3.1
The Inspector-General of Taxation and Taxation Ombudsman (IGTO) described to the Committee that there exists a legislative gap in Australia that could be addressed to achieve a fairer and more balanced tax system.
3.2
This chapter examines how those gaps result in only limited taxpayer protection, and what more can be done to improve this, including further enshrining in law the rights of the Australian taxpayer.
3.3
This chapter also explores the mechanisms available to assist taxpayers understand and exercise their rights, including in relation to tax debt and liabilities, the services offered by Tax Clinics and the effectiveness on the provision of advice and guidance by the Australian Taxation Office (ATO).
Debt liability and recovery
Existing tax laws and practice in Australia
3.4
In Australia when the ATO has formed the opinion that a debt exists, it issues a notice of assessment that gives it the power to collect the debt. The debt stands payable even if disputed by the taxpayer, and is being challenged in Administrative Appeals Tribunal (AAT) or a federal court.
3.5
Sections 14ZZM and 14ZZR of the Taxation Administration Act 1953 (Cth) (TAA 1953) provide that the ATO has the power to collect a disputed debt, before appeals and objections have been heard or decided.
3.6
The ATO told the Committee that several practice statements had been published about the use of the ATO legislative debt recovery power, including in the context of objections and audits. These include the Law Administration Practice Statement (PS LA) 2011/4 Collection and recovery of disputed debts, and the PS LA 2011/18 Enforcement measures used for the collection and recovery of tax-related liabilities and other amounts.
3.7
The ATO added that the practice was ‘generally to not enforce payments while a debt was subject to a review, dispute or objection,’ and that when payment was being enforced it was ‘based on a careful risk assessment’ on the likelihood of the debt standing as recoverable once the dispute has been finalised.
3.8
In comparison, in the United States of America (US), Canada, New Zealand and the United Kingdom (UK), the tax authorities cannot collect a disputed tax debt until the dispute has been resolved. However, legislative provisions exist in those jurisdictions that enable collection of disputed debt when there is a risk of debt recovery, such as in cases of tax avoidance for example.
3.9
Self-Employed Australia told the Committee that the US Internal Revenue Service (IRS) cannot collect a disputed tax debt until all appeals have been exhausted, and that the US has a dedicated Tax Court that adequately deals with such disputes. Mr Ken Phillips, Executive Director at Self-Employed Australia, commented that the UK had similar mechanisms and processes.
Shifting the onus of proof and enhancing procedural fairness
3.10
Under sections 14ZZK and 14ZZO of the TAA 1953, the onus of proof rests with the taxpayer once the ATO has determined that a tax liability applies. TaxResolve raised their concerns with the Committee about the protection of taxpayers’ rights in this regard, and specific to the incidence of fraud and evasion.
3.11
TaxResolve explained that taxpayers must disprove the findings from the Commissioner of Taxation (the Commissioner) for each item of income or deduction in dispute and each applicable tax return. TaxResolve commented that:
This can be a very challenging task that is very unfair to the taxpayer, particularly when the tax year ended many years prior and documentary and other evidence has not been kept and is very difficult to locate. The burden of proof in these cases always sits with the taxpayer.
3.12
Self-Employed Australia drew the Committee’s attention to the 1998 reform of the US tax system (the 1998 US reform), and advised that it consisted, in part, of shifting the onus of proof from the taxpayer to the tax administration, adding that the reform met bipartisan support and rebalanced taxpayers’ rights.
3.13
In 2016, the then Standing Committee on Tax and Revenue, as part of the
Inquiry into Tax Disputes, inquired into this legislative impediment and recommended that a change be made to:
place the burden of proof on the Australian Taxation Office in relation to allegations of fraud and evasion after a certain period has elapsed. The change should be harmonised with the record keeping requirements.
3.14
The recommendation was not supported by the Government of the day.
3.15
TaxResolve also expressed concerns about the procedural fairness afforded to the Australian taxpayer. It highlighted the absence of a statutory time limit on the age of the evidence requested by the ATO after the issuance of an assessment, for cases involving fraud or evasion. It recommended for the Committee’s consideration the amendment of section 170 of the Income Tax Assessment Act 1936 (Cth) to reduce the statutory timeframe to 10 years for these cases.
