XLPZ and Commissioner of Taxation (Taxation)
[2016] AATA 466
•1 July 2016
XLPZ and Commissioner of Taxation (Taxation) [2016] AATA 466 (1 July 2016)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2015/3474 & 2015/3475
Re
XLPZ
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President Gary Humphries
Date 1 July 2016 Place Canberra The decision under review is affirmed.
.............................[sgd]...........................................
Deputy President Gary Humphries
Catchwords
TAXATION – application for release from taxation liabilities – whether applicant would suffer serious hardship if required to satisfy the liabilities – no significant hardship – discretion to release the applicant from his liabilities not exercised – decision under review affirmed
Legislation
Taxation Administration Act 1953 (Cth) ss 14ZZK, 340-5
Cases
Huckle and Commissioner of Taxation [2014] AATA 362
Powell v Evreniades (1989) 21 FCR 252
Rasmussen and Commissioner of Taxation (2013) 61 AAR 323
Spicer and Commissioner of Taxation [2004] AATA 960Van Grieken v Veilands (1991) 21 ATR 1639
Secondary Materials
Practice Statement Law Administration (PS LA 2011/17)
REASONS FOR DECISION
Deputy President Gary Humphries
1 July 2016
Introduction
XLPZ seeks review of the Commissioner of Taxation’s (the Commissioner) objection decision dated 13 May 2015 to disallow his objection of 16 March 2015 in which the Commissioner refused to release him from certain tax liabilities pursuant to s 340-5 of Schedule 1 of the Taxation Administration Act 1953 (the Act). On 11 July 2015, XLPZ lodged an application for review of the above decision with the Tribunal.
Background
At the age of 53, whether through bad luck, poor decision-making or a combination of both, XLPZ, the applicant in these proceedings, faces a difficult financial outlook. At the time of the hearing in January 2016, he was unemployed and separated from his former wife. Protracted litigation with his former wife over access to his sons has left him in ruinous financial circumstances.
Relevant facts
XLPZ’s taxation debt relates to his income taxation liabilities for the income years ended 30 June 2010 and 2011 (the relevant periods). The debt arose because of the early access by XLPZ to his superannuation benefits from his Self-Managed Superannuation Fund. It was his submission that he accessed the funds to meet legal expenses associated with Family Court proceedings.
XLPZ notified the Commissioner of the early access to his superannuation benefits, which resulted in the Australian Tax Office (ATO) conducting an audit in relation to his superannuation fund. The audit found that XLPZ had not reported the withdrawals from his superannuation fund in his income tax returns lodged for the relevant periods. He was issued amended assessments by the ATO, which increased his taxable income for the relevant periods. He subsequently lodged objections under Part IVC of the Act.
XLPZ owes the Commissioner a taxation debt in the sum of $57,939.71. The following table is a breakdown of his taxation liabilities and amounts for General Interest Charge, as at 13 May 2015:
Income tax for the 2010 and 2011 income years 52,223.73 General Interest Charges 5,715.98 Total 57,939.71 The applicable law
Section 340-5 of the Act provides:
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
…
Thus the section gives the Commissioner a discretionary power to release an individual, in whole or in part, from certain tax liabilities where the person would suffer serious hardship if required to satisfy the liability.
The Tribunal must therefore consider two questions in relation to this application. First, would XLPZ suffer serious hardship if he were required to satisfy the liability and, secondly, if it is found that he would suffer serious hardship, should the discretion to grant relief be exercised in this situation.
The phrase serious hardship is not defined in the Act, however its meaning has been considered in numerous decisions of the Tribunal and the Federal Court. The term should be given its ordinary meaning.[1]
[1] See, for example, Powell v Evreniades (1989) 21 FCR 252 at 258, Van Grieken v Veilands (1991) ATR 1639, Spicer and Commissioner of Taxation [2004] AATA 960.
