Re Valerie Fay v Commissioner of Taxation

[2013] AATA 504

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(Decision by: Senior Member C R Walsh)

Re Valerie Fay
v Commissioner of Taxation

Tribunal:

Member:
Senior Member C R Walsh

Subject References:
Income tax
jurisdiction of Tribunal
Applicant applied to Commissioner to be released from her income tax liability pursuant to Commissioner's discretion
Applicant's release application refused by Commissioner
Applicant's objection disallowed by Commissioner
whether Applicant would suffer 'serious hardship' if required to pay her income tax liability
meaning of 'serious hardship' considered
Commissioner's objection decision affirmed

Legislative References:
Taxation Administration Act 1953 - s 14ZZK(b)(iii); s 340-5(1); s 340-5(2); s 340-5(3); s 340-10(2)
Income Tax Assessment Act 1936 - s 265

Case References:
Carter v Commissioner of Taxation - [2013] AATA 141
Commissioner of Taxation v Milne - [2006] FCA 1005
Corlette v Mackenzie - (1995) 62 FCR 584
Corlette v Mackenzie - 96 ATC 4502; (1996) 62 FCR 597
Drake v Minister for Immigration and Ethnic Affairs - (1979) 2 ALD 60; 24 ALR 577
Ferguson v Federal Commissioner of Taxation - [2004] AATA 779
Minister for Immigration and Ethnic Affairs v Pochi - (1980) 4 ALD 139
Powell v Evreniades & Ors - 89 ATC 4415; 21 FCR 252; (1989) 87 ALR 117
Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) - (1978) 1 ALD 167
Re Filsell v Commissioner of Taxation - [2004] AATA 1012
Re Kirby and Collector of Customs - (1989) 20 ALD 369
Rowe v Commissioner of Taxation - [2010] AATA 341
R v Trebilico; ex parte F S Falkiner & Sons Ltd - (1936) 56 CLR 20
Vagh v Commissioner of Taxation - [2007] AATA 32
Van Grieken v Veilands - (1991) 21 ATR 1963

Hearing date: 12 June 2013
Decision date: 16 July 2013

Perth

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Decision by:
Senior Member C R Walsh

REASONS FOR DECISION

INTRODUCTION

1. This application concerns whether Mrs Fay should be released from her income tax liability (currently totalling $49,780.09) pursuant to s 340-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) for the reason that she would suffer "serious hardship" if she were required to pay it.

2. In particular, Mrs Fay seeks a review of the Commissioner's objection decision (dated 20 October 2011) which disallowed her objection (dated 30 March 2011) to the Commissioner's refusal to release Mrs Fay's from her income tax liability under his discretion s 340-5 of Schedule 1 to the TAA (dated 6 September 2010).

EVIDENCE & JURISDICTION

3. A substantial amount of the material filed by Mrs Fay in support of her application is irrelevant to the issue for determination by the Tribunal, being whether Mrs Fay should be released from her income tax liability pursuant to the discretion in s 340-5 of Schedule 1 to the TAA for the reason that she would suffer "serious hardship" if she were required to pay it.

4. Rather, much of the material filed by Mrs Fay relates to: (i) the circumstances in which Mrs Fay's income tax liability arose (involving the conduct of her former accountant, Mr Ray Osborne); (ii) the correctness of the Commissioner's assessments which gave rise to Mr Fay's income tax liability; and (iii) the Commissioner's alleged negligent conduct in relation to those assessments and the Commissioner's alleged denial of procedural fairness by the Commissioner.

5. As expressed at the hearing of this application, the Tribunal considers that those issues are not germane to the question for determination by it in this application and, as such, are outside the Tribunal's jurisdiction in these proceedings. The Tribunal's broad power to stand in the shoes of the decision-maker (in these proceedings, the Commissioner) is enlivened only in relation to the decision under review -in this case, the Commissioner's objection decision (dated 20 October 2011).

6. The Tribunal's duty in conducting a merits review of the Commissioner's objection decision is for it to reach a decision that it objectively considers to be the correct and preferable decision within the context of Mrs Fay having made an application to be released from her income tax liability pursuant to section 340-5 of Schedule 1 to the TAA.

