Szekely and Commissioner of Taxation - [2001] AATA 704

DECISION AND REASONS FOR DECISION [2001] AATA 704

ADMINISTRATIVE APPEALS TRIBUNAL )

) No ST2001/29

TAXATION DIVISION     )
           Re      DEBRA SZEKELY
  Applicant
           And    COMMISSIONER OF TAXATION
  Respondent

DECISION

Tribunal Mr D.J. Trowse (Member)

Date8 August 2001
PlaceAdelaide

Decision      The Tribunal sets aside the decision of the respondent dated 18 January 2001 and in substitution therefor decides that the discretion, pursuant to section 106W(3) of the Act, be exercised to amend the amount assessed under Section 106T of the Act to nil on the basis that the payment of the HECS assessment debt has caused serious hardship to the applicant.
  (Signed)
  D.J. TROWSE
  (Member)
CATCHWORDS
EDUCATION - Higher Education Contribution Scheme – HECS repayment – deferral of payment – offset against tax instalment deductions – severe hardship
Higher Education Funding Act 1988 ss.106T, 106U, 106V, 106W
Income Tax Ruling 2440
McAusland v Deputy Commissioner of Taxation (Cth) 1993 118 ALR 577
Re Compton and FC of T 99 ATC 2287
Re Case 117 18 ATR 3859
Powell v Evreniades & Ors 89 ATC 4415

