A survey of evidence
The Australian Taxation Office (ATO) is responsible for the collection of the majority of Commonwealth revenue. Its management of this activity not only affects the quantity of revenue collected, but may also impact on the lives of individual taxpayers and on the viability of commercial operations.
During the Committee’s performance review of the Commissioner’s 2016–17 Annual Report, the ATO experienced challenges which have been potentially damaging to taxpayer confidence in our taxation system and its administrator. As discussed in the previous chapter, these have included those associated with the ATO’s digital transition, including the outages of late 2016 and early 2017, as well as those associated with the significant transformation of the ATO’s service culture.
As a point of practice, fairness and integrity are recognised as the foundations of taxpayer confidence in promoting voluntary compliance. However, further unwelcome developments over the 2016–17 reporting period and on into 2018 suggested that, within its compliance and resolution functions, the ATO may be struggling ‘to build trust and confidence in [Australia’s tax] system’, a core commitment under its Reinvention program.
This chapter reviews evidence received by the Committee from taxpayers in dispute with the ATO. As such the chapter is closely based on verbatim comments from submissions with some contextual analysis. It does not attempt an empirical assessment of the specific matters discussed, nor pretend to test the veracity of submitters’ assertions.
Technical consideration of some key matters raised in this review, especially in regards to the ATO’s fairness and accountability to the taxpayer, its transparency in reporting and its internal integrity frameworks, are considered in more detail in following chapters of this report.
ATO in dispute, and in the news
During the Committee’s period of inquiry, the ATO’s processes for management and resolution of debt and other tax-related disputes became a subject of intense and, for the ATO unwelcome, media scrutiny and public debate.
In March 2018, at the Committee’s first public hearing for this review, Tax Commissioner Mr Chris Jordan addressed these concerns at length in his opening address. The subject, as mentioned in the introductory chapter to this review, were remarks made by Self Employed Australia (SEA) in the context of the Treasury’s draft credit reporting legislation. While the purpose of the Treasury Laws Amendment (Tax 3 Transparency) Bill 2018 was to authorise the ATO to disclose small business tax debts to credit reporting bureaus, SEA had maintained that: ‘The Bill is not promoting a transparency issue. Rather, it is a grab for additional powers by the ATO for use against small business people’.
At hearings, the Tax Commissioner refuted SEA claims that the ATO exercised systemic unfairness to small businesses by citing the following data:
To put disputes into perspective, though, rather than routinely destroying businesses, we actually have very low numbers of disputes. In the 2017 financial year, there were just over 35½ million returns and activity statements lodged across all markets. Out of that 35½ million, 253,000 were adjusted following an audit—0.7 per cent. Out of those 253,000, 24,500 were objected to by the taxpayer—0.07 per cent. Out of those 24,500, only 456 were taken to court or the AAT [Administrative Appeals Tribunal]—0.001 per cent. Only 141 of those proceeded to a decision—0.0004 per cent. And out of those 141, 85 per cent of those cases were found to be in the ATO's favour, which tells you we are progressing the right cases.
Soon after, however, SEA’s allegations about procedural unfairness were reiterated in an even more public context. On 9 April 2018 the provocatively titled ABC Four Corners program ‘A Mongrel Bunch of Bastards’ was aired. It featured a number of aggrieved small businesses who accused the ATO of unfairness, ineptness and even illegality in its actions against these taxpayers. Further controversial elements were reports by whistle blowers that the ATO was using its garnishee process as a ‘cash grab’ to meet internal targets. It was also reported that the Australian Federal Police had raided the home of one of these whistle blowers four days prior to the release of the program.
Later in May 2018, when Mr Jordan was called to address these allegations during budget estimates, he condemned the ABC presentation as ‘highly offensive and inaccurate’ and its title unfair to his staff, saying ‘They are normal people trying to do a good job for the benefit of the economy’.
The Commissioner’s concluding remarks on the matter were both conciliatory and firm—he recognised the need for the ATO to acknowledge mistakes, while also upholding its management of the taxpayers in the presentation, asserting:
There is not much more to say, but the various cases you saw reported on Four Corners represent the spectrum of behaviour that we see: those who just don't understand what they're meant to do; those who get in a mess because they leave things too late or long; those who don't pay attention to their admin, put their head in the sand or are struggling without the right help; or, worse, those who are deliberately being evasive.
Internal and external reviews
The launching of the ABC Program, based on a joint Fairfax/ABC investigative report, initiated a prolonged exchange between the Tax Commissioner, tax professionals, small businesses and unions and the ABC’s Senior Executive, and journalists. The then Revenue and Financial Services Minister the Hon. Kelly O’Dwyer MP was quick to respond—two days after the program was aired she instigated a short term internal inquiry to be conducted by the Treasury. This inquiry was to be a closed review with input from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Inspector-General of Taxation (IGT).
Meanwhile, Mr Ali Noroozi, then IGT, announced he would conduct an independent public inquiry into the ATO’s use of garnishees to recover debt, with submissions invited by 22 June 2018. The review, which would report in early 2019, revived a subject of ongoing scrutiny by his office over a number of years, including a major review of ATO debt management practices instigated by the Committee, which also reported on those matters in 2015. In announcing his review the Inspector-General stated:
The ABC Four Corners program, which aired on 9 April 2018, included allegations by current and former Australian Taxation Office (ATO) staff about inappropriate use of ATO powers to issue garnishee notices and extracting payment particularly from small business taxpayers. Such allegations require independent investigation to allay or address concerns of inequity, lack of confidence in the tax system, and corresponding adverse impacts on voluntary compliance.
In the context of the Treasury review, the IGT and ASBFEO also conducted limited campaigns to attract public commentary from small business on the issues under review. The IGT advised that since the Four Corners program went to air he had received 178 complaints. The ASBFEO had received in excess of 100 requests for assistance from small businesses and their advisers following the ABC program.