7. As I said in Carter v Commissioner of Taxation [2013] AATA 141 at [57]:

.......the Tribunal's broad power to stand in the shoes of the decision-maker (here, the Commissioner), is exercisable only in relation to the decision under review (in this case, the Commissioner's objection decision dated 21 May 2012): see s 43(1) of the Administrative Appeals Tribunal Act 1975 (Cth) ( AAT Act ) which states that "For the purposes of reviewing a decision the Tribunal my exercise all the powers" of the decision-maker. However, the Tribunal has no general review power, nor does it have any general decision-making power. Its obligation is to conduct a merits review of the decision-maker's decision and to reach a decision that it objectively considers to be correct and preferable decision: Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 78; 24 ALR 577 per Smithers J. That is, the Tribunal has no greater powers than those which may be exercised by the decision maker. As President Brennan J said in Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) (1978) 1 ALD 167 at 175:

"The AAT is not a primary administrator. It is not the original repository of powers and discretions under an enactment."

8. In the Tribunals' view, it is clear from Mrs Fay's stated "Reasons for Application", her "Statement of Facts and Issues" (filed 21 March 2013), her "Outline of Submissions" (filed 9 May 2013), her "Statement" (dated 19 March 2013), her "Affidavit" (sworn 27 May 2013) and her "Affidavit" (sworn 30 May 2013), that what Mrs Fay is effectively seeking from the Tribunal is for it to exercise a general review power and a general decision-making power concerning the Commissioner's conduct and decisions, which powers the Tribunal simply does not have: Carter following Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 78; 24 ALR 577 per Smithers J and Re Brian Lawlor Automotive Pty Ltd and Collector of Customs (NSW) (1978) 1 ALD 167 at 175 per President Brennan J.

9. In any event, it is not open to Mrs Fay, in an application made pursuant to Part IVC of the TAA, concerning a decision by the Commissioner not to release her from her income tax liabilities under Division 340 of Schedule 1 to the TAA, to contest the correctness of any of her income tax assessments: Rowe v Commissioner of Taxation [2010] AATA 341 at [10] per Senior Member Frost. Consequently, Mrs Fay's income tax assessments (including any amended assessments) for the income years ended 30 June 2001, 30 June 2002, 30 June 2003, 30 June 2007 and 30 June 2008, which gave rise to her income tax liabilities are taken, for the purpose of these proceedings, to be correct: Rowe at [10] per Senior Member Frost.

10. That being said, at the hearing of this application, having noted the objections of the Commissioner concerning relevance, the Tribunal tendered the following documents into evidence in support of Mrs Fay's application:

(i)

"Statement" of Mrs Fay, dated 19 March 2013 ( Exhibit A1 );

(ii)

"Affidavit" of Mrs Fay, sworn 27 May 2013 ( Exhibit A2 ); and

(iii)

"Affidavit" of Mrs Fay, sworn 30 May 2013 ( Exhibit A3 ).

11. The Tribunal also tendered the three bundles of section 37 or T-Documents together into evidence as "Exhibit R1" ( Exhibit R1 ).

RELEVANT FACTS& EVIDENCE

12. On 28 July 2010 Mrs Fay applied to be released from her income tax liability (then totalling $40,221.99) pursuant to s 340-5 of Schedule 1 to the TAA ( Release Application ): Exhibit R1 at pp 52 to 64 (T12).

13. On 6 September 2010 the Commissioner refused Mrs Fay's Release Application ( Refusal Decision ): Exhibit R1 at pp 65 to 66 (T13). That Refusal Decision states:

The reasons for the decision, in accordance with the ATO Receivable Policy:

1)

After consideration of the circumstances in your application, the Commissioner has refused the release because you have shown surplus income of more than $500 per fortnight (after allowing for reasonable expenditure). The Commissioner considers that, given your fortnightly surplus income, you will be able to repay your income tax debt.

2)

In your application for release you have shown that you have $130,000 in a fixed term deposit along with equity in your home and commercial property. The Commissioner considers that these assets as indication of your capacity to pay the income tax debt: Exhibit R1 at p 65 (T13).

14. By letter dated 30 March 2011, Mrs Fay objected to the Refusal Decision ( Objection ): Exhibit R1 at p 67 (T14).

15. On 25 August 2011 the Commissioner requested that Mrs Fay provide additional information in relation to the Objection, including details about her income and expenditure, bank accounts and credit or store cards,: Exhibit R1 at pp 70 to 73 (T17).

16. On 28 September 2011 Mrs Fay provided the Commissioner with some of the additional information requested: Exhibit R1 at pp 74 to 87 (T18).

17. On 20 October 2011 the Commissioner disallowed the Objection ( Objection Decision ): Exhibit R1 at pp 88 to 89 (T19). In the "Reasons for decision", attached to the Objection Decision, the Commissioner states(at Exhibit R1 at p 17 (T2)):

Conclusion

......the onus is on the applicant to furnish sufficient information for the ATO to be satisfied that a release from the payment of a tax liability would be appropriate.

