Rob Steele v Commissioner of Taxation

[2005] AATA 1214

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(Decision by: Mr I R Way, Member)

Rob Steele v
Commissioner of Taxation

Tribunal:

Member:
Mr I R Way, Member

Subject References:
Taxation
review of application for release from payment of tax liability
assessment of Applicant's capacity to pay tax debt
whether serious hardship exists
consideration of whether Applicant should be released from his tax liability
decision under review affirmed

Legislative References:
Taxation Administration Act 1953 - 340-5; 340-10

Case References:
Powell v Evreniades & Ors (1989) - 87 ALR 117
Van Griekan v Veiland & Ors (1991) - 21 ATR 1639
Re Ferguson and Commissioner of Taxation - [2004] AATA 779
Re Jeffrey Filsell and Commissioner of Taxation - [2004] AATA 1012
Re Spicer and Commissioner of Taxation - [2004] AATA 960
Re Perrott and Commissioner of Taxation - [2004] AATA 1372

Decision date: 9 December 2005

Sydney

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Decision by:
Mr I R Way, Member

BACKGROUND

1. In February 2004 the Applicant in this matter, Mr Rob Steele, applied to the Commissioner of Taxation for release from payment of his tax liability of $34,706.79, on the grounds of serious hardship. Mr Steele's tax liability arises from income tax for the financial years ending 30 June 1992, 1993 and 1996, penalties for late lodgement and late payment, and interest charges. In April 2004 the Commissioner refused release and subsequently Mr Steele objected to this refusal. On 20 January 2005, Mr Steele applied to this Tribunal for review of the Commissioner's decision.

2. In assessing Mr Steele's income tax return for the financial year ending 30 June 2004, the Commissioner determined that Mr Steele was due a tax refund of $3,728, however, this amount has been withheld by the Commissioner and offset against his total tax liability, such that at the date of hearing of this matter Mr Steele's total tax liability was $30,978.79.

LEGISLATIVE AND POLICY FRAMEWORK

3. This matter is to be determined within the provisions of the Taxation Administration Act 1953 (the "Act").

4. Section 340-5(1) of Schedule 1 of the Act provides for a person to apply to the Commissioner of Taxation to release the person, in whole or in part, from a taxation liability if section 340-10 applies to the liability. Section 340-10(2) sets out a list of items including liability for income tax, penalties, interest and general interest charge. Section 340-5(3) states that the Commissioner may release a person, in whole or in part, from the liability if the person would suffer " serious hardship " if the person were required to satisfy the liability. The onus is on the Applicant to provide sufficient information to satisfy the Commissioner of such hardship.

5. " Serious hardship " is not defined in the Act. However, the meaning of this term has been comprehensively addressed by the Tribunal and the Federal Court in numerous cases and in this respect the Respondent referred the Tribunal to a number of cases, including: Powell v Evreniades & Ors (1989) 87 ALR 117 , Van Griekan v Veiland & Ors (1991) 21 ATR 1639 , Re Ferguson and Commissioner of Taxation [2004] AATA 779, Re Jeffrey Filsell and Commissioner of Taxation [2004] AATA 1012, Re Spicer and Commissioner of Taxation [2004] AATA 960 and Re Perrott and Commissioner of Taxation [2004] AATA 1372.

6. Release from payment of tax on the grounds of serious hardship is also the subject of a 1987 tax ruling (Number IT 2440) and covered in chapter 24 of the Australian Taxation Office ("ATO") Receivables Policy.

7. The Tribunal has considered the various cases and authorities referred to above, and is satisfied that the guidelines in chapter 24 of the ATO Receivables Policy provide appropriate and adequate guidance to decision-makers in terms of the kind of considerations which should apply in determining whether a person is suffering " serious hardship ".

8. The relevant aspects of the ATO guidelines are as follows:

"24.4 SERIOUS HARDSHIP

24.4.1 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 be seen 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.

24.4.2 On the other hand, elements of hardship may be regarded as marginal or minor rather than serious if the consequences of payment of tax are seen, for example, as limitation of social activities or entertainment, or loss of access to goods or services of a more luxurious nature or standard.

24.4.3 As a first step in considering an application for release, the Board must determine the person or persons to be included in its assessment of hardship factors. Although hardship will be largely personal to the debtor, or the dependant of a deceased debtor, it is not limited to the immediate state of that person. Rather, the prospect of inability to provide food, clothing, etc., for family members or others for whom the person has responsibility will also constitute a hardship faced by the person.

24.4.4 ...