3.16
Similarly, the IGTO commented on this lack of a statutory timeframe and described it as a ‘potential gap’ in Australia’s legislation. The IGTO looked to the ‘Right to Finality’ in the US tax system, where the IRS can collect taxes up to a limit of 10 years after the assessment date. The IGTO explained:
By limiting the time in which the IRS can collect debt in legislation, taxpayers in the USA are provided with assurance against later recovery actions when documentary evidence may no longer have been kept making it harder for the taxpayer to properly dispute or challenge the revenue authority’s claims for debt. This approach differs to that in Australia, where the statute of limitations (usually six years) does not apply to the recovery of tax debts where an assessment has been raised within the appropriate timeframe.
3.17
TaxResolve further stressed the discrepancy between the ATO’s administration of fraud and tax evasion cases to that of tax avoidance, and provided a series of recommendations to improve transparency, taxpayer engagement and procedural fairness, including:
informing taxpayers of concerns prior to a determination being made;
allowing them to provide a submission to address those concerns early and to participate to discussion panels;
having the ATO panel chaired by an Officer of the Deputy Commissioner level or higher;
appointing officers at a senior executive level to make determinations of fraud and tax evasion; and
undertaking a revision to the ATO’s Practice Statement on Dispute Resolution.
ATO interest rates causing hardship
3.18
Evidence provided to the Committee suggests that the above market interest rates the ATO charges for loans it has granted to taxpayers to assist them to repay tax debt may in fact increase taxpayers’ hardship.
3.19
Self-Employed Australia submitted to the Committee that the ATO charges seven per cent more in interest than the Australian Government itself pays on its debts. It noted that one of the provisions of the 1998 US reform is the prohibition on the IRS charging a higher rate of interest on an unpaid tax debt than the interest rate paid by the US Federal Government itself.
‘Modern world’ debt forgiveness and hardship provisions
3.20
The Committee heard that while the ATO is generally supportive of taxpayers who are taking steps to rectify their tax position, it has limited powers to forgive tax debt under the income tax law hardship provisions. For example, if a taxpayer’s financial hardship is caused by a Goods and Services Tax (GST)-related tax debt, the provisions cannot be exercised.
3.21
In her oral evidence Dr Ann Kayis-Kumar, Tax Clinic Director, University of New South Wales (UNSW) Tax Clinic provided the Committee with the following example:
We've got an increased incidence of the gig economy, and those liabilities will be classified as GST based in many instances. At the moment, there's no ability for tax relief for GST liabilities, but there is relief for things like CGT [Capital Gains Tax] liabilities. So one hypothetical scenario that presents a perverse problem in outcome is that you can have taxpayers getting relief for CGT debts that they incurred as a result of the sale of investment properties if they have since experienced financial hardship, but you can't have a sole trader, a subbie, who has not been able to keep up with their financial obligations and tax obligations get relief for GST related debts.
3.22
Mr Kevin O’Rourke, Director of O’Rourke Consulting, told the Committee that in most cases, it is not until businesses have become insolvent that the ATO can write the debt off.
3.23
The UNSW Tax Clinic suggested to the Committee for its consideration that the ATO adopts a wider interpretation of ‘hardship’ where tax debt is only one of the components needed to meet the definition, to adjust to current realities and provide hardship relief rather than wait for insolvency.
3.24
Dr Ann Kayis-Kumar suggested implementing law reforms to adapt serious hardship relief provisions to the ‘modern world.’
ATO communication and assistance
Advice and guidance products
3.25
In the ATO’s PS LA 2008/3 ‘advice’ is explained as the Commissioner's opinion on the application of the law that the Commissioner administers. It is binding on the Commissioner and is generally provided in the form of a ruling. Further, in PS LA 2008/3 ATO ‘guidance’ is explained as help provided to taxpayers to understand their obligations and entitlements under the laws administered by the Commissioner. Guidance is not binding on the Commissioner.
3.26
The IGTO commented that in the ATO’s view ‘the key to administering an effective tax system is fostering a high level of willing participation’ by building ‘trust and confidence amongst taxpayers.’