Under its annual report powers, the Committee may investigate relevant matters of concern to taxpayers, in the context of ATO’s performance as a tax administrator. Against the background of events described, the Committee determined late in its annual report review cycle to issue a call to taxpayers to gather their views. The purpose was to test the ATO’s performance reportage in the 2017 Annual Report, and more broadly its commitments under the Reinvention program to transform are service culture, against the perceptions and experiences of taxpayers.
Submissions made by the IGT, and from Ms Kate Carnell AO, Small Business Ombudsman (ASBFEO) to the Treasury were provided to the Committee in response to the Chair, Mr Jason Falinski MP’s final call for submissions on the matter in this inquiry on 25 September 2018.
These documents tended to support impressions that concerns expressed in the program have wider currency. The Small Businesses Ombudsman Ms Kate Carnell was forthright in advising:
Personal stories and evidence provided to my Office from small business demonstrate that the ATO has unparalleled authority in terms of its resources, administrative powers and access to legal expertise—creating a fundamental denial of access to justice for small business. Furthermore, the concerted push by individual tax officers to collect revenue (without properly accounting for impacts on the businesses involved) is causing an unfair and arbitrary approach to small business.
The Inspector–General emphasised that while his Office has not itself ‘seen evidence of the ATO systematically targeting small businesses’…‘there are clearly matters that need to be addressed and improved’.
The following survey first considers concerns that the ATO’s high risk audit model is encouraging a performance driven approach by staff. In the second part, the body of consideration, the Committee documents specific taxpayer experiences and concerns about the ATO’s management of its auditing and objections processes.
The taxpayer’s experience
With the annual report review period well advanced, the Committee provided only a small window of two weeks for receipt of additional submissions from taxpayers.
During that period, the Committee received an additional 18 submissions from small business operators and their representatives, in addition to those from the IGT and ASBFEO. A number of submissions came from participants in the Fairfax/ABC investigation and Four Corners report. Some included extensive attachments containing communications with ATO officers and/ or tax professionals documenting protracted exchanges following a negative ATO assessment.
One of the most concerning allegations in the ABC Four Corners Program was that ATO performance targets could be having a perverse effect on staff engaged in auditing and debt management processes.
As indicated above, following allegations by ATO whistle-blowers, the IGT committed to review the ATO’s garnishee processes. The IGT advised his review would consider ‘Key Performance Indicators (KPI) with respect to both tax debt collection and staff performance’, and in particular that the ATO:
gave directions to staff to issue standard garnishee notices in every case as a ‘cash grab’ towards the end of the 2016—17 financial year; and
set targets for staff and assessed their performance based on the level of debt collected.
In the Committee’s review, evidence received did not address these particular allegations. However there were concerns, in some cases strongly felt, that the ATO’s current compliance model, which involves the target auditing of high risk industries or problem practices, may lead to a heavy handed ‘performance driven’ approach by ATO staff during the auditing process, and in meditation of individual cases.
The Committee did not have the capacity to evaluate this in detail, nor is it empowered to address all the matters raised in the submissions received. The following overview brings together just some of the experiences related by submitters.
Targeting ‘high risk’ sectors
The 2017 Annual Report advises that the ATO applies ‘comprehensive risk‑based analytical models ’to identify industries or practices at high risk of tax non-compliance and to tailor campaigns targeting these high-risk debtor populations’.
In advance of its targeted audits, the ATO issues ‘Taxpayer Alerts’ to warn taxpayers about new or emerging issues, the nature of their concerns and any intended action. Over 2016–17, for example, ATO Alerts advised it would target a range of structure arrangements used by privately owned and wealthy groups.
The ATO maintains that it offers a supportive follow up to audited industries. The ATO’s submission elaborated on the model of support it offers under the Supporting Honest Business program, which applies to regional businesses identified as at high risk for cash activity. It advised that:
Following the visits, approximately 60 per cent of businesses are subject to follow up action. For example, some are offered the opportunity to undertake a recordkeeping workshop if we identify record keeping problems. We also provide information on electronic payment options. Higher risk taxpayers are provided an opportunity to voluntarily disclose any errors or omissions before an audit may be initiated.
Evidence suggested however that this supportive approach may not be consistently applied for those audited in other high risk sectors.
Regional industry audits
As noted, the ATO’s Supporting Honest Business program is part of its targeting of regional industries at high risk of cash activity. The Committee received testimony suggesting that in other sectors, such targeted activities may not only lead to less impartial auditing, but can even be devastating for entire regional industry sectors.
Like a number of others submitters engaged in disputes with the ATO, the writers of Submission 21 asked that all identifying information be redacted from their otherwise candid account. Their story was personal as were many others. As new directors (one a former employee) of a niche processing firm, the submitters were subject to an ATO industry wide audit, and found to be in default of GST requirements, despite arrangements being cleared by the ATO just three years previously. They described their treatment in the aftermath:
The retention of GST refunds placed a huge financial burden on our small business. Aware of the previous October 2013 GST audit, which had advised the business its GST reporting was in order, we sought guidance from the ATO on what we could do, given the ATO had previously advised the business its GST reporting was in order and the ATO had previously declined requests to send a GST expert to visit the business to ensure its GST reporting systems and procedures were in order.
On 1 September 2016 in response to these further requests for guidance, ATO officer xxxx refused to provide guidance, instead advising us ‘if you lay down with dogs, you get up with fleas.’
The failure to support the taxpayer, and the discourtesy with which it was done, gave ballast to the writers’ conviction that targeted audits distort the review of individual cases being considered. The submitters concluded:
…The terms of the Inspector General’s review which [the company] have been a part of refers to a potential ‘cash grab’ towards the end of the 2017 financial year. In our view a similar ‘cash grab’ existed in early 2018 when presumably the Commissioner finalised his GST audits of various taxpayers.
The ATO’s interpretation of GST law was a problem raised in a range of contexts in submissions to the inquiry. Two enterprises in receipt of the Research and Development (R&D) incentive also raised the matter in detailed submissions to this review.