REASONS FOR DECISION

8 August 2001 Mr D.J. Trowse (Member)

This is an appeal by Ms Debra Szekely (the applicant) for review of the decision of the Commissioner of Taxation (the respondent) not to exercise his discretion pursuant to section 106W(3) of the Higher Education Funding Act 1988 (the Act) to amend the amount assessed under section 106T of the Act to nil on the basis that the payment being made in terms of the Higher Education Contribution Scheme (HECS) had or would cause serious hardship. There was no dispute that the applicant had an accumulated HECS debt to the Commonwealth and that the respondent had correctly calculated the repayment for the year ended 30 June 1999 at $1,731.35. The repayment appears as a debit in the 1999 notice of income tax assessment which issued to the applicant on 1 December 2000. The applicant's request for deferral was lodged with the respondent on 9 January 2001.
The Tribunal received into evidence the documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, together with six exhibits. Additionally, the Tribunal heard evidence from the applicant and Mr Richard Clark, a close family friend who had provided regular financial assistance to the applicant. The applicant was self-represented and the respondent was represented by one of his officers.
The relevant legislation pertaining to this matter is contained in the following sections of the Act:
"106T   Assessment
The Commissioner may, from any information in the Commissioner's possession, whether from a return or otherwise, make an assessment of:
(a)the amount of the accumulated HEC debt of a person at 1 June immediately before the making of the assessment; and
(b)the amount required to be paid in respect of that accumulated HEC debt under section 106PC or 106Q.
106U   Application of tax legislation
(1)Subject to this Part, Part IV, and Division 1 of Part VI, of the Income Tax Assessment Act 1936 (Assessment Act), and Part 4-15 in Schedule 1 to the Taxation Administration Act 1953, apply, so far as they are capable of application, in relation to an HEC assessment debt of a person as if it were income tax assessed to be payable by a taxpayer by an assessment made under Part IV of the Assessment Act.
Note: Part 4-15 in Schedule 1 to the Taxation Administration Act 1953 deals with collection and recovery of amounts on and after 1 July 2000, replacing some provisions in Division 1 of Part VI of the Income Tax Assessment Act 1936.
(2)Sections 222A to 222F, 222 and 226G to 226ZB of the Assessment Act have effect as if any HEC assessment debt of a person were income tax payable by the person in respect of the year of income in respect of which the assessment of that debt was made.
(3)Part 2-5 (other than section 12-55 and Subdivisions 12-E, 12-F and 12-G) in Schedule 1 to the Taxation Administration Act 1953 applies, so far as it is capable of application, in relation to the collection by instalments of an HEC assessment debt of a person as if the HEC assessment debt were income tax.
(4)Division 3 of Part VI of the Assessment Act applies, so far as it is capable of application, in relation to the collection of an HEC assessment debt of a person as if the HEC assessment debt were income tax.
(5)Division 45 in Schedule 1 to the Taxation Administration Act 1953 applies, so far as it is capable of application, in relation to the collection of an HEC assessment debt of a person as if the HEC assessment debt were income tax.
106V    Notification on notices of assessment of tax
If:
(a)the Commissioner is required to serve on a person a notice of assessment in respect of the person's income of a year of income under section 174 of the Income Tax Assessment Act 1936; and
(b)an assessment (relevant assessment) has been made in respect of the person of the amounts referred to in section 106T of this Act but notice of the relevant assessment has not been served on the person;
notice of the relevant assessment may be served by specifying the amounts concerned in the notice referred to in paragraph (a).
106W Power of Commissioner to defer assessment or reduce assessment to nil
(1)The Commissioner may, on written application by a person, defer the making of an assessment in relation to the person under section 106T if the Commissioner is of the opinion that:
(a)if the assessment were made, payment of the assessed amount would cause serious hardship to the person; or
(b)there are other special reasons that make it fair and reasonable to defer the making of the assessment.
(2)The Commissioner may defer the assessment for any period that he or she thinks appropriate.
(3)The Commissioner may, on written application by a person, amend an assessment made in relation to the person under section 106T so that no amount is payable under the assessment if the Commissioner is of the opinion that:
(a)payment of the assessed amount has caused or would cause serious hardship to the person; or
(b)there are other special reasons that make it fair and reasonable to make the amendment.
(4)If an application is made under subsection (1) or (3), the Commissioner must as soon as practicable:
(a)      consider the matter to which the application relates; and
(b)notify the applicant of the Commissioner's decision on the application."
It is appropriate that the Tribunal offer some preliminary thoughts on the legislation in question. First, it is the Tribunal's view that the provisions to defer and amend an assessment provide some benefit to a person and for that reason they may be described as remedial or beneficial. As Gummow J stated in McAusland v Deputy Commissioner of Taxation (Cth) 1993 118 ALR 577, provisions of a remedial or beneficial nature "should be given a generous construction so as to permit the fullest relief which will be allowed on a fair reading of its language".
Secondly, the question of whether the payment would cause serious hardship raises the further issue of when the test should be applied. In the context of the legislation and the circumstances of this reference, the Tribunal finds that the test is to be applied as at 1 December 2000, that is, the day upon which the tax instalment deductions belonging to the applicant and held in trust by the respondent were used to extinguish the HECS repayment of $1,731.35.
Under the former PAYE (Pay As You Earn) system, which was effective during the year ended 30 June 1999, employers of employees with an accumulated HECS debt were required to make additional tax instalment deductions in the expectation that the HECS debt repayment debited in the annual income tax assessment of the employees would be met by those additional deductions. It should be noted that such a result was achieved for the applicant and that, in fact, the notice of assessment which issued for the 1999 year resulted in a credit balance of $445.82. Also of interest is the fact that the refund cheque for this amount was intercepted by the Child Support Agency and applied against the applicant's debt with that Agency.
history of the matter and applicant's evidence
The following nine paragraphs represent a recital of the pertinent facts and the relevant evidence presented by the applicant.
