10.1 The third focus for the terms of reference asks the Inspector-General to examine the impact of the Tax Office's small business debt collection policies and practices on aspects of that collection. One of those aspects specified in the terms of reference is the Commissioner's exercise of his power to release small businesses from their tax debts on the grounds of serious financial hardship. Few submissions voiced views on this aspect of the Tax Office's small business debt collection practices. This final chapter outlines those views.
10.2 Division 340 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) confers a discretion on the Commissioner to release taxpayers from tax-related liabilities on the grounds that the taxpayer is suffering serious hardship if they are required to satisfy the liability. A 'release' is a term used in taxation law to mean the extinguishment of a taxpayer's tax liability.
10.3 Prior to legislative changes on 1 September 2003, the Tax Relief Board had the power to grant release.
10.4 For the 2002-03 year, the Tax Relief Board considered 1798 release applications. Of those applications, 636 were granted a full release, 270 a partial release, 835 were refused and 57 either were deferred or withdrawn. These figures are substantially similar to those for the 2001-02 year. The Tax Office was unable to provide details on how many of these applicants were small businesses as they state that no data is available from the former Board. However, from 1 September 2003 to 30 April 2004, the Tax Office reports that approximately 30 per cent of release applicants have been small businesses.
10.5 Submissions express the following views:
- the Tax Office's published release policy is out-of-date;
- the Tax Office's interpretation of 'serious hardship' is inconsistent with the underlying legislative policy when considering a debtor's family home and the income of the debtor's spouse;
- the Tax Office did not properly advise Parliament, and consequently the public, of the removal of non-individuals' eligibility to apply for release; and
- the Tax Office insufficiently informs potential applicants of the existence of their right to apply for release.
Currency of policy
10.6 Before 1 September 2003, sections 265 of the Income Tax Assessment Act 1936 (ITAA 1936) and 133 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) conferred a discretion on the Commissioner to release taxpayers from tax-related liabilities on the grounds of serious hardship. On 1 September 2003, both sections 265 and 133 were repealed and effectively replaced by Division 340 of Schedule 1 of the TAA 1953.
10.7 Chapter 24 of the ATO receivables policy sets out the Commissioner's policy in exercising his discretion to release taxpayers from taxation debts on the grounds of serious hardship. However, chapter 24 does not refer to Division 340 but rather refers to sections 265 and 133. Both of these provisions were repealed on 1 September 2003. There are significant differences between the repealed provisions and Division 340.
10.8 The Tax Office advises that the policy is in the process of being updated to reflect the September 2003 amendments. The Tax Office provided the Inspector-General with a copy of a draft updated release policy. However, as at 13 October 2004 chapter 24 of the ATO receivables policy has still has not been updated.
September 2003 amendments
Before 1 September 2003
10.9 Before 1 September 2003, the Tax Relief Boards were empowered with the discretion to release taxpayers, both individual and non-individual, on the grounds of serious hardship from liabilities under the ITAA 1936 and the FBTAA 1986.78 The Boards comprised the Commissioner of Taxation, the Secretary of the Department of Finance and Administration and the Chief Executive Officer of the Australian Customs Service.
10.10 For debts under $500, the Commissioner could take the place of the Boards. The Boards could refer any application for release to the Administrative Appeals Tribunal (AAT). For debts over $10,000, the Boards were required to refer the application to the AAT. The merits of a Board's decision could not be reviewed.
1 September 2003
10.11 On 1 September 2003, the Tax Relief Boards were abolished along with the AAT's role in receiving and investigating applications for release.79 The Commissioner of Taxation was empowered to exercise the discretion in his own right. However, the Commissioner's decisions could now be reviewed under Part IVC of the TAA 1953. This meant that the merits of the decision could be reviewed by the AAT.
10.12 Additionally, the range of liabilities was expanded to income tax, Medicare levy, Medicare levy surcharge, administrative penalties, general interest charge, other penalties, FBT instalments and Pay As You Go instalments.
10.13 Serious hardship remained the sole criterion for deciding whether release should be granted. However, only individual taxpayers and trustees of deceased estates could apply to the Commissioner of Taxation for release.
Interpretation of 'serious hardship'
10.14 Some submissions indicate that the Tax Office is not exercising the release power consistently with the underlying legislative intent. They point to the Tax Office's policy which requires tax officials to consider the income of the debtor's spouse and the value of the debtor's family home.
10.15 A taxpayer representatives' group comments that the Tax Office policy of considering whether proceeds from the sale of a jointly owned family home or the debtor spouse's income could be used to help repay a debtor's tax debt is generally unfair. Additionally, the Commonwealth Ombudsman recommended in relation to its investigation of the Tax Office's handling of investors in the mass-marketed tax-effective investment 'Main Camp' that:
the Commissioner not seek to make a person bankrupt, or to require them to sell their principal place of residence to repay a debt, unless an unacceptable risk factor has been identified.80
10.16 The Tax Office points out that its interpretation of serious hardship is supported by case law. For example, Justice Gummow in the Federal Court considered whether the Board had taken irrelevant considerations into account when not exercising a discretion for relief under section 265 (the predecessor to Division 340):
the determination of whether the exaction of the full amount of the tax would entail serious hardship properly involves a consideration of the financial affairs of the taxpayer, including his financial relations with the other members of his household, and with any family company.81
Tax Office policy
10.17 In considering whether to release a taxpayer from a tax-related liability, the Commissioner decides whether the taxpayer is suffering from serious hardship. Chapter 24 of the ATO receivables policy does not define 'serious hardship'. Although chapter 24 does not reflect the September 2003 changes to the release provisions, the Tax Office states that the amendments did not affect the definition of 'serious hardship' and therefore the updated policy guidance for what constitutes serious hardship will not change.