Blackwater Treatment Systems (BTS) appeared in the ABC program and had input into the IGT’s survey for the Treasury review. This company along with Armorlog Group was also involved in a lengthy audit and dispute with the ATO over R&D incentive GST credits, which the ATO maintained were falsely claimed. The submissions indicated that the relevant distinction in ATO’s administration of this matter was that the company must demonstrate R&D investment and be trading to attract GST credits. Both submitters felt the ATO’s assessment of their situation was both incorrect and unfair as an interpretation of the law, and that they had been targeted as part of a wider tax assault on the R&D Sector.
In BTS’s case, its GST debt of some $250 000 was eventually reduced to nil after a seven year objection and appeal process, with the Minister’s apology for the ATO’s audit error. However, the submitter indicated he would litigate, alleging not only defective administration, but manipulation of evidence to distort the process. In summary, the writer advised:
The alleged senior ATO staff’s misconduct being depicted in the submission includes fabricated statements, fabricated debts, attempted defrauding of a commercial enterprise, misleading Ministerial inquiries and contravene Federal Legislation to deny justice and the fair recovery of losses. All of which are enacted for a pre-determined outcome to financially end the enterprise and thereby attempt to remove the links to the misconduct.
Armorlog’s dispute with the ATO is ongoing. Its submission contained a dot point critique of ATO decision-making and processes, with extensive attachments. The submitter’s conclusion was that the ATO was motivated by a ‘conflict of interest’, as an IT systems developer, and had thus ‘unlawfully cancelled’ the GST Registration and reclaimed GST credits of an authentication competitor. The submission maintained:
The ATO & Governments actions against us have made our lives intolerable but even so we have endeavoured to make our technology available for the benefit of the community. There is a clear conflict of interest in these matters we need assistance to bring this technology into reality not aggressive negative destructive actions to prevent us. There is a clear conflict of interest that prevents the Parliaments intent to foster the work of small businesses like ours that will be the next generation of businesses for our future generations.
Gig economy and ABNs
The Committee has considered a range of challenges associated with the expansion of the sharing economy both for business registration and also more broadly tax collection and regulation, in recent reviews.
Outscribe Pty Ltd, a niche transcription service, was one of the companies featured in the ABC 4 Corners program. In its submission to the Committee’s review, Outscribe advised that it had determined its business model, using contractors, by way of the ATO’s contractor tool. The submission advised:
Early in OutScribe’s growth it became a necessity to outsource transcription jobs. The Australian transcription industry as a general rule utilises the services of contractors due to the fluctuation of work flow and the general nature of remote work, and OutScribe adopted this model. The ATO’s website contractor tool assisted us in determining the suitability of this business model and we adhered to the guidance provided by that tool. Contractors are their own small business enterprises and we are but one of their clients. They are therefore responsible for their own PAYG and superannuation contributions.
In May 2017, the ATO conducted an audit of the business structure, with the result that the company’s transcribers were declared to be employees and the ATO withdrew their ABNs. Outscribe concluded that it was being unfairly targeted as a minor player in the gig sector, maintaining:
We are a small company in the industry so may be seen as ‘easy prey’ or ‘low-hanging fruit’ for the ATO to test flex its muscle on the burgeoning gig economy, however, we ask the questions, will they be auditing the very large transcription companies in Australia who utilise contractors and exercise a large degree of control over them? Why is OutScribe being targeted and not larger companies such as Auscript?
Risks to contractors
Other submitters to this inquiry had problems with the ATO as contract workers. This section covers discrete issues raised by contractors who considered they had been treated less favourably under targeted audits by the ATO than the dishonoured entities which had engaged them.
The first example has resonances with issues raised in regard to the Elbrus operation, in which contracted staff bore the tax and superannuation impact of labour hire company’s non-compliant structures and arrangements. The second case deals specifically with the ongoing problem of phoenix activity in the building industry.
Discretionary trusts in recruitment
Two submitters wrote of the impact on their lives following the 2011 issue of a Tax Alert advising of the ATO’s interest in ‘Certain labour hire arrangements utilising a discretionary trust to split income.’ Later, in 2013, a further media release advised that the ATO was ‘currently reviewing arrangements involving accountants, lawyers and other professionals operating through partnerships of discretionary trusts.’
A concern in both cases was that the ATO appeared to be favouring the recruitment agency, and its intermediaries, over the taxpayers, who bore the brunt of the ATO’s compliance action.
The writer of Submission 14, cited a matter discussed during the Committee’s 2015 inquiry into Tax Disputes as the context for his own situation. This involved contractors to government being required to use a tax intermediary, as a condition of recruitment. When, in 2015, the company Freelance Global ‘lost a NSW court case over PAYG payments’, the impact defaulted to the contractors:
Based on subsequent events, the ATO seem to have taken the court’s decision as a precedent to retrospectively change their attitude to Freelance contractors. It appears they formed a view that independent contractors should instead be classed as employees (though employees of who is not clear), and the distributions they allowed in prior years should be treated as salary and wages. Without considering individual circumstances they issued immediate audits to around 70 people, with two more waves of audits since and more to come.
Submission 26 (Name Withheld), also in this situation considered that the ATO had failed the contractors on a number of counts, including by not intervening early to halt the recruitment practice and to publicise the risks. To make matters worse, the agency in question was a major labour supplier to the ATO:
[the] ATO was fully aware of sham contracting and employee misclassification by the relevant and 30+ other recruitment agencies named in the DM Protocol.…
In 2012, or earlier, the ATO audited the relevant Trust Intermediary and its Tax Agent manager. Shortly afterwards the Trust entered voluntary liquidation and later allowed to liquidate. The Tax advisor was deregistered. It can only be assumed that the ATO now has nominated the trust to have been the employer in order to avoid any employer obligation compliance.
Tax crime in the building industry
The Committee has heard during its tax engagement inquiry about illegal phoenix activity in the building sector and how this undermines fair competition. An associated threat is to the viability of the contractors and suppliers to these phoenix companies, who are left to meet their tax and superannuation obligations when their employer folds or flees.
A contractor, Submission 17, engaged by a high profile phoenix operator, Highgate Group, considered the legal processes favoured this large business tax evader and its banker over the honest small businessperson.