24.4.5 Subject to the general considerations above, the steps by which the Board evaluates the merits of individual cases can be addressed in three segments:-

•

Income/Outgoings Tests

•

Assets/Liabilities Tests

•

Other Factors

Income/Outgoings Tests

24.4.6 The tests under this heading are concerned with quantifying the debtor's capacity to meet the tax liability from his or her current income. The tests in sequence are:-

(i)

what is the debtor's capacity to pay, as measured by the income and outgoings stated in the application or supporting documents, i.e., what net income remains after deducting total outgoings from total income?

(ii)

does the Board accept that the income and outgoings stated are accurate and that the outgoings are necessary, or is there scope to increase the net income available to meet the tax debt without serious detriment to living standards?

(iii)

if there is a margin by which available income exceeds reasonable outgoings, is it sufficient to allow the liability to be met within an acceptable time scale?

24.4.7 ...

24.4.8 ...

Assets/Liabilities Tests

24.4.9 The tests within this segment are concerned primarily with determining whether the debtor's store of assets, or equity in assets, is indicative of capacity to pay the tax debt. As a secondary consideration, the Board may also need to address whether the acquisition of assets has unreasonably been put ahead of meeting tax liabilities.

24.4.10 There are several types of assets which the Board has generally regarded as normal and reasonable possessions, and which would not be expected to be surrendered or sold to meet revenue debts. Subject to the proviso that values are modest rather than extravagant, those assets include:

•

ownership of, or equity in, a residential property which is the debtor's home

•

motor vehicle

•

furniture and household goods

•

tools of trade

•

cash on hand or bank balance, etc., sufficient to meet outgoings for necessities or other reasonable expenditures, e.g., funds put aside by aged persons to cover funeral expenses.

24.4.11 ....

24.4.12 ...

24.4.13 ..."

9. Clearly the Commissioner's power to release a person from a tax liability is discretionary and even where it can be said that there is some serious hardship, there may be other relevant considerations to take into account in deciding whether or not discretion should be exercised.

10. Such other considerations are also set out in the ATO guidelines as follows:

"Other Factors

24.4.14 ...

(i)

...

(ii)

... Examples of situations in which the Board may decide against granting release, even though implications of serious hardship may be drawn, are:-

(a)

where it appears that the debtor has, questionably or otherwise, disposed of funds or assets without making proper provision to meet tax liabilities;

(b)

where the granting of release would not result in reduction of hardship, such as where there is current or prospective bankruptcy action, so that granting of release would do no more than increase the amount, if any, available for distribution to other creditors;

(c)

where the debtor, for less than adequate reasons, has failed to pursue debts due to him or her, or to seek possible contributions from insurers, persons with joint responsibilities for debts, etc.;

(d)

where serious hardship is associated with a single event or short term outcome, such as might be encountered in the more speculative or seasonal business undertakings, the effects of which can be expected to abate within a short term, i.e., on the longer view any hardship will be less than serious; and

(e)

where the debtor has not lodged current returns (it could well be that a current assessment may result in a refund that can reduce the debt; alternatively, the current assessment may result in an additional debt that the Board should consider for release)."

ISSUES

11. The questions before the Tribunal are as follows:

•

What is the Applicant's capacity to meet his tax liability from his current income?

•

What is the Applicant's capacity to pay his tax debt, as indicated by his store of assets, or equity in assets?

•

If the Applicant suffers serious hardship, are there other factors that should be considered in determining whether to exercise the discretion to release the Applicant from his tax liability?

•

Taking all relevant matters into consideration, should the Applicant be released from tax liability?

APPLICANT'S EVIDENCE AND SUBMISSIONS

12. Mr Steele was self-represented at the hearing. He was born in 1944 and from an early age performed as an actor in the theatre, subsequently broadening his repertoire to work in film, television and radio. He has an impressive list of credits in theatre, television and film and more recently has been engaged in work as a director and producer.

13. Mr Steele moved from Sydney to Binalong (near Yass) in 1993 where he bought a block of land and refurbished a modest dwelling on this property. He lived in Binalong until early in 2004 when he moved to Woonona on the South Coast of New South Wales (near Bulli) because of health reasons. He sold his property in Binalong for $140,000 and now rents a one-bedroom " shoebox " for $140 a week. He receives $50 a week in rent assistance and in addition is in receipt of New Start Allowance of approximately of $190 a week.

14. Mr Steele now lives alone. He was married in 1984 and divorced some six to seven years later with no children from that marriage. He subsequently formed a relationship with a woman (now separated). He has two children from this relationship, a girl aged 12 and a boy aged nine. He rarely sees his former partner or his children (because of costs of travel) and he said he contributes $10 a week towards the maintenance of the children.

