Re Belinda Winter-Smith and Commissioner of Taxation
[2005] AATA 576(Decision by: Mr S. Webb)
Re: Belinda Winter-Smith
And: Commissioner of Taxation
Member:
Mr S. Webb
Subject References:
TAXATION
outstanding income tax
claim for release from payment for reasons of hardship
meaning of serious hardship
disability support pension
straitened financial circumstances
failure to pursue court order to discharge liability
decision under review varied
Legislative References:
Income Tax Assessment Act 1936 - s 177D; 177F
Taxation Administration Act 1953 - s 14ZZK; Schedule 1; ss 340-5; 340-10
Family law Act 1975 - s 86
Case References:
Corlette & Anor v Mackenzie & Ors - (1996) 42 ALD 193
R vTrebilco; ex parte F S Faulkner and Sons Limited - (1936) 56 CLR 20
Powell v Evrinades & Ors - (1989) 87 ALR 117
Re Ferguson and Commissioner of Taxation - [2004] AATA 779
Re Filsell & Commissioner of Taxation - [2004] AATA 1012
Re Perrott & Commissioner of Taxation - [2004] 1372
Re Spicer & Commissioner of Taxation - [2004] AATA 960
Decision date: 16 June 2005
Perth
Decision by:
Mr S. Webb
REASONS FOR DECISION
16 June 2005
Mr S. Webb
1. The decision and reasons for it were given orally at the conclusion of the hearing in this matter. The parties requested written reasons pursuant to s43(2A) of the Administrative Appeals Tribunal Act 1975. The following reasons are consistent with the reasons given orally in all substantive matters.
2. This is a matter in the Small Taxation Claims Tribunal in which the Applicant Belinda Winter-Smith seeks review of a decision of the Commissioner of Taxation, the Respondent in these proceedings, dated 23 December 2004. By that decision the Respondent disallowed the Applicant's objection to a decision not to release her from payment of outstanding income tax in the amount of $15,482.50.
3. It is not in dispute that that amount is outstanding and is comprised of the following:
- (a)
- $5,948.20 being income tax payable for the 1998-1999 tax year;
- (b)
- $2,094.00 being an incorrect return penalty for the 1998-1999 tax year;
- (c)
- $5,673.65 being income tax payable for the 1999-2000 tax year;
- (d)
- $1,546.60 being an incorrect return penalty for the 1999-2000 tax year; and
- (e)
- $220.05 being general interest charge.
4. On 15 April 2000 the Applicant claimed income tax deductions for the 1998-1999 tax year in relation to interest, bank fees and borrowing expenses associated with her acquisition of units in the W & B Unit Trust, in the amount of $11,753.00 (T3 folio 15). A notice of assessment was duly issued on 27 April 2000 (T4).
5. Anchortek Pty Ltd ("Anchortek") was the trustee company for the W & B Unit Trust (T8). The Applicant and her then husband were directors of that company (T12 folios 66 and 80).
6. The Applicant and her then husband filed for divorce in October 2000 and a decree nisi was granted, becoming absolute in November 2001. The Applicant redeemed units she owned in the W & B Unit Trust and ceased her directorship of Anchortek on 26 October 2000 (T8 folio 36). She was paid amounts of $45,000.00 and $69,000.00 into a superannuation fund from her ex-husband. Anchortek ceased being a trustee of the W & B Unit Trust in December 2000 (T12 folio 66).
7. On 16 May 2001 the Applicant claimed income tax deductions in relation to interest, bank fees and borrowing expenses associated with the purchase of units in the W & B Unit Trust, in the amount of $12,673.00 (T5 folio 24). A notice of assessment was duly issued on 24 May 2001 (T6).
8. On 22 June 2004 the Applicant was informed following an income tax audit that the aforementioned deductions claimed in relation to W & B Unit Trust were not allowable (T8). On 2 August 2004 amended notices of assessment for the 1998-1999 and 1999-2000 tax years were issued to the Applicant (T9 and T10). By those notices the amounts of outstanding income tax that is payable by the Applicant are $8,042.20 in respect of the 1998-1999 tax year and $7,220.25 in respect of the 1999-2000 tax year.
9. On 31 August 2004 the Applicant signed an application for release form in which she stated that she was in receipt of a disability support pension ("DSP") and estimated her total income for the (then) forthcoming year would be $12,220.00. The evidence is that the Applicant was paid DSP on and after 18 June 2004 (T12 folio 78).
10. It is not in dispute that the Applicant suffers from Crohn's Disease and a degenerative lumbar spine condition and receives a DSP, having ceased her previous employment as an Administrative Officer in or about August 2004. On 13 August 2004 Dr Malcolm Hoare, treating GP, reported that (T12 folio 69):
"It is likely that the above conditions [Crohn's disease and severe lumbosacral spondylosis] will continue to deteriorate and it is my opinion that it is unlikely that the [Applicant] will ever be gainfully employed again."
