Obert Richards examines an ATO 'flight risk' assessment; Part IVC Litigation; and trust distributions.
Questioning the ATO's right to clip wings
It is hard to imagine that, even in the early the sixties, a person could not leave Australia unless they had first obtained a certificate from the Australian Taxation Office (ATO) allowing them to leave the country. The current law does not contain any such draconian or impractical provision.
However, section 14S of the Taxation Administration Act 1953 (TAA1953) states that where a person is subject to a tax liability, and the ATO 'believes on reasonable grounds that it is desirable to do so for the purpose of ensuring that the person does not depart from Australia for a foreign country' without paying that tax, or making satisfactory arrangements for the payment of that tax, the ATO may issue a departure prohibition order preventing the departure of that person for a foreign country.
There are limitations to that power. The ATO must have issued an assessment before issuing a departure prohibition order; it is insufficient that the taxpayer might be subject to an audit.
The ATO cannot make a person return to Australia, and it cannot, as one former ATO auditor once claimed he did, order a plane that has departed from Australia to return to Australia.
Then, if the person against whom the departure prohibition order is made is aggrieved with the order, section 14V of TAA1953 allows that person to apply to a court for the setting aside of the order.
This is what the decision in Pattenden v F C of T (Federal Court, 24 October 2008) was about, where the ATO assessed Pattenden and ordered an income tax and administrative penalty of $6,435,101.31.
The ATO was concerned that Pattenden was a 'flight risk'. It noted that Pattenden had sold some of his Australian assets and had, in the past, made numerous trips in and out of Australia. However, there was no evidence as to whether or not Pattenden maintained a home and family in Australia. Pattenden sought to have the prohibition departure order set aside and was successful in doing so.
This was not, however, because Pattenden had disputed tax assessments (which he had). Rather, Logan J (who decided the matter) first decided that the order should be set aside because it was made by an ATO subordinate who did not have the authority to make it (a relatively minor but decisive technical point).
More importantly, Logan J also considered whether the ATO had reasonable grounds for the making of the order, and decided that it did not.
In particular, he noted that Pattenden had a history of attending to requests of the ATO and had known that he and his companies were the 'subject of increasing scrutiny by the ATO for some five years'. This meant that he had ample opportunity to depart Australia permanently and send his wealth overseas, yet he did not.
Further, Logan J said that Pattenden's 'frequency of international travel hardly made him a 'flight risk' from Australia when one considered the travel venues and related reasons for travel over time, ties of business and friendship in Australia and Vanuatu, remaining family in the UK, and retirement and friends in New Zealand'.
I find it hard to disagree with Logan J's decision. I do not think that the ATO had sufficient facts to justify the departure prohibition order. The ATO's ability to issue departure prohibition orders concerns me, however. My concern is that some in the future ATO may not be able to resist issuing such orders purely for tactical reasons.
Avoiding Part IVC litigation
An obsession of mine is what I feel is the inequitable restriction of a taxpayer's appeal rights against the ATO to Part IVC of the Taxation Administration Act 1955. Part IVC is not taxpayer friendly; the appeal system is unashamedly biased in favour of the ATO.
Thus, I welcomed the decision of the Full Federal Court in Futuris Corporation Limited v F C of T (2 June 2007; also in INTHEBLACK, August 2007, p. 67) which allowed a taxpayer (in appropriate circumstances) to challenge a purported assessment otherwise than under Part IVC.
However, the ATO appealed the decision to the High Court, which allowed that appeal (1 July 2008; also in INTHEBLACK, October 2008, p. 67).
As a matter of logic, I believe the High Court decision was incorrect. Because Part IVC only applies to assessments, surely a taxpayer, before going to Part IVC, should be able to test whether the piece of paper produced by the ATO is a valid 'assessment' or not. However, what the High Court says the law is, is what the law is.
I have recently been involved in a matter where the ATO increased two taxpayers' assessable incomes by adding additional income to that returned by the taxpayers, but refused to accept that the taxpayers might have incurred additional expenses in earning that income (ignoring its own industry benchmarks and refusing to consider asset betterment statements produced by the taxpayers).
The taxpayers wanted to avoid full-blown Part IVC litigation. This was really a matter of trying to minimise the costs of litigation (these costs can get out of hand) even before the Administrative Appeals Tribunal. Some counsel engaged by the ATO can make a simple matter a complex one.
Accordingly, the taxpayers sought a declaration trying to cause the assessments (there were many years in dispute) to be set aside. The ATO sought to strike out the taxpayers' efforts to challenge those assessments.
The matter was argued before Edmonds J of the Federal Court. The taxpayers were victims of timing. The matter was heard while the Full Federal Court decision was still authoritative, but before the High Court decision. However, Edmonds J did not decide the matter until after the High Court decision.
While Edmonds J expressed reservations about the High Court decision (Kocic & Ors v F C of T 27 October 2008), he found against the taxpayers and dismissed their applications. This means that they will have to bear the costs of the still to come Part IVC litigation.
Timely disclosure of trust distributions counts
I know of a tax promoter whose answer to concerns that his schemes might cause a beneficiary of a trust to be subject to unanticipated income tax is: 'Well, if it comes to that, the beneficiary will simply say that the income does not belong to him'. Perhaps that promoter was behind the decision in Confidential v F C of T (Administrative Appeals Tribunal, 13 October 2008).
That decision involved an application by the taxpayer against a decision of the ATO to assess him because of his failure to disclose a trust distribution as part of his assessable income for the year ended 30 June 2002. The taxpayer claimed that he did not have to bring that income to account in that year because he had effectively disclaimed a gift of a beneficial interest in the relevant trust.
The facts appear to be (and with respect to the tribunal, the facts are not clearly articulated) that the taxpayer instructed a solicitor to act on his behalf in relation to his 2002 tax affairs in August 2006. That solicitor became aware of the taxpayer's interest in the trust in the course of negotiating on the taxpayer's behalf with the ATO.
However, it was not until 17 April 2007 that the taxpayer executed a deed disclaiming his interest in the trust. The taxpayer then argued that, as a consequence of disclaiming his interest in the trust, he should not be assessed on any income of the trust for the year ended 30 June 2002.
Senior member McCabe, who heard the matter, accepted that, subject to two provisos, the deed would have been effective to cause the taxpayer to disclaim 'any and all interests in the income and corpus of the trust'.
The two provisos were that the taxpayer must have acted promptly upon learning of his interest in the trust, and must have done nothing in the meantime, which suggested that he assented to the gift of that interest.
Mr McCabe said that here, 'The solicitor did not promptly disclaim the interest on the taxpayer's behalf' and that 'while nice questions arise to what length of time is a reasonable time in the circumstances, I am not persuaded the taxpayer could be said [through his solicitor] to have acted reasonably promptly'.
Accordingly, Mr McCabe decided against the taxpayer.
To me, the decision is unsatisfactory (not that I think it is wrong) in that it does not examine the consequences of effectively back dating a disclaimer to an entitlement. Section 97 of the Income Tax Assessment Act 1936 (which causes a taxpayer to be assessed) looks to see what a taxpayer is entitled to at 30 June. One would think that if a taxpayer has not disclaimed an interest at 30 June, it might be too late for them to subsequently do so.
