Robert Richards looks at why the ATO serves statutory tax demands in some cases; the exemption from GST of some supplies; and having a fair fight with the tax watchdogs
Getting all wound up
Of all of the features of the tax system the one which I find most blatantly unfair is the rule that requires a person to pay tax even though there may be genuine doubt as to whether that tax is properly payable or not.
This is because the tax legislation says that tax is payable as a consequence of the raising of an assessment, it does not matter if that assessment is objected to or not.
It is true that the Australian Taxation Office (ATO) might allow payment of disputed tax to remain in abeyance pending the determination of an objection against income tax, but the ATO is much more robotic when it comes to goods and services tax and PAYG liabilities.
The ATO will not hesitate, and the daily court lists are proof of this, to seek the bankruptcy of a person or cause a company to go into liquidation if it feels it needs to do so. And a constant complaint of practitioners is that the ATO often, to its own detriment, forces a company into bankruptcy or seeks the liquidation of a company instead of making a proper decision as to whether or not the debt can be worked out.
If the ATO wants to wind up a company it will first serve a statutory demand on that company. Then, unless the company manages to have the statutory demand set aside, the ATO will be able to, without having to prove the debt, cause the company to be wound up. Unless the company manages to have the statutory demand set aside then it will, after the statutory demand is served, be at the mercy of the ATO.
A creditor has 21 days from receipt of a demand (unless a court allows an extension of time) in which to file an application seeking to have the statutory demand set aside. A statutory demand will be set aside if the court is satisfied that there is a genuine dispute between the company and the creditor about the existence of the debt to which the demand relates, or that the company has an offsetting claim against the creditor.
A genuine dispute does extend to an objection to an assessment since the legislation makes the tax payable simply as a consequence of the serving of an assessment. However, a taxpayer might be able to dispute the amount shown by the ATO on one of its 'running account balance' statements, provided that dispute is not a dispute as to an underlying assessment, while an offsetting claim would include a claim for a goods and services tax credit, or a tax refund.
Alternatively, a court can set aside a demand if it is satisfied that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside, or if there is some other reason why the demand should be set aside.
Last year the Queensland Court of Appeal in Neutral Bay Pty Ltd v DC of T (Queensland Court of Appeal, 28 September 2007) held that a statutory demand could be set aside where the demand related to disputed tax (in this case the demand related to goods and services tax). The ATO (as part of its test case program) appealed that decision to the High Court.
The High Court allowed that appeal (the High Court case is known as DC of T v Broadbeach Properties Pty Ltd, High Court, 3 September 2008).
The High Court approached the matter in what might be categorised as a legalistic and matter-of-fact manner. Issues such as equity and commercial sense seemed to be of no concern.
Rather, the Court observed: '[The Queensland Supreme Court] emphasised the importance of the disruption to the taxpayers, their other creditors and contributories that would suffer from winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the commissioner upon the statutory demand system.'
A pattern is emerging: the High Court will not allow taxpayers in dealings with the ATO to go outside the tax law. The Broadbeach Properties decision should be seen as an extension by the court of its decision in FC of T v Futurius Corporation Ltd (High Court, 1 July 2008, INTHEBLACK, October 2008, p 67-68) where it would not allow a taxpayer to dispute an assessment other than under Part IVC of the Taxation Administration Act 1995.
A fair fight
Fighting the ATO can be hard. A starting point is the burden of proof. The ATO can raise an assessment and then pass the burden of proving that it is incorrect onto the taxpayer. What is worse is the inequality of resources. Taxpayers are subject to both monetary budgets and time constraints.
On the other hand, it appears that once the ATO decides that a matter is to be litigated, it will invest whatever time and money is required to win the matter.
All of that could be accepted if the ATO were to litigate fairly. Sometimes it does not, and before any member of the ATO protests, I should stress that this is uncommon and not a criticism of the ATO generally. The ATO is supposed to be a 'model litigant' since the attorney general has directed this in his Model Litigant Guidelines. However, sometimes the ATO will not be a 'model litigant'.
The decision in Paper to Paper International Pty Limited and Holland v FC of T (Administrative Appeals Tribunal, 19 September 2008) is an example of where the taxpayers sought to minimise their costs of fighting the ATO. And by way of disclosure, I acted for the taxpayers.