In a report dated 26 August 2004 Dr Rod Moore stated that "it is unlikely that [the Applicant] will be able to return to her previous occupation" and expressed the opinion that the Applicant's condition "should be considered permanent and unlikely to improve in the future" (T12 folio 68).
11. On 2 November 2004 the Respondent refused the Applicant application for release (T14). The Applicant lodged an objection to that decision on 4 November 2004 (T15). On 23 December 2004 that objection was disallowed (T19).
12. Subsection 340-5(3) of Schedule 1 of the Taxation Administration Act 1953 ("TAA") provides a discretion in the Commissioner, and in those shoes this Tribunal, to release a person from liability, in whole or in part, to repay outstanding amounts of tax if the person would suffer serious hardship if required to repay the liability. It is not in dispute that the outstanding amounts are liabilities within the terms of subsection 340-10 of the TAA Schedule 1. The term 'serious hardship' is not given particular meaning in the applicable legislation and can be understood by its ordinary meaning.
13. I pause to note that the existence of serious hardship does not create a mandatory release from liability. Even if serious hardship is found, a decision pursuant to subsection 340-5(3) to release a tax payer from liability for an outstanding amount of tax that is payable is within the Commissioner's discretion in the particular circumstances. Authority for that propostion is to be found in the Full Federal Court decision in Corlette & Anor v Mackenzie & Ors (1996) 42 ALD 193, following the High Court decision in R vTrebilco; ex parte F S Faulkner and Sons Limited (1936) 56 CLR 20.
14. The Respondent submits that guidance is to be found relevant to the exercise of the aforementioned discretion in the Tax Office Receivables Policy. Reference is made to Chapter 24 of that document. Paragraph 24.4.1 of the Policy states:
"The term serious hardship is not defined in the law and must be given its ordinary meaning. In determining the existence of serious hardship, the Board applies several tests that follow a conceptual position that the term serious hardship has connotations of unduly burdensome consequences, the magnitude of which would be likely to lead to persons being deprived of necessities according to normal community standards. Thus, serious hardship would seem to exist where payment of a tax liability would result in the debtor being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements."
15. Paragraphs 24.4.6 to 24.4.8 of the Policy set out three tests for considering a taxpayer's ability to meet a taxation liability from current income:
- (i)
- the person's ability to pay, according to the income and outgoings stated in the application or supporting documents, ie., what net income remains after deducting total outgoings from total income?
- (ii)
- whether the income and outgoings stated are accurate, whether the outgoings are necessary, or whether there is scope to increase the net income available or to reduce outgoings to meet the tax debt without serious detriment to living standards?
- (iii)
- if there is an excess by which available income exceeds reasonable outgoings, is it sufficient to allow the liability to be met within an acceptable time scale?
16. Paragraphs 24.4.9 to 24.4.13 are concerned with tests applicable to assets and liabilities. Paragraphs 24.4.14 to 24.4.16 are concerned with other factors that may have relevance. In this case the Respondent relies on sub-paragraph 24.4.14(2) when contending that the Applicant has not pursued her ex-husband for payment of her taxation liability for the 1999-2000 tax year pursuant to an agreement made and registered in the Family Court of Western Australia on 26 October 2000 pursuant to section 86 of the Family Law Act 1975 (T18). The terms of that agreement include at clause 8:
"The husband has agreed to pay any taxation liability incurred by the wife during the 1999-2000 financial year."
17. The evidence given today reveals that the Applicant has not taken any civil action to recover her tax liability arising from the 1999-2000 tax year from her ex-husband. Her evidence is that she approached her ex-husband and was informed that he is unwilling to pay the tax debt. She asserts that she cannot afford to engage a lawyer to pursue the matter and Legal Aid declined to give assistance. That may be so, but it does not diminish the fact that she has options to seek legal remedy and restitution under the registered agreement in relation to her 1999-2000 taxation liability.
18. The Applicant's evidence today in relation to her income and expenses was not challenged and I am satisfied that her weekly income is approximately $291.05. On the basis of the Applicant's budget tendered at Exhibit A, Attachment 2, her budgeted weekly expenses are approximately $271.81. On that evidence the Applicant's weekly income exceeds her expenses by $19.24. However, the Applicant's evidence was that, in reality, she regularly exceeds her weekly budget. Her unchallenged evidence was that she had obtained assistance from Communicare to pay a power account and that she had accrued a debt on her ANZ credit card of approximately $1,500.00 as a result of difficulties living within the aforementioned budget. I accept that evidence and find that the Applicant's income is barely sufficient to cover her weekly outgoings.
19. With regard to her assets and liabilities the Applicant owns the residential property in Wilson in which she lives with her son. The estimated value of that property is estimated to be $190,000. The property is under mortgage, with an amount of approximately $37,702.62 presently owning.