In your case, as you have not provided all the information requested, nor an explanation for the change in your income, we cannot be satisfied that a release from the payment of the tax liability would be appropriate.

Accordingly, your objection to the Commissioner's refusal to release you from your tax debt is disallowed.

18. On or about 20 December 2011, Mrs Fay applied to the Tribunal for a review of the Objection Decision. Mrs Fay's stated "Reasons for Application" are as follows:

The tax debt liability in issue has been created by my ex accountant Ray Osborne who has been convicted of stealing and who made false representations in my tax returns for the 2001, 2002, and 2003 income years claiming tax refunds for the sham tree-growing schemes. My ex-accountant prepared and lodged my tax returns for the 2001, 2002 and 2003 income years and which were accepted by the ATO; (a) I was not the perpetrators of the sham tree-growing scheme/s; (b) did not prepare or lodges their returns that made false claims about the tree growing schemes. All the tax returns were prepares by Mr Osborne; (c) did not receive the refund cheques sent by the ATO to Mr Osborne or had any control on it; and hence (d) I should not be held liable to pay back those refund cheques which were misappropriated and stolen by my then accountant under the cover of sham paulownia tree-growing schemes.

BURDEN OF PROOF

19. Pursuant to s 14ZZK(b)(iii) of the TAA, Mrs Fay bears the burden of proving, on the balance of probabilities, that the Objection Decision should have made differently (i.e. that the Commissioner should have exercised his discretion in s 340-5 of Schedule 1 to the TAA and released Mrs Fay from her income tax liability): Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and Re Kirby and Collector of Customs (1989) 20 ALD 369.

RELEVANT LAW & ANALYSIS

20. Pursuant to s 340-5 of Schedule 1 to the TAA, the Commissioner "may" (i.e. has the discretion to) release a taxpayer, who is an individual, from his or her income tax liability if he or she would suffer "serious hardship" if required to satisfy the liability.

21. Section 340-5 in Schedule 1 to the TAA provides:

340-5 Release from particular liabilities in cases of serious hardship

Applying for release

(1)

You may apply to the Commissioner to release you, in whole or in part, from a liability of yours if section 340-10 applies to the liability.

(2)

The application must be in the approved form.

Release by the Commissioner

(3)

The Commissioner may release you, in whole or in part, from the liability if you are a person specified in the column headed "Person" of the following table and the condition specified in the column headed "Condition" of the table is satisfied:

Effect of the Commissioner's decision

(4)

If the Commissioner:

(a)

refuses to release you in whole from the liability; or

(b)

releases you in part from the liability;

nothing in this section prevents you from making a further application or applications under subsection (1) in relation to the liability.

Notification of the Commissioner's decision

(5)

The Commissioner must notify you in writing of the Commissioner's decision within 28 days after making the decision.

(6)

A failure to comply with subsection (5) does not affect the validity of the Commissioner's decision.

Objections against the Commissioner's decision

(7)

If you are dissatisfied with the Commissioner's decision, you may object against the decision in the manner set out in Part IVC. [Emphasis added]

22. For the purposes of s 340-5(1) of Schedule 1 to the TAA, the "liabilities" from which the Commissioner may release a taxpayer include income tax liabilities, penalties, general interest charge and shortfall interest charge: s 340-10(2) of Schedule 1 to the TAA.

23. In essence, the release from a liability under s 340-5 of Schedule 1 to the TAA involves two-steps. The first step is for the Commissioner to determine whether the taxpayer would suffer "serious hardship" if he or she were required to satisfy the liability. If the answer to this is "yes", the second step is to determine whether, in the particular circumstances, the Commissioner should exercise his discretion in section 340-5(3) to grant the release sought: see R v Trebilco; ex parte F S Falkiner& Sons Ltd (1936) 56 CLR 20 at 25 to 27 per Latham CJ; per Dixon J at 31; Evatt and McTiernan JJ at 33; Powell v Evreniades & Ors 89 ATC 4415; 21 FCR 252; (1989) 87 ALR 117 per Hill J at 259 and 262 to 263; Commissioner of Taxation v Milne [2006] FCA 1005 at [17] citing, with approval, Re Filsell v Commissioner of Taxation [2004] AATA 1012 and Vagh v Commissioner of Taxation [2007] AATA 32 at [30].