The applicant, aged 41 years and unemployed since April 2000, is a single parent with two teenaged children, who, until more recent times, resided with their father at Coober Pedy. In terms of that arrangement, the applicant was liable for income maintenance payments for both children. The elder child, a daughter, is no longer living with the father and thus the maintenance commitment only applies to the second child, a son, who now lives with his father in Adelaide. The applicant has defaulted on those payments and currently owes the Child Support Agency an amount of $4,776 which is attracting monthly penalties of about $40. It seems that, lately, the applicant has organised to have $10 per fortnight deducted from her Newstart Allowance and offset against that debt.
The HECS debt to the Commonwealth originates from the applicant's attendance at the University of Adelaide during the years 1992 to 1995 inclusive. The course of study undertaken related to a Bachelor of Arts Degree majoring in psychology which, according to the applicant, was selected in the hope that the information gained could be utilised in improving the health and lifestyle of members of the Aboriginal community. For reasons not relevant to this decision, the study program was curtailed in 1995 when the applicant took up employment. At the point of cessation, the debt stood at $5,739. Repayments since made, including the one in question, have reduced the outstanding to $54.
A copy of the applicant's 1999 income tax return shows that she was employed by the North Western Adelaide Health Service as a community health development officer and that the tax instalments deducted from her salary included a component to cover the HECS repayment. The applicant stated that the duties of her employment included the rendering of services to members of the Aboriginal community.
It was in April 1999 that the applicant purchased a Toyota RAV 4 for a consideration of $27,300. The acquisition was funded by way of loan from a financial institution which was to be repaid by 84 monthly instalments of $440. The selection of that kind of vehicle was based on a combination of personal preference and the possible need to travel to more remote areas to visit Aboriginal clients. The evidence before the Tribunal established that, in about November/December 2000, the repayments required in terms of the loan agreement were in arrears to the extent of $5,000 and that the lender was endeavouring to take possession of the vehicle.
Upon terminating her employment with the Health Service in June 1999, the applicant, in the company of two young children then in her care, left her rented Housing Trust accommodation and travelled to Alice Springs and Katherine in the Northern Territory. Throughout the duration of that travel, which extended to December 1999, the applicant and her companions stayed with friends and relatives. Soon after her return to South Australia, the applicant ascertained that the relative, who took up occupancy of the leased property during the time of absence on the understanding that that person would pay the rent as it fell due, had defaulted on the arrangement. Consequently, the applicant found herself indebted to the Housing Trust for an amount of $3,375. The amount remains outstanding and it seems that recovery action has been frustrated by the inability of the landlord to locate the applicant.
After a brief stay in Northern Queensland where she had found employment, the applicant returned to South Australia in April 2000. It appears that problems within her family motivated the return and that those problems had caused the applicant stress which, in turn, had led to the onset of the skin condition known as eczema. Unfortunately, the applicant continues to suffer this condition which, in the main, affects areas of her arms and face. The Tribunal was told of the additional expenditure incurred in the treatment of the condition and, also, of how the marring appearance to the facial area had adversely impacted on her job prospects.
Since returning to South Australia in April 2000, the applicant has spent most of her time either in Adelaide seeking employment and medical treatment for the skin condition or at Andamooka where she stayed with Mr Richard Clark. Mr Clark, an elderly gentleman who has known the applicant since her childhood, has provided financial assistance to the applicant in two forms. One, by allowing her to reside at his home free of charge, and, the other, by the making of cash advances to enable the applicant to meet her commitments. There are other occasions when the applicant visited the township of Whyalla where she stayed with her father. Once more, that accommodation was offered on a rent-free basis.
The evidence of the applicant was that she came and stayed in Adelaide on a two weekly basis and that her return to either Andamooka or Whyalla was because of her inability to pay rental on a full-time basis. It was estimated that the cost of petrol in travelling to and from Andamooka was in the region of $140 per trip. When in Adelaide, the applicant shared accommodation and meals with friends located either at Richmond or Tea Tree Gully. The costs associated with those arrangements were $80 per week at Richmond and $100 per week at Tea Tree Gully. The applicant stated that this transient lifestyle enabled her to pay every other monthly car instalment of $440. The alternate instalments were and are being paid on her behalf by Mr Clark.
The sole source of income received by the applicant at the relevant time was the Newstart Allowance of $357.80 per fortnight. It is noted that the applicant has on two occasions borrowed sums of $500 from Centrelink and that repayments have been effected by way of deductions of approximately $40 from the Newstart Allowance. The final repayment on the first of the loans was made in November 2000, whereas the second advance was received in April 2001 and deductions are currently being made.
evidence of mr richard clark
The witness told the Tribunal that he had known the applicant from her infancy and that he regarded her as a member of his family. He confirmed that the applicant stayed at his Andamooka home from time to time on a rent-free basis.
Mr Clark further stated that he had advanced various sums of money to the applicant and that, despite a lack of formality regarding the terms and conditions of those advances, he expected repayment when the applicant secured a position of employment. Mr Clark referred to the cheque heels of his bank account and verified a payment of $5,000 to the applicant in December 2000. It was his understanding that those funds had been applied towards the settlement of the outstanding car instalments then owing to the financial institution. The witness also confirmed paying some of the car instalments falling due after December 2000 and that currently the applicant was in his debt to the extent of $7,000.
In the giving of his evidence, Mr Clark mentioned other earlier advances to the applicant and to the fact that those transactions occurred at a time prior to the operation of his cheque account. The advances were made by money order and the witness was not able to confirm the amounts so advanced. Notwithstanding that deficiency, Mr Clark contemplated a situation whereby he and the applicant would agree an amount which she would repay upon finding employment.
submissions
The respondent's submission that the request for deferral be refused was based upon the following factors:

The applicant should have been aware of her HECS debt repayment responsibility.
The applicant's poor financial position was a consequence of her own actions and was not caused by the payment of the assessed amount.
Tax instalments deducted from the salary derived by the applicant covered the HECS repayment raised in her income tax assessment notice and, as there was no outstanding amount, she could not claim that payment would cause serious hardship.
Whilst the applicant's lifestyle would not be easy or affluent, she was not destitute and her requirements in terms of nourishment, shelter and clothing were being met.

In the opinion of the respondent, the identified factors also prevailed in the case of Re Compton and FC of T 99 ATC 2287 and, for that reason, the Tribunal's decision in that matter should be followed.

In the course of presenting those submissions, the respondent's representative contended that the issue of serious hardship should be determined at a particular point in time and that the appropriate time was 1 December 2000 when the respondent raised his assessment. The Tribunal's decision in Re Case 117 18 ATR 3859 was cited as authority for such a view.
discussion and findings
The first matter to be considered relates to the credibility of the applicant and Mr Richard Clark and the veracity of their evidence. The Tribunal found them to be forthright in their presentation and accepts them to be witnesses of truth and their accounts to be honest and generally accurate.
It is opportune for the Tribunal to offer the following comments regarding the respondent submissions:
(a)It is accepted that the payment of the assessed amount took place when the respondent applied monies being held on the applicant's behalf to the settlement of the repayment. That application was made at the time of raising the 1999 income tax assessment, ie 1 December 2000, and, in the context of the legislation, it is that date that bears on the question of serious hardship.
(b)The Tribunal fails to see how the applicant's awareness of her repayment responsibility is relevant to the resolution of this dispute.
(c)The proposition that serious hardship cannot co-exist with a tax instalment deduction system that provides for the payment of HECS repayment ex those deductions is problematic. If such is the case, and bearing in mind that the vast majority of former students would come within this system, one is left to ponder as to who stands to benefit from these beneficial provisions of the Act. This then leads to the question as to whether the legislation intended to treat debtors coming under the tax instalment deduction system less favourably than those who do not. The Tribunal rejects such a proposal. The preferred approach is to ascertain whether the outlaying of $1,731.35 in the manner described, as distinct from the making of those funds available to the applicant, has caused serious hardship.
(d)The statement that the applicant's poor financial position is a consequence of her own actions, although possibly true, overlooks the fundamental question as to whether the payment caused severe hardship.
The Tribunal finds that, as at 1 December 2000, the applicant stood possessed of the following assets and liabilities:
Assets
Motor vehicle – Toyota RAV 4