The facts were simple. The ATO increased the assessable income of a taxpayer (which was a company) and levied penalties on the company as a consequence of that understatement of income.
At the same time, it assessed Holland (who was a director and shareholder of the company) as liable for tax on part of those understatements of income made by the company and assessed penalties on him.
Both the company and Mr Holland lodged objections (on the same day) against the assessments and the penalties. Up until then, the dispute involving the company and Mr Holland had run in parallel. But for some reason the ATO only determined the objections lodged by the company.
For cost efficiency purposes, the company and Mr Holland wanted matters to continue to be joined together. So, Mr Holland made a number of applications to the ATO pursuant to section 14ZYA of the Taxation Administration Act 1953. This section allows a taxpayer, where 60 days has elapsed since the lodgement of an objection, to give notice to the ATO requiring it to determine the objection.
The ATO ignored that request and was deemed to have disallowed those objections lodged by Mr Holland, which allowed Mr Holland to refer the decisions to the Tribunal.
The company and Mr Holland then sought to have the disputes heard together. The ATO refused, so the taxpayers sought directions from the Tribunal that they be heard together.
In seeking such directions, the taxpayers relied on section 2A of the Administrative Appeals Tribunal Act, which requires the Tribunal to adopt procedures that are 'fair, just, economical, informal and quick', and they also relied on the fact that part of the attorney general's Model Litigant Guidelines states that the Commonwealth must minimise the costs of litigation.
The Tribunal made the directions sought by the company and Mr Holland. It noted 'the greater efficiency of hearing the matters together and, notably, being able to cross-examine on all related issues at the same time'.
The decision might not seem very important. However, what it does do is serve as a valued reminder to the ATO of the purpose of the Tribunal and the importance of the Model Litigant Guidelines.
GST and the importance of intention
One of the complexities of the goods and services tax is that not all supplies are subject to it. In particular, there are three types of supply which, depending upon the conduct of either the recipient of the supply or the supplier, might not be subject to goods and services tax. These are supplies of residential premises, farming land, and going concerns.
A supply of residential premises is 'input taxed' to the extent that the property is to be used predominantly for residential accommodation (section 40-65 of the Act).
So while the making of the supply will not be subject to goods and services tax, the person making the supply will not be able to claim any goods and services tax credit in relation to the supply, such as claiming a goods and services tax credit on acquisition of the premises being onward sold.
A supply of 'farming land' might be GST-free. There is a distinction between a supply being 'input taxed' and a supply being 'GST-free'.
If it is the former, the supplier will not be able to claim any tax credit in respect of the supply. If it is the latter, the supplier will be able to claim an input tax credit, even though goods and services tax is not paid on the making of the supply.
I have a client who only makes export sales,which are 'GST-free'. That client can claim credits on the cost of making the sales, but does not have to pay goods and services tax on the sales.
A supply of farming land is GST-free, provided it is land on which a farming business has been conducted for at least five years preceding the supply, and the recipient of the supply intends that farming business to be carried on (section 38-480 of the Act).
A supply is a supply of a going concern and is GST-free if the supplier supplies to the recipient all that is necessary for the continued operation of the enterprise, and the supplier carries on, or will carry on the enterprise until the day of the supply (section 38-325 of the Act).
What all this means is that a person who makes a supply of residential land, or of farming land's liability to goods and services tax, will depend on the perhaps unknown intention of the recipient of the supply, and that a person acquiring a going concern's ability to claim an input tax credit is dependent on the perhaps unknown conduct of the supplier. This is quite unsatisfactory to both.
So, how does one decide whether a person acquiring residential premises or farming land intends to use them as residential premises or for farming? The Administrative Appeals Tribunal considered this question in Sunchen Pty Ltd as Trustee of the Sunchen Family Trust v FC of T (Administrative Appeals Tribunal, 19 September 2008).
In this instance, the taxpayer purchased land. A director of the taxpayer stated that the trust intended to develop it. However the land was leased at the time of purchase and two years later was still leased to the same tenant. The taxpayer claimed a GST credit on the basis that the property was part of a land development.
The Tribunal rejected that claim. It felt that the taxpayer's claimed intention was insufficient. It said: 'The subjective intentions of the [taxpayer] are not to be considered in isolation and must be considered in light of the relevant objective circumstances, nearly all of which are against the [taxpayer].'