[Our business] has honoured and paid all it's contracts with Suppliers and workers at the Hightrade Hunter Valley Gold Resort worth 750 million.
The [bank] got their $750 Million asset and are earning money from their asset, whilst [the Business is] still paying for the asset from the proceeds of Criminal Rogue trading.
The submitter contrasted the ATO’s delayed prosecution of the phoenix company and its decision to provide a concessional settlement to a company director, with the regulators’ unrelenting pursuit of the affected subcontractor for outstanding tax and superannuation debts. The submitter reported the outcome for him and his family:
…I had to retire early to cash in my Super $270k and my wife's super to pay Workers Comp and payroll tax debts since 2004. As loan payments, ie interest payments were classed as income for our stakeholders who gave us their assets to use as collateral for over a $1.425mil of loans.
Now, the ATO Superannuation Office is chasing [business] because myself and stakeholders had to retire early to use my superannuation to pay interest payments from Hightrade loan debts, taken out by all of [Business’] stakeholders.
I have run out of avenues to raise funds as our credit is in tatters re: Bank Loans, we are paying thru the nose for finance to trade out of trouble waters.
Fairness in auditing
The matters set out so far called into question aspects of the ATO’s auditing processes, the consistency of its advice and its overall commitments to fair treatment of taxpayers. The submitters’ circumstances may be varied but there are many points of correspondence in these accounts.
The audit process can be a prolonged and stressful period, between two and four years for complex cases, and longer should the Commissioner make a determination of tax fraud or evasion, in which case there is no limit. It has been suggested in evidence that ATO staff are not objective in their assessments of fraud or evasion, and that ATO demands for documentation are excessive and unreasonable, with penalties issued in default of willingness to engage, despite evidence to the contrary.
Another consideration was the perceived inconsistency in interpretation and administration of tax law—that the goal posts were shifting, and opinion could be interpreted differently over time and between sequential audits, irrespective of professional advice taken.
Presumption of guilt
Section 170 (1) of the Income Assessment Act 1936 provides the Commissioner with powers to determine on fraud or evasion. A principal concern in evidence to the Committee was the perception that the ATO operates on the presumption of guilt, with a conviction of fraud or evasion a necessary corollary irrespective of the taxpayer’s active attempts to engage with the process.
A meeting with the auditor confirmed Outscribe’s view that an impartial review would not occur, irrespective of the detailed information provided in tight timeframes by the company to support its case:
Our chairman, xxxx, attended a meeting with [ATO officer] and it became immediately apparent that an outcome had been pre-determined as to the status of the contractors. This manifested itself in the ATO officer’s style of questioning and his apparent refusal to address our chairman’s question regarding any changes that the ATO may require of OutScribe to satisfy the criteria for contractor status of the transcriptionists. [ATO officer] closed the meeting by advising that his conclusion was that the contractors were employees. Clearly this decision had been reached before considering all of the information.
Mr & Mrs Des and Stephanie Lyons had a similar sense that tendered evidence would not override the auditor’s preconceived view of their guilt, nor senior ATO staffs’ acceptance of it, until the AAT overturned the ATO’s case:
…the (ATO Auditor) and his supervisor (xxxx) had a preconceived opinion of our guilt and went out of their way to make us look as bad as possible (the [Auditor’s} superiors always believed a report published by Auditor and believed it to be correct without any reference to our evidence). He painted a picture that we had been ‘systematically’ under-reporting our turnover over a very long period. Xxxx (ATO lawyer at AAT) proved this in our mediation meetings; he had not bothered to look at our evidence because he fully believed [the auditor’] report without referring to our evidence, hence a very red face when our evidence was pointed out to him. The AAT found in our favour. All that we were guilty of, was not keeping our taxation lodgements up to date.
Mr John Vincent, a tax professional assisting another submitter, detailed a similar very unsatisfactory experience, from start to finish:
The whole process to which the clients were subjected reveals the denial of procedural fairness prior to and during the assessment process.
There was no reasonable basis to support the raising of the assessments.
The clients were denied the opportunity to be heard in relation to the matter.
The decision to issue the assessments was not based on logical and probative evidence as the taxpayer’s evidence was not considered and the auditor’s evidence was flawed. It could not provide a basis for a logical decision to be made.
The decision to issue the s.167 assessments was APPROVED BEFORE the time allowed for the clients to respond to the Interim Reports – further evidence of lack of procedural fairness.
Consideration of material evidence
Under an audit review, the auditor will consider the ‘material facts’ of the case as evidence of the taxpayer’s willing engagement with the ATO within the audit process.
As indicated above, an audit involves provision of a great deal of information. Outscribe considered that the ATO had demanded such documentation in unreasonably short timeframes but noted, by contrast, that the ATO did not honour any of its own deadlines. The writer concluded this was a tactic deployed to demoralise the taxpayer and to coerce them to accede to the ATO’s assessment. The submission advised:
One of our complaints regarding the ATO is their use of deadlines to put us under pressure. During the last 18 months we have been subjected to extremely tight deadlines to produce documentation and evidence within 1– 2 weeks. We have assiduously worked, to the detriment of our business operations, to meet these deadlines, however the ATO officers delay their responses by many months and repeatedly do not meet agreed deadlines themselves. This is a typical bullying tactic and not worthy of an Australian government department.
Submission 27 was one of a number of submitters who alleged that ATO officers had ‘adjusted’ taxpayer evidence to support their assessments:
Despite assertions by the ATO of independence, affidavits filed by the ATO in my matter contradicts such statements…Where dispute resolution and debt co-ordinate against a taxpayer, the combined effect is the capitulation by a taxpayer against an assessment that is incorrect…
Another matter raised was the issuing of penalties if a taxpayer failed to keep full documentation, or not be able to furnish it promptly on demand. This would result in a determination of ‘careless’ or ‘reckless’ administration, and penalties would be applied as a percentage of the outstanding debt.