3.27
The IGTO told the Committee that the ATO’s advice and guidance products were ‘key tools’ to ‘deliver consistent tax outcomes’ and ‘deter non-compliance’. Yet, the IGTO noted reports of a shift in the ATO’s practice towards producing non-binding products, which was marked by the decline in advice products provided between 2009 and 2019. The IGTO suggested that Committee may wish to inquire about the causes of the decline.
3.28
Between the financial years 2016-17 and 2018-19, binding products (advice) declined by 27.6 per cent and non-binding products (guidance) increased by 14.6 per cent. The IGTO explained:
Advice products are generally in the form of a ruling that explains the taxpayer’s obligations or entitlements under a provision of tax or superannuation law. A ruling is generally binding on the Commissioner and can be relied upon by the taxpayer for the purposes of calculating an assessment of tax.
3.29
The IGTO observed ‘growing concerns’ amongst taxpayers and tax practitioners about the decline in the level, timeliness and value of public binding advice produced, especially in an environment where tax and superannuation laws are becoming increasingly complex. The IGTO added that ‘an absence of this exposes the taxpayers to an increased risk of adverse ATO views, eroding taxpayer certainty and confidence in the ATO.’
3.30
Taxpayers may apply for a private ruling to reduce uncertainty, but at a cost, raising questions about the ‘fair treatment of all taxpayers in providing consistent binding advice,’ especially as small businesses may not have the same financial resources as larger organisation.
3.31
The IGTO commented further that according to the ATO’s Taxpayers’ Charter, a ‘critical role’ for the ATO to play is to help taxpayers navigate through the complexities of the taxation system. It said:
The IGTO observes that taking a proactive approach in identifying areas of uncertainty and compliance risks will further tailor the ATO’s Advice and Guidance products in addressing the taxpayer’s needs, encouraging compliance and potentially minimising risk to revenue.
3.32
In 2018, the Standing Committee of Tax and Revenue recommended that a review of the Australian tax system be undertaken before 2022 to: simplify the tax system; reduce the ‘quantum of tax law’; and improve compliance by allowing taxpayers to understand the tax regulations without the need for taxation law expert to provide advice or guidance.
3.33
The persisting complexity of the tax system and the need to streamline it was again raised as an issue as part of this inquiry. Limited financial and tax literacy was reported to be particularly challenging for vulnerable taxpayers and sole traders and microbusinesses with limited funds to access professional tax expert advice.
National Tax Clinic program
3.34
In 2019, the Commonwealth Government launched a pilot program called the National Tax Clinic program, which is designed to provide financially vulnerable taxpayers with pro bono tax advice. The initiative provides government-funding to 10 universities across Australia to establish and run tax clinics offering this service.
3.35
While the ATO offers eligible taxpayers free tax assistance to help them lodge their annual tax returns through the ATO’s Tax Help Program, the service does not provide tax advice. Only registered tax agents are authorised to provide tax advice, pursuant to section 90.5 of the
Tax Agent Services Act 2009 (Cth).
3.36
Tax clinics have been designed to act as an independent continuation of the ATO’s guidance activities. Their role involves offering professional tax advice and representation to eligible individuals, small businesses, not-for-profit organisations and charities.
3.37
Dr Kayis-Kumar from the UNSW Tax Clinic told the Committee that tax clinics are now deeply integrated into the existing ‘social impact ecosystem,’ including the financial counselling sector and the community legal sector.
3.38
The UNSW Tax Clinic highlighted how critical it is that tax clinics provide tax advice and support to vulnerable people to prevent them becoming further marginalised. Dr Kayis-Kumar explained that many of their clients are eligible for Centrelink payments, but that their outstanding returns acted as a barrier to accessing such payments.
3.39
In Australia approximately 840,000 financially vulnerable people are in financial distress and in need of independent tax advice. On average, 90 per cent of cases tax clinics review related to tax lodgement and debt collection support, amounting to 93 and 88 per cent of cases respectively, rather than litigation matters, which represent 7 per cent of cases.
3.40
The UNSW Tax Clinic estimates that 40 per cent of their client base is small business in financial distress. Dr Kayis-Kumar suggested to the Committee that it consider recommending the creation of more tax clinics to provide adequate tax advice to vulnerable people, adding that:
tax clinics provide a cost-effective approach to dealing with this cohort of taxpayers, because they are facing long-term outstanding lodgements and other issues, like mental health and potentially fear of government agencies, including the ATO.