The Commissioner’s policy on the application of s 340-5 is explained in Practice Statement Law Administration (PSLA) 2011/17 (last updated 3 July 2014). Although such policies are not strictly binding on the Tribunal, it should have regard to those policies in reaching a decision.[2] The PLSA includes the following at paragraphs 24-25:
[24] The term “serious hardship” is not defined and must be given its ordinary meaning … The object of the tests is to determine whether the consequences of paying the tax would be so burdensome that the person would be deprived of what are considered necessities according to normal community standards.
[25] Serious hardship would be considered to exist where payment of a tax liability would result in the person being left without the means to afford food, clothing, medical supplies, accommodation, education for children and other basic requirements at a reasonable level.
[2] Drake and Minister for Immigration and Ethnic Affairs (No 2) (1979) 2 ALD 634.
In evaluating these factors it is necessary to have regard to XLPZ’s income/outgoings, assets/liabilities and any other factors and, pursuant to s 14ZZK(b)(ii) of the Act, he bears the burden of proving that the taxation decision concerned should not have been made or should have been made differently.
The applicant’s financial situation
Clearly, an assessment of XLPZ’s financial position lies at the heart of the exercise the Tribunal must engage in to arrive at the correct or preferable decision in his application for review. Undertaking that assessment, however, has not been a straightforward exercise, with XLPZ’s financial position changing depending on the temporal point of reference. His written submissions to the Tribunal, though very extensive, were not always easily comprehensible as to precisely what his financial position was at a given point in time. Nonetheless, the Tribunal was able to reach certain conclusions as to those matters.
Income
When XLPZ submitted his application for release his stated fortnightly income was nil.[3] On 6 October 2015, XLPZ advised the ATO that he was in receipt of a Newstart allowance. The Commissioner then calculated XLPZ’s income from Newstart to be $524.40 per fortnight. XLPZ submitted that his income from Newstart was $1,201 per month. With reference to a bank statement provided by XLPZ to the Tribunal on 6 October 2015, I choose to prefer the calculations of the Commissioner in relation to XLPZ’s fortnightly income.
[3] T3 folio 44.
XLPZ is also financially supported by his father. In September 2015 XLPZ was provided a lump sum in the amount of $47,320.11. In a spreadsheet provided to the Tribunal, XLPZ claimed to be receiving monthly advances from his father in the sum of $2,390.
XLPZ was trained, but had not practised for 20 years or so, as a lawyer. At the hearing, he advised that he was seeking employment as a Family Dispute Resolution Practitioner.
Outgoings
XLPZ has stated that his fortnightly living expenses are as follows:
Expenditure Per fortnight expenditure ($)
Per original release application 28 October 2014[4]
Per fortnight expenditure ($)
Per updated figures on 28 October 2015
Difference between original and latest figures Mortgage 500.00 500.00 0.00 Food and household expenses 50.00 250.00 +200.00 Telephone (including mobile phone) 50.00 40.00 -10.00 Internet, pay television 25.00 0.00 -25.00 Clothing 0.00 15.00 +15.00 Vehicle registration and insurance 25.00 30.00 +5.00 Vehicle repairs, maintenance, petrol and oil 50.00 65.00
105.00 (petrol/oil)
+120.00 Fares 0.00 3.00 +3.00 Health insurance 50.00 47.00 -3.00 Life insurance, sickness or accident insurance 125.00 40.00 -85.00 Medical, dental and pharmacy 25.00 40.00 +15.00 Child support or maintenance 17.00 0.00 -17.00 Loan repayments, credit card repayments (total) “Credit card payments are currently in arrears” 0.00 0.00 Entertainment 100.00 86.00 -14.00 Other 0.00 185.00 +185.00 Total 1,017.00 1,406.00 +389.00 [4] T3 folio 32.
In December 2015 XLPZ relocated to furnished rental accommodation in Deniliquin, NSW. The cost of this accommodation is $110.00 per week.
Assets/Liabilities
XLPZ provided the following information regarding his assets and liabilities on 28 October 2014[5]:
[5] T3 folios 49-50, 53-55.
