving consideration to the exercise of the discretion which requires first determining:
(a)whether the settlement of the taxation liability would result in ‘serious hardship’; and
(b)if so, whether, in all the circumstances, the respondent should exercise the discretion to release the liability.[1]
[1] See Powell v Evreniades (1989) 21 FCR 252, 264.
There is no definition of ‘serious hardship’ within the TAA itself, however, its meaning has been considered many times through decisions of the Tribunal and the Federal Court. It is now well established that the term should be given its ordinary meaning.[2]
[2] Ibid, 258, Van Grieken v Veilands (1991) 21 ATR 1639; Spicer and Commissioner of Taxation [2004] AATA 960.
The respondent has also developed guidelines which set out tests for determining whether or not to exercise the discretion. The guidelines are contained in Practice Statement Law Administration 2011/17 (the “Practice Statement”). The relevant tests include the income/outgoing test and the asset/liabilities test for determining whether or not serious hardship would result. In addition, the Practice Statement acknowledges that the respondent is not bound to grant a release even where a taxpayer can demonstrate serious hardship.
The Practice Statement includes a number of examples of circumstances which may be relevant to a decision to refuse to release a tax debt where serious hardship is made out. For example where:
(a)a taxpayer appears to have unreasonably acquired assets ahead of meeting their tax liabilities;
(b)the taxpayer appears to have disposed of funds or assets without giving consideration to their tax liability;
(c)serious hardship is likely only to be short term;
(d)a taxpayer has a poor compliance history;
(e)a taxpayer is unable to show that they have planned for future debts; and
(f)a taxpayer has delayed lodgement of returns resulting in the accumulation of a large debt that they are unable to pay.
The above factors are not intended to be an exhaustive list of relevant factors but rather are examples of the types of considerations it would be appropriate for the decision-maker to have regard to in the exercise of their discretion.
In applying this approach the issues to be determined by the Tribunal are whether:
(a)a requirement for the applicants to pay the tax debt would result in the applicants suffering serious hardship; and if so then whether,
(b)in all the circumstances of the applicants’ case, the residual discretion should be exercised to release the applicants of their tax debt either in part or in full.
In accordance with section 14ZZK of the TAA the applicants have the burden of proving that the objection decision should not have been made or should have been made differently.[3]
[3] See Minister for Immigration and Ethnic Affairs v Pochi (1980) 44 FLR 41 and also Corlette v Mackenzie (1996) 62 FCR 597 which considered a similarly worded predecessor to s340-5 of the TAA.
Further evidence, contentions and consideration
The applicants are a retired, married couple in their 70s although Mr Smith continues to do some part-time work on a casual basis as a truck driver with a local transport company.
Prior to their retirement the applicants operated a small interstate transport and freight business based in Benalla, Victoria. They operated the business as a partnership successfully for many years. Around 8 years ago a large contractor of the business went into voluntary administration owing the business approximately $80,000. The applicants were not able to recover any money from the contractor as the contractor was ultimately liquidated and the applicants were not secured creditors. The applicants also suffered a number of significant mechanical breakdowns in their transport fleet at around this time costing them approximately $60,000.
The adverse turn of events caused serious cash flow pressures for the business. The applicants battled through their business stress for a number of years before ultimately coming to a decision to put the business on the market. The applicants described being very stressed during this period with their main focus being on keeping the business afloat for the purpose of a sale. After trying to sell the business for a number of years a sale of the business was ultimately completed in May 2017.
After paying out loans and other costs associated with the sale of the business the applicants were left with approximately $70,385 net proceeds from the sale. The applicants told the Tribunal that during this period they felt significant personal pressure to pay debts owed to other parties with whom they had long-standing business relationships including meeting the superannuation and long service leave entitlements owed to an employee. The applicants told the Tribunal they were concerned about the impact a failure by them to pay out their creditors and their employee would have had for the individuals involved, as they were aware a number of them were experiencing their own cash flow problems at the time.