3.41
The Committee also heard from the Curtin Tax Clinic, which expressed support for a ‘fully independent, low-cost external support mechanism’ to provide legal or taxation representation and encouraged Australian tax clinics to adopt the ‘design and operation of the US Low Income Taxpayer Clinic’ and adjust it to the Australian system.
3.42
The Curtin Tax Clinic advocated for expanding the vulnerability criteria to avoid ‘unintentionally excluding taxpayers who require tax-related assistance’ and for a continuation of the funding for the program.
3.43
The Curtin Tax Clinic encouraged ‘the Committee to consider endorsing the establishment of a National Tax Clinic Board or Steering Committee’ to inform tax clinic funding models, identify need across Australia, promote best practice approaches, and advise on taxpayer eligibility.
Taxpayer Bill of Rights
3.44
The Committee was interested to hear further evidence on the 1998 US reform and how that led to further moves to protect taxpayer rights. Self-Employed Australia and Ms Nina Olson, Executive Director at the Center for Taxpayer Rights in the US provided the Committee with an overview of this reform.
3.45
Over the period June 2014 to December 2015 the Taxpayer Bill of Rights was adopted administratively by the IRS and was eventually passed in the US Congress. Ms Olson explained:
At that point, less than half of the US taxpayers believed they had rights before the IRS and only 11 per cent of them said they knew what those rights were. Two years after the Taxpayer Bill of Rights had been adopted, that had gone up to 75 per cent of taxpayers believing they had rights before the IRS and 50 per cent knowing what those rights were.
3.46
By July 2019, the US taxpayers’ rights were being further protected and enshrined in law with the passing of the Taxpayer First Act. Self-Employed Australia outlined in its evidence to the Committee the primary protections afforded by this law:
enhanced access to independent appeal process for taxpayers and increased transparency to resolve dispute without litigation;
improved customer service through the development of a Congress produced customer service strategy for the IRS;
streamlined and less costly early settlement procedures;
increased limitation to the authority to seize properties derived from illegal sources;
greater protection for non-complicit spouses;
fewer ‘fishing expeditions’ of foreign bank accounts;
reduced used of private debt collectors;
earlier notification to taxpayers when a third person is contacted for information;
added restriction to IRS’ contractors’ access to taxpayers’ information;
new and extended powers allocated to the Taxpayers Advocate;
increased measures to protect taxpayers from identity theft; and
the IRS obligation to accept credit and debit cards for payment of tax liabilities.
3.47
Self-Employed Australia recommended to the Committee that these reforms be mirrored in Australia to modernise the ATO, ‘by creating a fairer, just, transparent and accountable tax administration system that enhances voluntary compliance, efficiency and revenue collection.’
3.48
Self-Employed Australia argued that increased tax justice leads to higher productivity in tax collection, and therefore saw fairness as critical to enhance ATO’s cost efficiency.
3.49
In 2018 the Committee raised the idea of a framework that clearly and transparently outlined the rights and obligations of taxpayers and the taxation office. The concept was encapsulated in Recommendation 11 of the Taxpayer Engagement with the Tax System inquiry report:
In the interests of promoting fairness and taxpayer confidence in Australia’s tax system, the Committee recommends that the ATO should work to develop a framework which clearly outlines the rights and obligations of both parties in the tax engagement process for adoption in the near future.
The process, involving the review of high level ATO mission statements, would be consistent with the ATO’s principle-based approach to service delivery and support design of a Regulatory Philosophy document.
3.50
Mr Ashley King of TaxResolve described how the ATO Taxpayers’ Charter was designed to grant rights to taxpayers but highlighted the non-binding nature of the document. He commented that:
a taxpayer bill of rights and having a taxpayer advocate, like they do in America, is a much more substantial area for having those rights situated. Certainly it would give much more power and balance to the whole tax system, in my view.
3.51
Mr Phillips of Self-Employed Australia also described the powers of the Commissioner as ‘uncontrolled’, explaining that when the ATO formed ‘an opinion of a debt that is owed, that opinion becomes law.’