Berry Superannuation Fund was set up by a couple to manage their superannuation as operators of a small cleaning business which they later sold. Found not to have paid interest under trust arrangements set up under their existing SMSF for a development project, they not only had a large debt but were penalised retrospectively for being ‘reckless ’in recordkeeping. The submitter protested:
This despite the fact that I am not an expert in these technical matters and had engaged professional accountants and an overarching auditor to ensure compliance. Having deemed that my actions constituted ‘recklessness’, the ATO proceeded to impose a 50% penalty on any tax imposed.
Needless to say, they also now included to punitive 11% interest rate on the outstanding deemed amounts dating back to 2012.
Consistency in legal interpretation and decision making
As discussed in the first section of this chapter, a number of submitters felt frustrated that the ATO’s decision-making and its interpretation of relevant law was not consistent nor supported by independent legal opinion.
Many of these submitters had previously had their arrangements approved by the ATO during industry wide audits, only to have the same arrangements reviewed later and found to be non-compliant. The situation of the writers of Submission 21, as mentioned previously, is a case in point. They advised, that despite previous approval of arrangements three years before:
From August 2016 (ONE month after we had acquired the (business) the ATO commenced auditing the Company, retaining each of its monthly GST refunds up until January 2017—until the ATO was retaining some $1.3 million GST refunds owing to us the taxpayer.
The writers’ confidence in the ATO’s decision making was further diminished when legal advice suggested ATO interpretations were inconsistent with current case law:
… we think the GST reassessments are significantly over-stated. It was only on the finalisation of the GST audit that it became apparent the Commissioner’s interpretation of the GST law is completely contrary to established interpretation principles, including those established by the High Court.
Mr Michael Shord referred to his mistaken reliance on a Deputy Commissioner’s advice, after his non-resident tax status was rejected out of hand by an ATO officer on his return from an extended period working overseas:
Six months later, the troubles started with a phone call from a xxxx from the ATO office in Brisbane. He wanted to know "where had I been for the last 12 years?" I explained that I had been working and living around the world, working as an offshore diver and that I had been given an agreement with the ATO that I was a non-resident for Taxation purposes. He told me that he didn't agree with the information that I had been given 12 years prior, and I had to pay tax for the monies earned over the twelve year period. I was given 4 weeks to provide the twelve tax returns "or else".
As mentioned, for Outscribe, the ATO’s online contractor tool proved to be an unreliable guide when used to design its business structure. Advice from its lawyer that the ATO’s actions did not ‘appear to have legal grounding’ convinced the submitter that ATO staff were neither professional nor fair:
Throughout the audit and dispute process we have found that the ATO’s action in cancelling the contractors’ ABNS and the use and application of case law to be legally flawed. For us this would attest not only to the relevant ATO officers’ understanding and application of the legislation, but also to the apparent attitude that the ATO may be above the law and therefore can arbitrarily act as judge, jury and executioner.
Submission 27, who considered that his statements had been altered, as set out previously, accordingly argued that: ‘Appeals against assessments should be based on the facts and the law independently of assessing, debt and other internal functions of the ATO.’
Right to object
Taxpayers have a right to make an objection to ATO assessments about certain categories of matters. The ATO website provides:
You should consider lodging an objection to a decision we've made about your tax affairs if:
you disagree with the way we've interpreted the law; for example, you disagree with an amended assessment we have given you
you're uncertain about your interpretation of the law (for example, you're not sure whether you should have included some income on your tax return or claimed some expenses)
you want the option of seeking an external review if we don't agree with you
we have made a decision to retain a refund. Guidelines on Objections provide the following undertakings to taxpayers.
Other aspects of the process—the time limits for objections in each category and the availability of the ATO’s Alternative Dispute Resolution (ADR) processes, which provide ‘impartial’ adjudication’ and supports to taxpayers, are underpinned by the ATO obligations to taxpayers as a ‘model litigant’. In particular:
Under the Legal Services Directions 2017 we have an obligation to act as a model litigant. This means that in handling claims and litigation, brought by or against us, we are required to act with complete propriety, fairness and in accordance with the highest professional standards.
A number of taxpayers writing to the Committee, however, did not consider that the ATO is honouring these commitments. Their experience suggested that the ATO’s administration of objections processes was not designed to achieve fair and impartial outcomes for the taxpayer, but instead is in service to ATO efficiency goals.
Garnishees in the objection process
As previously discussed in this chapter, submitters have considered that the ATO’s targeted audit activities had not been impartially conducted. A further dimension to this, as highlighted in the ABC Four Corners Program and subsequent IGT review, were questions about motivations and processes in the ATO’s issuing of garnishees as part of its compliance action.
At hearings on 28 March 2018, Commissioner Jordan reassured the Committee about the probity of the process, indicating that only 0.5 per cent of all collectable debt cases involve garnishees, and stating:
We only use stronger action like garnishees and bankruptcy proceedings when a taxpayer refuses to engage with us and don’t deal with their tax debt over a period of time. In all cases except a small few where there is a very high risk, we issue a warning letter to taxpayers before undertaking firmer actions such as the issue of a garnishee.
Submission 21 maintained, however, that ATO staff are not acting in accordance with these assurances in terms of proportionality, nor in timing or fairness noting that:
Only 3 weeks prior to the Commissioner making this statement, the Commissioner’s delegates had issued garnishees on 6 March 2018—
two business days after the due date [for the residual sum of the debt assessed, below at b.] without any attempt to contact us, our tax agent or our authorised legal representative (which if contact had been made the ATO would have been advised that the debts were disputed debts and the legal practitioner had already contacted the ATO several times prior to the due date with a view to arranging a payment arrangement);
to collect a residual 11.68% debt, given the bulk of the $1.48 million ATO debt assessed on 1 February 2018 had been offset by $1.3 million in retained GST refunds…
Submission 27 (Name Withheld) also took issue with early imposition of the garnishee order alleging that the ATO uses garnishees ‘to deprive taxpayers of cash flow to fund appeals and also to force them into insolvency’:
In my personal circumstances the amended assessment was issued on 21 September 2017. The garnishee notice was issued on 27 September 2017. Both the amended assessment and garnishee notice were issued by the ATO before the expiry date for my response to the ATO position paper. The garnishee notice was issued despite my offer for the proceeds from the transaction to be placed on trust and held as security for the ATO debt.