Asset/Liability Asset - Market Value ($) Liability - per original application ($) Investment property – Waverton, NSW 400,000.00[6] 458,008.00[7] Motor vehicle – 2001 Toyota Avalon 3,000.00 Nil ANZ cheque account – PJR[8] Nil Nil ANZ overdraft account – PIR Panjal Investments Pty Ltd Nil Nil HDFC back account (India) – PJR 600.00 Nil ANZ credit card – PJR Nil Nil ANZ credit card – Ski Himalaya Nil 12,750.00 Legal Aid NSW Nil 35,364.53 Dr BW Nil 13,823.72 SH (legal costs) Nil Unknown WH (legal costs) Nil 10,162.50 Mills Oakley (legal fees) Nil 9,937.94 Makinson d’Apice (legal fees) Nil 13,759.00 Supreme Court of NSW Registrar Nil 2,050.38 Sundry debts owed to JR and RR Nil 185,083.00 Debt owed to SR Nil 3,820.00 Laptop N/A N/A Taxation debt Nil 57,939.71 Total 403,600.00 802,698.78 [6] The applicant indicated that he has applied an increase in the valuation of 15%.
[7] The applicant indicated that he has applied an increase in the valuation of 15%.
[8] Some individuals’ names in this table have been redacted.
In documentation updating his financial position in October 2015, XLPZ estimated his total assets to amount to $462,000 and his total liabilities to amount to $773,131 as at 30 September 2015. He estimated that he owed his father $282,549 at that time, and members of his family collectively $422,381.
In October 2014 there were substantial amounts of money owed in legal fees. In the statement lodged one year later, a number of these liabilities have been excised from his reckoning of assets and liabilities. XLPZ gave evidence that he was assuming, on the basis of a lack of correspondence with his legal creditors, that at least some of these debts would no longer be pursued.
Other factors
XLPZ pays a small amount of child support. His children live with his former wife.
On 20 February 2015 the Commissioner decided to treat XLPZ’s taxation debt as uneconomical to pursue. The effect of this decision is that the Commissioner will not take any steps to recover the debt for so long as the non-pursuit decision remains in place. At the time of the hearing, XLPZ was not being required to pay the debt owed to the ATO.
Would the applicant suffer serious hardship if required to satisfy the liability?
In the evidence taken before the Tribunal at the hearing, some exchanges ensued between the parties as to how certain assets and liabilities should be treated. For example, submissions were made regarding XLPZ’s supposed preference of other creditors over the tax office, the value of a property he owns in Kashmir and the status of a property he owns in Sydney jointly with other members of his family. The Tribunal discerns no benefit in reciting the details of those submissions by the parties, since none, even if fully accepted to XLPZ’s benefit, alters the reality that his financial position is, on paper at least, extremely dire. Even on XLPZ’s own figures, and assuming that some $50,000 in legal debts has effectively been forgiven, his liabilities exceed his assets by at least $300,000. Similarly, as at the time of the hearing, his monthly expenses were capable of being met only through a combination of his Newstart allowance and regular advances from his father.
The case law has established a number of principles on serious hardship. In determining whether XLPZ would suffer serious hardship, the Tribunal must consider his financial hardship, as opposed to physical or social hardship.[9] The resources of the household, not just of XLPZ, are to be considered in determining the relevant assets and income as against liabilities and expenditure.[10]
[9] Powell v Evreniades (1989) 21 FCR 252, 258.
[10] Van Grieken v Veilands (1991) ATR 1639, 1646.
There must be a causal relationship between the requirement to satisfy the tax liability and the serious hardship. As Forgie DP explained in Rasmussen:
Although I look at what is meant by the expression “serious hardship” in this section of my reasons, I must keep in mind that s 340-5(3) requires me to do more than decide whether Mr Rasmussen is in serious hardship or would be having regard to his circumstances. The issue that I must come back to and decide is whether he would suffer serious hardship “… if he were required to satisfy the liability”. The need to focus on this becomes clear from the authorities which have considered the criteria that must be met under s 340-5(3) and the discretion that must be exercised.