10.18 In determining the existence of serious hardship the ATO receivables policy provides three tests that:
follow a conceptual position that the term 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 normal community standards. Thus, serious hardship would be seen to exist where payment of a tax liability would result in the debtor being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements.82
10.19 In considering an application for release, the effect of hardship may be on other family members:
As a first step in considering an application for release, the [Commissioner] must determine the person or persons to be included in its assessment of hardship factors. Although hardship will be largely personal to the debtor, or the dependant of a deceased debtor, it is not limited to the immediate state of that person. Rather, the prospect of inability to provide food, clothing, etc., for family members or others for whom the person has responsibility will also constitute a hardship faced by the person.83
10.20 However, the ATO receivables policy states that the financial resources of family members may also be taken into account when assessing the capacity to meet family expenditures:
Conversely, although a debtor's immediate situation may suggest inability to meet the combined total of the tax debt and family expenditures, that factor will not indicate hardship if the income or asset positions of other members of the family are such as to suggest that the debtor cannot reasonably be regarded as responsible for all relevant outgoings. For example, the separate earnings, allowances or benefits received by other family members will be relevant to an assessment of the debtors overall financial circumstances.84
10.21 Additionally, the Tax Office states that if an applicant has other creditors, then a more appropriate avenue for an applicant in financial hardship may to apply for voluntary bankruptcy under the bankruptcy laws. It is of the view that these laws are aimed at achieving a balance between protecting creditors and enabling a debtor to bring finality to a financially unsurmountable position and allow them to start again.
10.22 The Tax Office also points to the September 2003 amendments that provide a release applicant with the right to apply to the AAT to have the merits of the release decision independently reviewed.
Removal of non-individuals' eligibility
10.23 The repealed sections 265 of the ITAA 1936 and 133 of the FBTAA 1986, entitled a 'person' to apply for release. A person is defined in section 6 of the ITAA 1936 as including a company.
10.24 However, the new subsection 340-5(3) of Schedule 1 to the TAA 1953, only permits either an individual or a trustee of a deceased estate to apply for release. An individual is defined as a natural person.85
10.25There is no express statement in the material surrounding the legislative change that it would remove rights from non-individuals.
10.26 The Explanatory Memorandum states that:
Schedule 9 to this bill amends the ITAA 1936, FBTAA 1986, TAA 1953, ITAA 1997 and the Administrative Appeals Tribunal Act 1975 to streamline the procedures under which an individual taxpayer can be released from a tax liability where payment would entail serious hardship.86
10.27 The table under that paragraph indicates that the repealed law only applied to individual taxpayers also.
10.28 The Tax Office confirms that one of the main effects of Division 340's introduction was that non-individual taxpayers were not entitled to release.
10.29 However, there is no reference in the Explanatory Memorandum or the Second Reading Speech that indicates that under the repealed law a non-individual was eligible to apply for release on the grounds of serious hardship.
10.30 The Tax Office states that it is unable to advise how many non-individual taxpayers applied for release on the grounds of serious hardship before September 2003, as those records were kept with the Board.
Debtors' awareness of hardship provisions
10.31 Submissions indicated that the Tax Office may not bring to debtors awareness that they may apply for release on the grounds of serious hardship. In 2001, the Commonwealth Ombudsman commented that this was the case in relation to certain investors in mass-marketed tax-effective investments. He recommended that:
The Commissioner … consider providing taxpayers with information about ATO debt recovery policy, the existence and role of the Tax Relief Board, and relevant contact points, including access to the Ombudsman, when they are advised that a debt is to be raised.87
10.32 The Tax Office states that it now publishes a booklet, Difficulty in paying your tax debt (business clients).88 This booklet contains the following entry on applications for release:
What if the payment will cause you serious hardship?
Serious hardship is when you are unable to provide food, accommodation, clothing, medical treatment, education, or other necessities for yourself or your family, or other people for whom you are responsible.
You can apply to the Tax Office for a release from payment of your tax debt.
For more information and an application, phone the Client Account Management helpline on 13 11 42.
10.33 Other Tax Office publications contain substantially similar wording.Additionally, the ATO receivables policy states that debtors should be made aware of the right to apply for a release.
78 Section 265 of the ITAA 1936 and section 133 of the Fringe Benefits Tax Assessment Act 1986.
79 Schedule 9 to the Taxation Laws Amendment Act (No. 6) 2003.
80 Commonwealth Ombudsman, The ATO and Maincamp, Canberra, January 2001, recommendation 17, pp. 5 and 24.
81 Van Grieken v Veilands 1991 ATR 1639/91 ATC 4423, per Gummow J, at paragraph 21.
83 ibid, paragraph 24.4.3.
84 ibid, paragraph 24.4.4.
85 Section 995-1 of the Income Tax Assessment Act 1997.
86 Explanatory memorandum to the Taxation Laws Amendment (No. 6) Bill 2003, paragraph 4.1.
87 Commonwealth Ombudsman, The ATO and Maincamp, Canberra, January 2001, recommendation 18, p. 7.
88 First published on 2 September 2003.