In 2016 the applicants also sold their house in Benalla and purchased a smaller house at a retirement village in Shepparton. As part of the house sale transaction the applicants’ paid out the mortgage for the house in Benalla. The applicants utilised the residual proceeds from the sale of the Benalla property together with the realisation of a number of other assets to purchase the new house in Shepparton. Those additional assets included a superannuation amount, some shares and a boat. Under the terms of the purchase agreement for the new house the applicants are not able to take out a loan against the house. After all loans and other costs associated with the transaction were paid out the applicants were left with the residual amount of approximately $18,626.
The applicants’ tax affairs both personal and business were handled by their local accountants. The applicants maintained that they were not aware of the extent of their tax liabilities until they received assessment notices from the ATO. They conceded that in a number of income years tax returns have been lodged late but stated that they were not aware of the precise timing of the lodgement of the returns because they had always relied on their accountants. The applicants’ evidence was that they still do not fully understand precisely how they were left with the tax debt they currently have nor are they aware of details of their business accounts more broadly including how the income of the business was determined as again they relied on their accountants to manage their accounts. The applicant’s conceded in cross-examination that their accountants had informed them that they were likely to be required to pay some tax on the sale of their business but they were not aware of the likely amount of the tax. The applicants do not dispute the amount of the tax debt owed.
Until around the end of April 2019 the applicants had been paying regular amounts towards the tax debt and had paid off almost all of Mrs Smith’s 2015 tax debt. The applicants told the Tribunal that they had stopped making regular payments at that time as they were running low on funds and they wanted to be able to offer some form of settlement payment to the ATO and also because Mr Smith was not working as much and they needed some savings to meet the shortfall in their income.
The applicants have previously offered to pay a lump sum towards the repayment of the tax debt from the savings they still retain although they maintain they could only afford a partial settlement as any requirement to pay the majority or all of the outstanding amount would not leave them with enough residual capacity to be able maintain even a basic standard of living. When asked how much from their savings they believed they could pay without causing serious hardship the applicants told the Tribunal that they currently held approximately $42,000 in savings and that they believed they could contribute an amount of approximately half of that amount. The applicants contend that if required to pay any greater amount of their tax debt they would be unable to meet their basic needs and would suffer serious hardship.
The applicants told the Tribunal they have limited income made up primarily of their pension receipts and supplemented to a minor degree by Mr Smith’s casual work.
The applicants told the Tribunal that they have no mortgage on their home which they estimated to be worth approximately $250,000 although they cannot borrow against their home under the terms of purchase. They told the Tribunal that they have no capacity to borrow given their limited income and the constraint on borrowing against their house at the retirement village in Shepparton. They told the Tribunal that they also own two cars including a 2008 Toyota which they are estimated to be worth approximately $20,000 and which they stated was used by Mr Smith for his casual work purposes and also a 2009 Holden which they estimated to be worth between $2000 and $3000 and which Mrs Smith uses for day-to-day purposes including assisting her children in looking after the grandchildren. The applicants told the Tribunal that they also currently have approximately $5000 in super. The applicants both receive the pension and Mr Smith earns a modest amount of approximately $250 week gross as a casual truck driver for a local transport company. They told the Tribunal that they have no other realisable assets.
Under cross-examination the applicants conceded that their day-to-day living expenses currently exceed their income although Mrs Smith told the Tribunal that it’s “right on the borderline”. The applicants both stated that they believed their day-to-day living expenses would likely always exceed their income to some degree particularly given that both Mr Smith and Mrs Smith have had health issues which could lead to unbudgeted medical expenses.
The applicants told the Tribunal that they have three adult children aged between 38 and 49. When asked whether or not their adult children are in a position to financially assist they told the Tribunal they did not believe it was possible because their children have their own significant financial pressures although they conceded that they had not directly asked their children to assist.