3.52
To illustrate the argument, Self-Employed Australia quoted Mr Mark Leibler AC, a long-standing specialist tax lawyer, in his speech to 33rd National Convention of the Tax Institute of Australia:
The Commissioner effectively continues to act as lawmaker […] The Commissioner can raise an assessment on almost any basis he pleases, and then require the taxpayer to prove before the Administrative Appeals Tribunal or the Federal Court what their liability should have been. Merely proving that the Commissioner's assessment was incorrect will not suffice.
3.53
Mr Phillips explained how an ‘adverse statement of tax record’ prevented organisations to do business with government agencies, even when the case was disputed, and called for reforms in the tax administration to be legislated rather than self-initiated by the ATO.
3.54
Similarly, Mr King emphasised that while ‘currently most of the taxpayers’ rights are legislated, for example the rights of objection, review and period of amendments, the ATO ‘has enormous power,’ which ‘far outweighs the power of taxpayers.’
Taxpayer Advocate
3.55
Mr Phillips of Self-Employed Australia described to the Committee the role of the independent Taxpayer Advocate in the US, which is staffed with 1,600 officers (as at June 2019), and in his view creates effective checks and balances in the tax administration.
3.56
Ms Olson, who ‘founded the first low-income taxpayer clinic in the country,’ explained how the Taxpayer Advocate Service ‘started out as a complaints function inside the [IRS] in 1998.’
3.57
Ms Olson described the original proposal in 1992, ‘to make the taxpayer advocate a position outside the IRS and report directly to the Treasury secretary, but also be appointed by the President.’ Ms Olson explained how the proposal received bipartisan support but was vetoed by the then US president, before being revived a few years later:
what the commission recommended [in 1998] was that you create this independent agency inside the IRS. What the legislation ended up being was that the National Taxpayer Advocate is appointed by the Secretary of the Treasury, and the IRS is under the Treasury department. The Secretary of the Treasury appoints the taxpayer advocate, but the taxpayer advocate reports to the commissioner, so that you're inside the IRS.
3.58
Ms Olson commented that having the Taxpayer Advocate inside the IRS allowed her to exchange information with the IRS before decisions were made and rapidly identify and defuse issues , rather than ‘just coming from behind like our inspector-general’ of taxation or the Government Accountability Office.
3.59
Ms Olson explained that the Taxpayer Advocate is required by law to produce two reports annually and provide them to the Tax-Writing Committee of the US Congress.
Committee comment
3.60
In 2015, the then Standing Committee on Tax and Revenue recommended to the Government of the day that it introduce legislation to place the onus of proof on the ATO in relation to allegations of fraud and evasion after a certain period has elapsed. It also recommended that the ‘change should be harmonised with the record keeping requirements. These periods could be extended, subject to concerns of regulatory costs on business and individuals.’
3.61
The ATO, as part of the Government response, advised that it would review its processes and guidance material to reinforce staff messages about not unfairly relying on the burden of proof and the absence of records beyond the required record-keeping periods.
3.62
The Government, in its response, did not support the recommendation.
3.63
Yet, during this inquiry, the Committee again received calls to shift the burden of proof to the ATO. The Committee agrees that they are gaps in the protection of taxpayers in the current legislation and tax administration practices when a taxpayer disputes a tax debt.
3.64
The Committee reiterates its support for shifting the onus of proof to the ATO, and putting in place a statutory timeframe of 10 years on the age of evidence requested by the ATO, to enhance taxpayers’ protection and align to similar practice in other jurisdictions, including in the US.
3.65
The Committee was encouraged to see that in the 2021-22 Federal Budget it was announced that the Government will make it simpler, faster and cheaper for small businesses with an aggravated turnover of less than
$10 million per year, to pause or modify ATO debt recovery actions for cases under review by the AAT. This will be done by broadening the AAT’s powers to pause actions until the underlying dispute is resolved, and such actions includes the recovery of the underlying debt, application of garnishee notices, and/or related penalties and interest.
3.66
The Committee accepts that the determination of a tax liability is a serious matter and that adequate and rigorous processes should be in place, or developed where necessary. This is to ensure that taxpayers’ are aware of their rights, that those rights are protected and taxpayers feel empowered to exercise them, and to ensure that the tax administration is fair, transparent and accountable.