Senior Member Cunningham also referred to this requirement in Huckle and Commissioner of Taxation [2014] AATA 362:
The “serious hardship” referred to in section 340-5 must result as a consequence of an individual being required to satisfy their tax liability. … if the relief sought was to be granted and the individual still suffered serious hardship because of their other financial commitments, the discretion sought should not be exercised.
XLPZ argued that the use of the word if in s 340-5 did not connote a causal connection between the requirement to satisfy the tax liability and the suffering of serious hardship. The Tribunal cannot accept that submission, as it flies in the face both of the plain meaning of the words of the section and of the authorities which have commented upon that meaning.
At the time of the hearing, XLPZ’s current income consisted of Newstart payments. He has been and continues to be supported by his family to meet his needs. Until recently he was living with his parents and brother on a rent-free basis in Mudgee. In December 2015 he relocated to Deniliquin.
XLPZ told the Tribunal…absent the tax office debt, I’m actually saying I’m getting by. This founded an argument that, on the basis of an income subsidy from his father, XLPZ is not in serious hardship in terms of his day-to-day living expenses, but if he were required to repay $57,939.71 to the ATO over the coming three years (what he asserted was the ATO’s standard timeframe for debt recovery) his situation would become untenable.
He also provided the following statement to the Tribunal:
The taxpayer points out, that the genesis of his relevant tax debt, was the severe financial stress, in which the taxpayer found himself, prior to the relevant tax debt arising. It was that pre-existing financial stress, which led to the taxpayer illegally accessing his super funds, which in turn triggered the tax debt, which is in question. At no time since the triggering of that tax debt, has the taxpayer ever been in any financial state, other than one of ongoing financial difficulty. At no time since he became aware of the tax debt, has the taxpayer had funds available to him (excluding credit lines) with which he might satisfy that large tax debt.[11]
[11] Applicant’s Statement of Facts, Issues and Contentions dated 14 December 2015 at [88].
With respect, it appears that XLPZ is conflating two separate exercises that must be undertaken in assessing the extent to which the tax office debt occasions him serious hardship. The Tribunal accepts the argument that if he were required to repay the substantial tax office debt in the space of a few years, he would be placed in serious hardship in terms of his day-to-day expenditure. However, the ATO has made it clear that it does not propose to recover the debt at this time, in light of XLPZ’s financial circumstances. The existence of the debt, in notional terms, therefore cannot be said to impose serious hardship on him since he is not presently required to make payments to satisfy it. He is, indeed, able to get by notwithstanding the fact of the debt.
The Commissioner has exercised the discretion not to waive the debt itself, however, which means that it must be accounted for on XLPZ’s personal balance sheet of assets and liabilities. In this sense, too, the fact of the debt cannot be said to place XLPZ in serious hardship, since the waiving of the debt would not restore the health of that balance sheet, i.e. he would still remain heavily in debt even if the tax debt were waived.
XLPZ raised issues during the hearing regarding the conduct of the ATO towards him. While acknowledging that his relationship with the ATO has on occasions been difficult, the Tribunal discerned nothing in that regard which was relevant to these proceedings. XLPZ also alleged that some actions of the ATO were undertaken in breach of its own protocols and policies, in particular the Practice Statement Law Administration. The Tribunal was not persuaded that this was so but notes that, even if its actions were in breach in the way alleged, the relevant reference point for the decision maker is the statute, not subordinate policies. If the Commissioner has taken his decision in accordance with the statute, it little avails the taxpayer that in the course of doing so the Commissioner might have offended a policy or protocol.
Although XLPZ is experiencing financial hardship, this is not sufficient to meet the statutory requirement for release under s 340-5(3) of the Act. XLPZ himself recognises that he was experiencing pre-existing financial stress prior to incurring the tax liabilities in question. Accordingly, the financial hardship he is experiencing is independent of the requirement to satisfy his taxation liabilities.