The objection against the amended assessment was lodged by me on 4 October 2017.
As a result of the garnishee notice the transaction failed.
Mr & Mrs Des and Stephanie Lyons had the same result, advising of the financial impact of the upfront garnishee combined with a lengthy and inefficient objections process:
Our objection decisions were very drawn out with the appointment of multiple case officers plus waiting for other cases to finalise thinking the decisions could be used in our determinations. The main case they waited on had no relevance to our case at all. The 20 months of time taken accelerated the downturn in our financial situation which started from the very early issue of garnishee notices in June 2011, which stopped any further support from our bank.
The submission from SEA was succinct in its assessment: the ‘ATO exhausts people into submission’. It observed:
The process of dealing with the ATO is exhausting and beyond the resources of most people. This reflects major inefficiencies and dysfunction in the ATO but we surmise that it is also a deliberate strategy adopted by the ATO. The ATO knows that few small business people have the resources to defend themselves against ATO claims. The ATO wins by default—regardless of the facts or truth of any given situation.
In-house facilitation and dispute assist
The ATO Annual Report highlights its work to provide for ‘fair, efficient and respectful resolution of disputes’, with a focus on faster resolution and lowering costs for both the taxpayer and the ATO.
Centrepiece initiatives which support this are the ATO’s Alternative Dispute Resolution (ADR) services—in-house-facilitation for taxpayers and small business, and the Dispute Assist pilot for vulnerable unrepresented taxpayers, which was recently expanded to small business (discussed later in this report).
Both of these services provide assistance from an independent facilitator or disputes guide to support the taxpayer through the objections process. The ATO website describes the service offered under In House facilitation, for example, as both considered and impartial:
In-house facilitation is a mediation process where an impartial ATO facilitator meets with you and the ATO case officers to:
identify the issues in dispute
attempt to reach a resolution.
In-house facilitation is also highlighted in the 2016-17 Annual Report as an important efficiency measure, offering potential savings of $50 000 per taxpayer within the dispute resolution process.
Mr Graeme Halperin, a tax professional appearing in the Four Corners program, wrote to the Committee to assert that, despite these suggested benefits, this service is not ‘promoted or encouraged’ by the ATO, and that neither In-House Facilitation nor Dispute Assist are in reality vehicles for independent assessment or advice on any particular case.
In regard to in-house facilitation, Mr Halperin noted that the mooted positives of the service for taxpayers, being voluntary and impartial, are double edged—ATO staff can also refuse to engage in it, and impartial can mean just poorly informed or ill prepared to deliver a fair and effective resolution process. He writes:
The ATO's lack of interest in practice in in-house facilitation has been demonstrated on occasions by the ATO failing to send officers to an in-house facilitation conference who are sufficiently well informed about the case or authorised to resolve it. I have attended an in-house facilitation conference where the ATO officer who attended had only a rudimentary understanding of the background to the case and had never been involved in it. It was therefore impossible to have any meaningful discussion. I asked for the conference to be adjourned until officers with responsibility for the carriage of the case, and with direct knowledge of it, participated in it.
The ATO’s focus on ‘faster resolution’ and ‘reduced costs’ was not helpful to the writers of Submission 15. While they went on to win their case at the AAT, their auditor discouraged them from seeking external advice, and when they did, insulted their advisor:
From the out-set the [ATO staff] discouraged us from having any professional representation saying we can work it out between us which would save us from spending a lot of unnecessary money. When xxxx (our ex-ATO advisor) became involved [the Auditor] refused to meet with him on two occasions and he told [submitter’s advisor] he was going ahead with the amended assessments and if he didn’t agree with them he could then lodge objections, adding rudely ‘do you know how to do that’…
Outscribe’s experience of the ATO’s in-house facilitation service was similarly unsatisfactory. Rather than providing a genuine opportunity for a transparent and impartial resolution, the submitter was silenced and subjected to intimidation prior to the event:
We attended an in-house facilitation (mediation) in December, 2017 and due to a confidentiality agreement that was signed at the commencement of the session we are unable to state what was said or occurred during that session. However, prior to the mediation, we were threatened twice that if we did not accept their findings that back-pay of tax and superannuation contributions would be [ ] meted out, which would effectively bankrupt OutScribe.
Supports for the vulnerable in dispute
In addition to new supports for unrepresented taxpayers, the ATO provides services to taxpayers subject to debt management and resolution processes. In past reviews, the Committee has recorded positive work being done to assist taxpayers to stay viable and to manage their tax debts, and to help small business in particular deal with any associated mental health impacts of an ATO compliance action.
The 2017 ATO Annual Report provides an update on services targeted to assist small business, and rates their effectiveness in making compliance easier:
This year, we have adopted a range of strategies to improve client satisfaction and perceptions of fairness. Initiatives have been developed by having regard to feedback obtained through Fix-it Squads and through insights we have gained through research. The latest data indicates that these initiatives have been effective in making it easier for small businesses to meet their tax and super obligations, with the most recent findings showing that dealing with the ATO is getting easier (up from 46% in February to 59% in May 2017). Similarly, satisfaction with the helpfulness of ATO information increased from 54% in February to 64% in May 2017.
The Annual Report also refers to the ATO’s continuing support to small business under its mental health focus, advising:
The ATO continued to work with mental health support services, small business owners and their representatives in supporting small business operators affected by mental health issues. Initiatives include a new website and video and relevant training for ATO staff. ATO support is available for business operators facing health issues and includes deferred payment and lodgement arrangements where this will help them get back on their feet.