Liabilities
Hire purchase debt on vehicle
Outstanding instalments    $5000
Amounts owing to:
Child Support Agency        $4,776
Housing Trust          $3,375
Richard Clark – advances made by money order
Flatmate for use of telephone      $60

Notwithstanding the imprecise nature of the evidence, the Tribunal has structured the following statement to give a four weekly snapshot of the cash flow problems being encountered by the applicant:
Income
Newstart Allowance less payments to Child Support Agency            694
Less Expenditure
2 weeks board in Adelaide 180
Cost of petrol for return trip to Andamooka        140
Car insurance         52
Contribution towards monthly car payment        220     592
Preliminary surplus            $102

The above exercise demonstrates a weekly excess of approximately $25 to cover - the cost of petrol used while in Adelaide and Andamooka – car registration, tyres and repairs – special creams, soaps and shampoos required in connection to the skin condition – and the purchase of some food and personal items not included in the arrangement for board and lodgings. The Tribunal is satisfied that there was no excess of income over expenditure and accepts the applicant's statement that there were occasions when she obtained food from the Salvation Army kitchen and clothing from her friends.

In the Tribunal's view, it is an understatement to describe the financial affairs of the applicant as being parlous. Not only is it unlikely that this lady will pay her debts in full but, upon appraisal, it is reasonable to assume that, without the generosity and charity of others, her already depleted lifestyle would require further downgrading. The Tribunal is in no doubt that the financial circumstances of Ms Szekely are significantly worse than those endured by the taxpayer in the case of Compton (supra).
Having outlined the applicant's financial position as at December 2000, the Tribunal turns to a consideration of the vital question of whether the payment of the HECS repayment in the manner indicated had caused or would cause serious hardship to the applicant.
The framework of the legislation makes it clear that the hardship in question refers to financial hardship rather than physical or social hardship. It is accepted that the expression serious hardship has connotations of unduly burdensome consequences, the magnitude of which would be likely to lead to persons being deprived of necessities according to their standards and those of the community. Generally, it seems to be accepted that serious hardship will arise where the payment of a tax liability will result in a taxpayer being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements – see, for example, views expressed in Income Tax Ruling 2440. But, as Hill J stated, at p4421 in Powell v Evreniades & Ors 89 ATC 4415:
"That is not to say that in any particular case something less than that will not constitute serious hardship."
The Tribunal has considered the various items of expenditure brought to account in the measure of outgoings against income and concludes that all come within the basic requirement category. In forming that opinion, the use of the vehicle in the containment of the costs of food and accommodation and the need for such a vehicle in future employment have been recognised. As previously indicated, the Tribunal is satisfied that there were insufficient funds available to meet the kinds of outgoings of this class and it is against that background that the Tribunal makes the finding that, at the relevant time, the applicant was suffering serious hardship.
The final issue to be addressed is whether, in all the circumstances, the payment of the HECS debt has caused or would cause serious hardship to the applicant. In view of the offset system applied in the settlement of the outstanding, it seems appropriate to approach the enquiry from the aspect of whether the withholding of the $1,731.35 from the applicant caused her serious hardship. Bearing in mind the critical financial position then existing, the Tribunal's answer is clearly yes.
For the reasons stated, the Tribunal sets aside the decision of the respondent dated 18 January 2001 and in substitution therefor decides that the discretion, pursuant to section 106W(3) of the Act, be exercised to amend the amount assessed under Section 106T of the Act to nil on the basis that the payment of the HECS assessment debt has caused serious hardship to the applicant.
I certify that the 30 preceding paragraphs are a true copy of the reasons for the decision herein of Mr D.J. Trowse (Member)
Signed:         .....................................................................................
  (Personal Assistant)
Date/s of Hearing  10 & 12 July 2001
Date of Decision  8 August 2001
Counsel for the Applicant        In person
Solicitor for the Applicant         -
Counsel for the Respondent    An officer
Solicitor for the Respondent    ATO