The applicants told the Tribunal that they believed that the discretion to relieve them of their debt should be exercised in their favour as their financial circumstances had emerged through no fault of their own and they had been hardworking operators of a small business employing people and contributing economically for a very lengthy period of time. They conceded that they had lodged a number of tax returns late but argued that they had relied on their tax account to manage their tax affairs and that prior to the decline in their business they had consistently paid their tax.
The respondent contends that the applicants already face serious financial hardship given that their expenses currently exceed their income and their savings are dwindling. The respondent contends that therefore there is no basis for concluding that the payment of the tax debt itself would cause serious financial hardship.
The respondent contends that the discretion to relieve the applicants of their debt should not be exercised in the applicants’ favour as they have failed to meet their tax obligations by lodging late returns on more than one occasion and they have realised assets, including their principal house, their business and a boat and paid out creditors and an employee in priority to meeting their tax obligations. The respondent also contends that the applicants were put on notice regarding their tax shortfall in the 2015, 2016 and 2017 financial years and in those circumstances have failed to properly plan their financial affairs to meet reasonably anticipated tax liabilities. The respondent contends that in all the circumstances of the applicant’s case there is no justification for treating the applicants differently to other taxpayers who are required to meet their tax obligations.
In considering this matter the Tribunal has had careful regard to all of the evidence before it, including the direct evidence of the applicants themselves. The Tribunal can say at the outset that it found the applicants evidence to be consistent, frank, truthful and compelling. There is no doubt in the mind of the Tribunal that the applicants are very decent, hard-working people.
Income/outgoing
The Tribunal accepts that the applicants’ stated expenditure for the period between 18 April 2019 and 17 July 2019 is reflective more broadly of their general income and outgoings. During that period the applicants’ total income was $14,392 and their total outgoings were $14,646. Having considered the evidence before it the Tribunal is satisfied that the income/outgoing test is satisfied on the basis that the applicants’ joint fortnightly expenditure currently exceeds their joint income, albeit by a marginal amount, and therefore there is an insufficient capacity to service the debt in a timely manner. The Tribunal is satisfied that the applicants’ day to day expenditure is reasonable in all of the circumstances. Taking account of the applicant’s accumulated savings the Tribunal does not accept the respondent’s contention that the applicants are currently experiencing serious hardship. However, the Tribunal is satisfied that if the applicants are required to repay their tax debt in full they will be put into a position of serious hardship and they are likely to continue to experience serious hardship over the longer term.
Further, the Tribunal is satisfied that the applicants also satisfy the assets/liabilities test. The information before the Tribunal was that the applicants have total assets of approximately $320,000 which is made up of their home at the retirement village (approximately $250,000 with no mortgage), a 2008 Toyota (approximately $20,000), a 2009 Holden (approximately $3000), savings of approximately $42000 and approximately $5000 in super. Against this the applicants have their outstanding tax debt.
The Tribunal accepts that the applicants have no realistic capacity to borrow against their assets and that in all of the circumstances it would be unreasonable to require the realisation of the applicant’s principal home. The Tribunal is also satisfied that it would be unreasonable to require the realisation of the applicants’ two cars which the Tribunal accepts are comparatively modest and reasonably required for day to day activities including Mr Smith’s work and Mrs Smith’s day to day activities including in assisting in their care of her grandchildren. The Tribunal accepts that a portion of the applicant’s savings could be paid against the outstanding tax debt and further accepts the applicants’ contention that any contribution above approximately $21,000 is likely to cause the applicants serious hardship given their need to utilise those savings in meeting the small shortfall in their income/outgoings and also in ensuring they are able to meet any unanticipated medical expenses in connection with their personal health concerns.
The Tribunal accepts the respondents contention that the applicants have failed to lodge their tax returns on time on more than one occasion, realised a number of assets and paid out business contractors and also an employee ahead of meeting their tax obligations and also, to some degree, failed to properly plan their financial affairs in order to meet reasonably foreseeable tax obligations.
However, against these considerations the Tribunal is satisfied that prior to the incurring of the tax debt the applicants had successfully operated a business for approximately 50 years and there is no evidence before the Tribunal that the applicants had failed to pay any tax owed during that period.