Unfortunately, in this review there was no collaborating evidence of the positive effects of these supports for more vulnerable taxpayers. Instead a number of submissions indicated instability, insecurity and a palpable distrust of the ATO. Mr Roger Waldock wrote:
Over 30 years of my life.between tax and centrelink.ive lost had most everything taken I had or owned .as a single dad as I was low income wages..but upon my son's nearing high school I opened Wyatt Earp holdings tombstone trust whistle stop logistics Roger roadways....was a Qld security officer and had a msic card AFP ASIO checks national police check and passed all of it .....30 years ago the ATO made out I was a fraudster..false it was..and in the past 25 years between centrelink.ato and a range of depts.they shut my Abn on any of my business names..bank accounts they checked so I got zero....along with pension now.against my wishes.but IV been run through the system.manipulated...
Many submitters reported insensitive treatment from ATO staff who, it was considered, prioritised debt recovery over and above any other obligations to the taxpayer. Submission 14 advised:
Any medical advice is being ignored or not taken serious. My spouse was already chronically ill and suffering from depression. Due to ongoing stress of the huge debt and potential debt collection we got divorced, although I am still liable to support her. In days where mental health issues are continuously put in the spotlight, it beggars belief how ill-informed and prejudiced some of the ATO staff are when discussing the ramifications of these circumstances and the consequences of their actions. It is almost like they are under pressure to disregard them, all in the name of debt recovery.
Submission 21 (Name Withheld) reported that senior ATO staff had failed to record medical documentation of the serious mental and physical health impacts of its action on the company directors, and hence : ‘By issuing garnishees in the circumstances, the Commissioner’s powers have been exercised in a reckless manner—jeopardising the health of the Directors’.
Berry Superannuation Trust considered, moreover, that the ATO had deliberately exerted mental stress to compel their capitulation to an unfair assessment:
Throughout these ‘negotiation’ enormous stress was placed on my family situation. My wife wanted to knuckle down and give up to the ATO, whilst I was determined to continue the fight for some justice. In the end, this was a major contributor to the breakdown of a 30 year successful marriage. We have subsequently had a Legal separation.
The Trust’s submission concluded:
I know that this commission was largely in response the 4 Corners programme ‘A mongrel butch of bastards, but I just think that didn’t go far enough by half!
As you might imagine, my confidence in the Australian tax jurisdiction and administration is non-existent.
Access to compensation
Many submitters to the inquiry considered the ATO’s administration of their case was ‘defective’, and compensation should be claimable. It was maintained that the ATO does not support the taxpayer to access the Compensation for Defective and Detrimental Administration (CDDA) scheme and instead pushes complainants to accept small amounts of compensation for significant financial loss resulting from ATO mistakes and maladministration.
Blackwater Treatment Systems maintained that the ATO had denied it procedural fairness by refusing to review an associated CDDA claim. As mentioned previously BTS had an ATO imputed GST credit debt cleared in court. The submission reports that BTS was denied compensation for significant losses, occasioned by an ATO administrative oversight leading to years of dispute:
The ATO auditor has been provided with the BTS invoices in July 2011 and they lost them. The ATO contends that it completed the BTS 2011 audit on the 31st August 2011. This information failed to be revealed for 7 years, that included 2 years of ATO audits, almost 2 years of BTS objections and 2 years of ATO compensation reviews.
Submission 26 (Name Withheld) also reported a flawed process which was not independent, and seemed by contrast to be geared at deflecting damage from the ATO, including by insisting on confidentiality on the outcome:
A claim was lodged with CDDA and again there appears to have been no independent consideration. CDDA offered a payment of $3 750 as recommended by the previous complaints manager. This amount is equal to the 15% contribution tax paid to the superannuation fund (not refundable by the fund due to ATO delay in audit.) ATO’s double taxing of the $3 750 should have been offset prior to amending the assessment in 2015.
CDDA will not reveal the documents it relied on for its decision. It claims to have relied on documentation as released under FOI. In the absence of the most relevant documentation, CDDA cannot reasonably be seen to have properly investigated the claim. It had no background records or records of pre audit and audit decisions…
Acceptance of the inadequate CDDA offer is conditional upon releasing the ATO from all liabilities or further actions and includes a confidentiality clause.
Mr & Mrs Des and Stephanie Lyons felt the ATO was exerting pressure on them to accept a small compensation figure for substantial business losses, where a larger company would have had the option to pursue the matter:
Our claim was for financial losses and costs to defend ourselves and pain and suffering. Our claim totalled $6M and XXX said the ATO doesn’t pay for pain and suffering, however he did offer $200,000 (he even called it ‘rough justice’) and said he would make a payment to us within 7 days.…We made a further claim with additional evidence as suggested. A new person XXXX from Legal Counsel reviewed our new claim and 3 weeks ago refused our claim with no compensation to be paid at all…
If they knew we had the money to take this issue to court, I believe they would have been pleased to hush it up and settle quickly for a more reasonable amount. They know they were wrong but are trying to bully their way through it regardless of the harm caused to innocent taxpayers.
Self-Employed Australia argued that the ATO’s treatment of High Wealth Individuals (HWI) favours them compared with small business people. The building contractor writing in Submission 17 compared the ATO’s favourable settlement with the illegal phoenix company’s HWI director with his own case, arguing that the ATO or government should provide compensation to building companies with tax liabilities due to trading with corrupt phoenix operators:
I have applied for a one off tax credit/Compensation of $1.425 mil, so I can pay off my loans relating to Hightrade and right my business. Hence, continue trading and employing 12-20 workers and paying Tax like before the Hightrade Rouges. I have not heard back from the ATO.
Mr Vincent observed that ‘There is no independent review of CDDA claims’, noting:
The appeal processes relating to CDDA claims ultimately go back to the ATO and the ATO is not bound to any suggestion that compensation should be provided.
The fact that CDDA is established under the executive power of section 61 of the Constitution suggests that no small business taxpayer, even through an Ombudsman has a viable, appealable right.
The ATO do not believe that the guidelines provide by the Department of Finance apply to them.
It is unusual for the Committee’s annual report review to attract many responses from taxpayers. There have always been, however, a few submissions addressing taxpayer concerns about tax law, tax issues, or about ATO decision-making and complaints matters managed by the Inspector-General of Taxation.