20. The Applicant owns a 1998 Ford Festiva vehicle that is unencumbered with an estimated value of $6,000 to $7,000. She owns household and electronic items with an estimated value of $10,000. Her evidence is that she owns a piano that was her mother's with a value of up to $3,000.
21. The Applicant gave evidence that she entered an agreement to purchase an $1,800.00 lounge suite in or about April 2000 on the basis of a deferred payment loan. Those repayments are due to commence in January 2006 and are not included in the Applicant's tendered weekly budget. Her evidence is that she has no capacity to repay the loan and she may be forced to sell her piano to do so.
22. The Applicant owes approximately $1,500 on her ANZ Visa card.
23. Plainly, the Applicant's net asset position is positive, with a net value, on her evidence, of at least $160,000. I note, however, that those assets are not extravagant assets. Her place of residence is a two bedroom "villa", her car is seven years old and her household effects are unexceptional. I accept that the Applicant entered into an agreement to purchase a lounge suite prior to her illness and prior to being notified of her tax liability. I also accept that she may be required to sell the aforementioned piano to repay that debt.
24. The evidence is that the Applicant made payments totalling $94,445.00 against the mortgage on her residential property on 9 and 29 November 2004. Her evidence is that those funds derived from release of her accumulated superannuation funds in November 2004 in consequence of her permanent incapacity and disablement. The evidence is that she had an accumulated superannuation amount of approximately $110,239.02 on 1 November 2004. I accept that those funds were used to reduce her mortgage and to repay tax liabilities, accountancy fees and related costs on the superannuation account, as well as to repay $250.00 from the Applicant's ANZ Visa card debt.
25. The Applicant was properly notified of her tax liability in August 2004, but has not made any payments to reduce her debt since that time.
26. Plainly, on the evidence before me, this Applicant is in straitened financial circumstances. She is able to meet the basic necessities of life but has difficulty paying bills and has extremely limited financial capacity to repay her debts. She has no capacity in the foreseeable future to return to employment and earn income to improve her financial circumstances, and is totally reliant on Centrelink payments and rental income from her son to cover her weekly living costs.
27. The question is would repayment of her tax liability cause her serious hardship. As will appear I am satisfied that it would.
28. In the Respondent's submission she could use the equity in her home to repay the liability. That may be so, but on the evidence before me this Applicant has no prospect of being able to repay additional borrowings and I am not persuaded that forcing a person who suffers from a permanent disabling condition and who is in receipt of a disability support pension to sell their home in order to repay a tax liability is a reasonable option in the circumstances here pertaining.
29. I am mindful of the authorities to which attention has been drawn. I accept that the tests set out in, for example, Powell v Evrinades & Ors (1989) 87 ALR 117 and Re Ferguson and Commissioner of Taxation [2004] AATA 779, as well as the aforementioned Receivables Policy, are applicable here.
30. I note in passing that this case is to be distinguished from the case of Re Ferguson (supra). In that case the Fergusons had the prospect of improving their financial circumstances in the future, whereby a deferral of repayment of their tax liability was appropriate. Those circumstances do not pertain here. On the medical evidence, this Applicant has no prospect of improving her financial circumstances in the foreseeable future. This case is also to be distinguished on the facts from other recent cases to which attention is directed, including Re Filsell & Commissioner of Taxation [2004] AATA 1012; Re Perrott & Commissioner of Taxation [2004] 1372; Re Spicer & Commissioner of Taxation [2004] AATA 960.
31. I am satisfied on the evidence before me that this Applicant will suffer serious hardship if she is required to repay her tax liabilities and so find.
32. Nonetheless it appears to me to be reasonable to expect the Applicant to act upon the terms of the agreement made under section 86 of the Family Law Act 1975 to recover funds from her ex-husband in relation to her tax liability for the 1999-2000 financial year. That being so it is not appropriate to release her from her tax liability of $7,220.25 in relation to the 1999-2000 tax year.
33. However, it is appropriate in the particular circumstances to release her from her tax liability in relation to the 1998-1999 tax year. Even though she used her superannuation funds, on release, to reduce her mortgage and to repay debts other than her tax debt, I am persuaded that her circumstances are such that the serious hardship that will result from recovery of her 1998-1999 tax liability, even by deferred repayment, is likely to adversely affect this Applicant's health and her ability to provide for the basic necessities of life to a standard that is reasonably accepted in the general community.
34. Considering all of the evidence, the submissions of the parties, the relevant caselaw and legislation, those factors compel me to conclude that releasing the Applicant from her taxation liabilities, in part, would not be either unjust or unfair to other taxpayers who are required, in the normal course, to honour their tax liabilities.
35. That being so, the decision under review is varied to the extent that this Applicant is released from her income tax liability for the 1998-1999 tax year in the amount of $8,042.20.