24. Establishing "serious hardship" will not necessarily lead to an exercise by the Commissioner of his discretion in s 340-5 to release a taxpayer from his or her liability: see Corlette v Mackenzie96 ATC 4502; (1996) 62 FCR 597 and Vagh[2007] AATA 32 at [31]

"Serious hardship"

25. The phrase "serious hardship" is not defined in the TAA for the purposes of s 340-5 of Schedule 1 and should therefore be given its ordinary meaning.

26. In Powell, discussed the meaning of "serious hardship" in the context of former s 265 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), the predecessor to s 340-5 of Schedule 1 to the TAA. Hill J referred (at 89 ATC 4415 at 4420 to 4421) to the relevant type of hardship as requiring financial difficulty of a serious kind:

Clearly, there is a distinction between, on the one hand hardship which is serious, and on the other hand, hardship which may be said to be extreme although it is obvious enough that what will constitute either will depend upon the circumstances of a given case.

27. Further, in Powell, Hill J said (at 89 ATC 4415 at 4421):

It is inappropriate to endeavour in the abstract to state tests of what will and what will not constitute serious hardship within the context of sec. 265 [of the ITAA 1936].

28. Similarly, in Ferguson v Federal Commissioner of Taxation [2004] AATA 779, the Tribunal concluded that "serious hardship" was less severe than extreme financial hardship but was nevertheless hardship of a significant kind in terms of normal community standards

29. In Corlette v Mackenzie (1995) 62 FCR 584 (which was affirmed by the Full Federal Court in Corlette v Mackenzie 96 ATC 4502; (1996) 62 FCR 597) Beazley J said (at 593), also in the context of s 265 of the ITAA 1936, that a finding in relation to whether "serious hardship" existed involved an evaluation of material placed before the Board and the exercise of judgment in the fact finding progress.

30. More specific relevant considerations have been identified in decided cases and Tribunal decisions as follows:

(a)

The financial affairs not only of the taxpayer are relevant, so too are the financial affairs of the other members of the taxpayer's household who are expected to contribute to the household expenditure: Van Grieken v Veilands (1991) 21 ATR 1963 at 1946 and Filsell[2004] AATA 1012 at [21]; and

(b)

The debtor's capacity to pay: see Filsell at [2004] AATA 1012 at [20].

31. It is not disputed that Mrs Fay was entitled to apply under s 340-5 of Schedule 1 to the TAA to be released from her income tax liability (currently totalling approximately $49,780.09).To reiterate, the real issue in this case is whether Mrs Fay would suffer "serious hardship", within the meaning of s 340-5(3) of Schedule 1 to the TAA, if she were required to satisfy that income tax liability.

32. Based on the evidence before the Tribunal (and, in particular, Exhibits A1, A2 and A3), the Tribunal considers that Mrs Fay would not suffer "serious financial hardship" if she were required to pay her income tax liability because:

(i)

She has sufficient assets to meet that income tax liability; and

(ii)

Her expenditure on discretionary items is inconsistent with a person who is suffering "serious hardship", and there is scope for her to reduce this expenditure.

See the authorities in [25] to [29] above.

33. Clear evidence that Mrs Fay would not suffer "serious hardship" if required to pay her income tax liability is provided in Exhibit A3 (at p 2 [4]) where Mrs Fay states:

4. I further say if the Tribunal or a Court of Law orders that the alleged tax liability is one that I am morally and legally obliged to pay; I state that I have the financial capacity to pay it ; and I will comply with any and all such orders. [Emphasis added]

34. Further, the Tribunal is of the view, based on the totality of facts and evidence before it, that Mrs Fay does not demonstrate "serious hardship" within the meaning of that expression (refer to the authorities in [25] to [29] above) because:

•

Mrs Fay's current household income is incomplete;

•

Mrs Fay has not identified whether, and what amounts, her husband and/or her adult children contribute to the household's income;

•

Mrs Fay has not provided further and better particulars of her household's current financial circumstances;

•

If Mrs Fay's husband and/or any adult children were required to contribute towards the household expenses, this would increase the surplus income available to Mrs Fay; and

•

Mrs Fay has significant available assets compared to her liabilities and outgoings.

35. Having found that Mrs Fay would not suffer "serious hardship" if she were required to pay her income tax liability, it is unnecessary for the Tribunal to consider whether it should exercise the discretion in s 340-5(3) of Schedule 1 to the TAA to release Mrs Fay, in whole or in part, from her income tax liability (i.e. under Step 2 of the two-step process discussed above in [23]).