The Committee has kept a watching brief on contentious issues and has, in the past, instigated reports on the more significant ones, such as the ATO’s debt collection practices and reportage through the IGT. In keeping with its original mission, the Committee has also continually monitored the concerns of tax professionals and those of small businesses in particular, during its annual report process.
As indicated in the Committee’s recent major review of taxpayer engagement with the tax system, complexity in Australia’s tax system continues to be a perennial challenge. In the last annual report review the Committee recommended the ATO should report on progress on the redesign of tax law and report on the number and timeliness of public rulings issued and finalised, over the reporting period. Evidence taken this time suggests further improvements to general advice, and more easily accessible updates are needed.
A lack of clarity in GST law, and the ATO’s interpretation of it, continues to frustrate taxpayers. At hearings, the Institute of Public Accountants encapsulated the situation stating that GST law is ‘hopelessly difficult even for accountants, let alone the small business operator’.
In relation to GST refund withholding and R&D incentives, the Committee has noted, in consideration of the evidence, that the 2017 Annual Report advises that the R&D Incentive had supported growth in the sector, up by 2.7 per cent compared to 2016–17 to value of $2.5 billion. There was also a corresponding growth in the ATO’s compliance activity due to its disallowance of R&D refundable tax offset claims over the period. Given the tendency of the evidence in this review, this suggests a need for reform. A research incentive is no incentive to innovation if the risk is doubled by an unforeseen tax impact later.
For reform of GST arrangements more broadly, the Committee referred to the IGT’s review of GST refunds, released in August 2018 which made recommendations, among other things, on withholding of funds for refund verification and the lengthy timeframes involved. The IGT’s Recommendation 5 addressed concerns about the ATO’s investigation of serious fraud, making proposals to amend legislation provisions to ensure serious fraud has been determined by the Federal Court before the ATO advanced its investigation and addressed associated risks.
The activities of phoenix companies, and concerns about ABN registration of processes, were discussed in some detail during the Committee’s major inquiry and report on taxpayer engagement with the tax system. The Committee also heard in the current review about the impact of these companies on contractors in the building industry who, though honest traders, appear to suffer most in the aftermath. The Committee is encouraged by ATO work with the Australian Securities and Investments Commission (ASIC) to identify dummy directors, and on the development of the new shared business registration directory, as discussed by Commissioner Jordan at the hearing in August.
The Committee also notes that, in its submission to this review, the ATO has acknowledged a need for reforms to the ABN legislation registration process, so as not ‘create unintended barriers for businesses and workers to meet their ABN obligations’ which is relevant to gig economy innovators like Outscribe.
In regard to the Government’s announcements that the ATO will soon be able to disclose to credit reporting bureaus the tax debt information of businesses that have not effectively engaged with it to manage debts, the Committee notes that credit legislation now provides that the ATO will consult with the IGT before business debt information is first reported. This protection was supported by the IGT at hearings in March 2018, and should somewhat ameliorate concerns that the ATO would use the measure unfairly against small businesses.
The Committee has also followed up on recommendations made during the tax engagement inquiry for implementation of a directors’ identification number (DIN) to halt the activities of phoenix companies. The Tax Commissioner advised that the ATO currently has limited director identification capacity (as Operation Elbrus has revealed) although ASIC has a technical system for insider trading. The ATO, the Department of Industry and ASIC are working on the proposed new industry registry, with Government considering outcomes of tender convened by ATO (as at March 2018).
The Committee anticipates the Government will also consider introduction of the DIN as part of this process as a distinct tax measure.The Committee also considers there is a need for a more compassionate approach to be taken by the ATO so that burden of any new measures do not fall disproportionally on the victims of illicit phoenix activity or other corrupt businesses.
The Committee will keep a watching brief on these matters, and related issues, with further consideration of fairness measures to be discussed in the next chapter.
A fair ATO?
In regard to the body of evidence surveyed overall, the Committee considers that the candid nature of submissions received—their voluminousness and detail, along with the high profile media scrutiny of the matters at issue in many instances—makes them a unique category of evidence for an annual report review. This in itself provides both challenges and opportunities for the Committee’s scrutiny of ATO practices from the taxpayers’ point of view.
The Committee notes, in this regard, that while the submissions to this review represent only a small proportion of taxpayers, there was a disturbing consistency in evidence provided—taxpayers felt strongly that they were not receiving impartial treatment, that the ATO’s responses were not proportionate, ie calibrated to the degree of debt or risk associated with the taxpayer; and that mediation processes were not designed to assist the taxpayer get a fair resolution of their disputes.
Moreover, as indicated previously, evidence from the Inspector–General of Taxation and the Australian Small Business and Family Enterprise Ombudsman tended to support the tendency of evidence reported in the media, which in turn was reflected in the submissions discussed in this chapter.
In his submission to the Treasury, the Inspector–General identified a number of matters which he considered required prompt action, including to introduce greater independence in the ATO’s review and decision-making processes—in audit, mediation, appeals, and in adjudication of compensation, and also to produce measurably fairer outcomes for taxpayers, including by raising awareness of his Office and its role.
In addition to this, Mr Ali Noroozi, the retiring IGT, had urged the ATO to nuance its communication strategy to better respond to public criticism ‘fully and genuinely’ when serious allegations have been raised, stating:
Specifically with respect to the Four Corners program, serious concerns were expressed by small business owners and former ATO officers. Their concerns appear to have been unresolved and certain cases had stretched over many years. The program seemed to be a public outlet for their frustration. Many have commented that the ATO’s initial responses were to, first, pre-emptively publicly negate the existence of a problem and discredit the people raising the concerns, and then later, refine its message to acknowledge a problem, but diminish it. Given the ATO’s extensive use of media, such attempts have been perceived to be ‘gaming’ the media or being a ‘fair weather friend’—they have not reflected well on the ATO as an institution and for some their negative views of the ATO have been confirmed.
In the following chapter, the Committee conducts a considered evaluation of identified concerns, against taxpayer evidence received. Recommendations are also made to improve accountability and transparency in reportage, as well as to support the taxpayer perceptions of fairness which underpins the ATO’s provenance as the trust worthy custodian of the voluntary compliance model.