I find that XLPZ does not meet the statutory condition of release under Schedule 1, s 340-5(3) of the Act as he will not suffer from serious hardship if required to satisfy the taxation liabilities.
Exercise of the discretion
The Tribunal does not consider that XLPZ meets the circumstances in Item 1 of s 340-5(3) of the Act but, for completeness, I will consider whether I would have exercised the discretion under that provision had he done so.
The factors that may be relevant to the establishment of the discretion may be wider than those factors that go to the establishment of serious hardship.[12]
[12] Powell v Evreniades (1989) 21 FCR 252, 264.
The PSLA 2011/17 includes a list of factors relevant to the exercise of the discretion:
Examples of situations in which the ATO may decide against granting release, even though implications of serious hardship may be drawn, are:
· where it appears that the person has, questionably or otherwise, disposed of funds or assets without making proper provision to meet tax liabilities
· 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
· where the person has used available funds to discharge debts due to other private creditors in preference to debts due to the ATO
· 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
· 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 responsibilities for debts
· where serious hardship is associated with a single event or short term outcome, such as might be encountered in the more speculative or seasonal business undertakings where the effects are likely to be only short term
· where the person has a poor compliance history, and
· where the person is unable to demonstrate that they have made provision for future debts.
Several of the above grounds could be considered relevant to the circumstances in which XLPZ finds himself. Despite him alerting the ATO as to his access of his self-managed superannuation fund, he failed to make provision for the taxation requirements attaching to those funds.
The Tribunal finds that the granting of release would not result in a reduction of hardship for XLPZ. As the respondent put to the Tribunal, much of the situation in which XLPZ has found himself has arisen quite independently of XLPZ’s liability to the Commissioner. XLPZ has experienced failure of his self-operated business, and termination of his non-replaceable ‘niche’ consultancy work.[13] In addition to this, he has incurred costs in litigation relating to contact with his sons, and has had costs orders made against him in other court proceedings.
[13] Applicant’s Statement of Facts, Issues and Contentions dated 6 January 2016 at [43].
It is apparent that XLPZ has paid other debts. He has used loans from his father to meet liabilities of Pir Panjal Investments, a company of which he is the sole director and shareholder. XLPZ submitted that the terms of the loan were exclusive to Pir Panjal Investments. The Tribunal notes that the issue of selectively paying other debts has been considered in other cases to militate against the exercise of the discretion.[14]
[14] Vagh and Commissioner of Taxation [2007] AATA 32 at [25], [47]; Adams v Commissioner of Taxation [2010] AATA 744 at [35].
There are no extenuating circumstances that warrant XLPZ being treated preferentially to other taxpayers.[15] Releasing XLPZ from his debt is not appropriate in the circumstances. Even if I had found that XLPZ qualified for consideration of the exercise of the discretion in s 340-5 of the Act, that discretion should not be exercised in XLPZ’s favour.
[15] Fox and Commissioner of Taxation [2005] AATA 766 at [20]; Ferguson and Commissioner of Taxation [2004] AATA 779 at [34], Wilson v Minister for Territories (1985) 7 ALD 225 at 232-3; Filsell and Commissioner of Taxation [2004] AATA 1012 at [20]; Vagh and Commissioner of Taxation [2007] AATA 32 at [48].
Conclusion
XLPZ has not discharged the onus of proof to establish that he would suffer serious hardship if he was required to pay the relevant tax liabilities. Accordingly, I affirm the Commissioner’s decision of 13 May 2015. Even if XLPZ had established that he would suffer serious hardship, for the reasons given I do not consider that the discretion should be appropriately exercised to release XLPZ from his tax liabilities.
I certify that the preceding 43 (forty - three) paragraphs are a true copy of the reasons for the decision herein of Deputy President Gary Humphries ............................[sgd]............................................
Associate
Dated 1 July 2016
Date of hearing 15 January 2016 Applicant In person Respondent In person Counsel for the Respondent Reg Graycar
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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Statutory Construction
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Procedural Fairness
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