3.67
In 2015, the House Standing Committee on Tax and Revenue received compelling evidence about the need for tax determinations to be made by senior officers given the costly and long-lasting impact of those determinations on taxpayers and businesses. The then Committee recommended that ‘that the Australian Taxation Office amend its internal guidance so that findings or suspicion of fraud or evasion can only be made by an officer from the Senior Executive Service.’
3.68
As part of the Government response the ATO advised that it was:
reviewing its existing guidance material and working through how best to provide further clarity for its staff about the responsibilities and necessary consideration for an allegation or finding of fraud or evasion.
3.69
Yet, the Committee received evidence during this inquiry suggesting that determinations are still being made below the Senior Executive Service level.
3.70
The Committee notes the evidence put to it on the US reform of the IRS, including the alignment of the interest rate taxpayers are charged on their outstanding loan amounts, to the interest rate paid by the government. The Committee accepts that this would assist taxpayers to meet their tax liabilities and would help in the prevention of further financial hardship.
3.71
Recommendation 9 of the 2015 Tax dispute inquiry report provided that taxpayers should be engaged prior to litigation. The ATO responded in the Government response that discussion with the Attorney-General’s Department had been engaged on this issue.
3.72
Yet, evidence received by the Committee during this inquiry is that taxpayers are still only informed of the allegation of fraud or evasion after a determination has been made.
3.73
The Committee notes reports and evidence provided to it that highlighted the power imbalance between taxpayers and the ATO, and agrees with the need to establish a more balanced tax system.
3.74
The Committee believes that a Taxpayer Advocate would provide the Australian tax system with meaningful checks and balances that would better protect taxpayers’ rights.
3.75
The Committee recommends that the Australian Taxation Office ensure that debts are not be payable by the tax payer until a final determination is made by the relevant dispute body or court. If the Australian Taxation Office fears that funds will be removed during an enforcement action, it should apply as all other plaintiffs do for a court ordered injunction.
3.76
The Committee reiterates Recommendation 7 from the Tax dispute inquiry report and recommends that legislation be introduced to shift the onus of proof to the Australian Taxation Office in relation to allegations of fraud or evasion after a certain period has elapsed.
3.77
The Committee recommends amending section 170 of the Income Tax Assessment Act 1936 (Cth) to reduce the statutory timeframe for cases involving fraud or evasion to 10 years after the issue of an assessment by the Australian Taxation Office. The Committee also recommends that the period of review of evidence requested by the Australian Taxation Office should be harmonised with the record keeping requirements. The amendment should contain provisions to extend the period on a case-by-case basis.
3.78
The Committee recommends that the Australian Taxation Office aligns the interest rate it charges taxpayers on any loans for tax liabilities, to the interest rate paid by the Federal Government.
3.79
The Committee recommends that the Australian Taxation Office enhances its staff awareness about taxpayers’ rights through guidance and training, including in the management of complaints, objection and disputes, and in their engagement with vulnerable taxpayers.
3.80
The Committee recommends that the Australian Taxation Office develops and promotes an Australian Taxpayers’ Bill of Rights that clearly outlines taxpayers’ rights and obligations.
3.81
The Committee reiterates Recommendation 4 of the 2015 Tax dispute report, that suspicion or finding of fraud or evasion be made by an officer from the Senior Executive Service.
3.82
The Committee reiterates Recommendation 9 from the 2015 Tax dispute report and recommends that the Australian Taxation Office conducts earlier engagement with taxpayers in cases of fraud and evasion, and align the process to that of the tax avoidance process.
3.83
Specifically, the Committee recommends that the Australian Tax Office provides taxpayers with information about suspicion of fraud or evasion, inviting them to provide a submission to ensure that the auditor has access to comprehensive information, ensuring that taxpayers are informed about their rights and the appeal process.
3.84
The Committee also recommends amending the makeup of review panels to include independent members, and that they be chaired at the Deputy Commissioner level or above.
3.85
The Committee recommends the Inspector General of Taxation be renamed the ‘Taxpayer Advocate’, and that the role aligns more closely with the powers and structure of the United States Taxpayer Advocate, based on the needs of the Australian tax system.
3.86
The Taxpayer Advocate must continue to have the freedom and independence enjoyed by the current Inspector General of Taxation.
Mr Jason Falinski MP
Chair
20 October 2021