In addition, while the Tribunal is satisfied that in retrospect the applicants should have prioritised the payment of their tax obligations over the payment of contractors and an employee from the proceeds of the realisation of a number of assets including their business, their principal house in Benalla, a boat as well as some shares and superannuation, the Tribunal accepts that at the time those transactions were entered into the applicants were both under considerable financial strain as a consequence of the serious cash flow issues they were experiencing in the business, the pressure they felt to pay business contractors and suppliers and their employee as well as personal pressures as a result of their own health issues in addition to those of their adult daughter.
The Tribunal accepts that at all times the applicants were doing what they considered to be the responsible thing to do and were not seeking to advantage themselves in any way but rather seeking initially to keep their business afloat for the purpose of its sale and then to fulfill what they considered to be the obligations they owed to other third parties. The Tribunal is satisfied that at no time during this period did the applicants engage in a course of action with the intention of denying the ATO its due revenue. The Tribunal is also satisfied that there is no evidence of the applicants having engaged in reckless or extravagant spending during this period.
While the Tribunal is satisfied that the applicants clearly did not have a sufficient handle on the management of their business accounts and their tax affairs during this period, in the Tribunal’s view this was not an example of wilful blindness on the part of the applicants but rather an example of a couple running a business who became overwhelmed by their circumstances as a consequence of a number of adverse events outside of their control and which occurred within a relatively short period of time and from which they were not able to recover.
The Tribunal is also mindful of the fact that the applicants continued to make regular payments to the ATO in the repayment of their debt up until April 2019. Based on the evidence before it the Tribunal is satisfied that between June 2017 and the end of April 2019 the applicants repaid approximately $34,400 of their outstanding tax debt. The Tribunal is satisfied that this course of action is indicative of the applicants’ good faith efforts to repay the debt.
Of most significance to the Tribunal is the fact the over the course of approximately 50 years the applicants have operated businesses and in doing so have made a considerable contribution to the economy. During that period the applicants have employed a number of full-time staff. There was evidence before the Tribunal, which it accepts, that at its peak the applicants’ business employed as many as 10 people. The Tribunal is mindful that the applicants have made a very significant contribution to the broader Australian community by successfully operating a business and employing people over such an extended period of time.
Further the Tribunal is satisfied that in the event that the applicants are required to pay their tax debt in full it will cause them to suffer serious hardship which, given their advancing age and limited capacity to earn increased income, is likely to subsist during their retirement years.
Having regard the fact that the initial events leading to the applicants’ business running into cash flow difficulty were beyond their control, the significant contribution the applicants have made to the community through the operation of their business for approximately 50 years, and the likelihood of them facing serious hardship through their retirement years if required to pay the tax debt, the Tribunal is a satisfied that on balance it is appropriate to exercise the discretion available to release the applicants of their tax debt in part.
As stated above, the Tribunal is satisfied that the applicants have a capacity to make a contribution towards the tax debt of approximately $21,000 from their savings while retaining a small amount of savings to ensure they are able to avoid serious hardship in the future. In these circumstances the Tribunal is satisfied that it is appropriate that the applicants’ tax debt be reduced to the amount of $21,000.
For these reasons, the Tribunal is satisfied that the decisions under review should have been made differently in that the discretion to release the applicants of their tax debt in part should have been exercised.
Decision
The decisions under review are set aside and in substitution it is decided that the applicants tax debt in respect of the 2015, 2016 and 2017 income years (including general interest charges) be reduced to a total amount of $21,000 (being $10,500 each).
I certify that the preceding 52 (fifty-two) paragraphs are a true copy of the reasons for the decision herein of The Hon. Matthew Groom, Senior Member
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Associate
Dated: 14 May 2021
Date of hearing: 21 October 2020 Date final submissions received: 6 November 2020 Applicants: By videoconference Counsel for the Respondent: H. Mazloum
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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