15. Mr Steele told the Tribunal that because of his age and because of limited funds in his industry, it is difficult for him to gain employment, however, he is currently teaching a Certificate Two course in radio broadcast locally at Studio 313, earning approximately $220 a week. He said this course runs for nine weeks and will finish shortly, however, he is hopeful of being engaged by Studio 313 next year for further teaching duties. In respect of his health, Mr Steele described his main problem as a vascular condition affecting his legs for which he has been receiving treatment for the past 12 years, this being the reason for his recent move to a cooler climate on the South Coast. He said he also had been diagnosed recently with gout in both of his knees. He said these health issues were not a concern in respect of his ability to work in the industry in which he seeks employment and he displayed a very positive attitude towards seeking some form of suitable employment next year. Mr Steele has a Certificate 4 in Workplace Training and Assessment as well as a Certificate 4 in Film and is currently completing a Certificate 2 IT course. He expressed confidence in being able to gain employment based on his combined qualifications in training, assessment and IT. He told the Tribunal that but for his lack of IT qualification he recently would have been successful in his application for a job in this field, paying approximately $900 a week.

16. In respect of assets, Mr Steele said he has various pieces of equipment that are necessary for work in his industry and which he values at approximately $10,000. He has a four year old Toyota car that he bought new four years ago on hire purchase and for which he makes hire purchase payments of $420 a month (this agreement has one year to run). He told the Tribunal he accessed his superannuation some years ago and currently only has $5,000 available, which he views as a contingency amount. Apart from these assets and basic items of clothing, furniture and furnishings he has no other assets.

17. In respect of debts he said he currently has no credit cards, no credit card debt and only owes one person an amount of $9,000. He described this person as a very good friend who is not pressing for repayment. He said he had no other debts or liabilities. The Tribunal notes the Respondent's concern that the Applicant has not provided any documentation to support his evidence that he is free of any debt due to credit providers.

18. The Respondent drew the Tribunal's attention to the request to the Applicant to submit an updated application for release and his failure to comply with this request. Mr Steele told the Tribunal he had completed a new application but had left it at home when he came to the hearing. A further form was provided to Mr Steele at the hearing, which he duly completely (Exhibit R1). The Tribunal notes the details in this form are consistent with Mr Steele's evidence, that his expenditure estimate is $630 fortnightly (including $210 for his car hire purchase) and that his income (including his current part-time wage) balances this expenditure.

19. It was Mr Steele's evidence that he bought a new car (Toyota) on hire purchase four years ago, for just under $20,000 and that he had one further year of hire purchase payments of $420 per month to pay. When asked why he saw fit to purchase a new vehicle in 2000 when he knew he owed money to the ATO, Mr Steele said he needed a reliable car to get from his home in Binalong to Sydney (for work) and that he thought a new car under warranty was a better deal than having to pay to maintain an older, less reliable vehicle.

20. In answer to questions about the proceeds of the sale of his property at Binalong in 2004, Mr Steele told the Tribunal the gross proceeds of the sale were $140,000 and of this $75,000 went to the bank to discharge his mortgage. He said the balance of $65,000 was used to pay legal fees, outstanding rates and debts he owed to various friends. He said that after meeting these costs he thought he was left with some $20,000. However, when pressed to be more precise about how the $65,000 was distributed, Mr Steele was unable to give accurate details or provide any records to show how the money was spent. It was Mr Steele's evidence that he made no attempt to pay any money to the ATO at this stage.

21. The Tribunal notes that Mr Steele's debts to friends and his agent (T4/34) amount to $18,800 and this amount along with his estimate of legal fees and rates of $4,400 totals $23,200. Allowing for other small debts and the $5,500 Mr Steele paid for his Certificate 4 Film course, this still leaves some $35,000 unaccounted for.

22. Mr Steele told the Tribunal that he was a poor record keeper, that he was confused over the whole matter of his tax liabilities and that his confusion and difficulties in understanding his tax position went back to 1987/88. He said he had been unable to pay for legal advice and that his circumstances were not helped by a lack of clear notification of his tax position from the ATO. He told the Tribunal that he had paid the ATO $10,000 in 1993 when he sold his home in Sydney and that he had also made subsequent payments to the ATO. The Tribunal notes that there are no records of these payments and that Mr Steele was unable to provide any documentation of such payments, nor was he able to quantify the payments he claimed he made after the initial payment of $10,000. Mr Steele agreed he had a poor tax compliance record over the past 10 years or so. He said that he had complied as a tax payer for 40 years but that he had struck a bad patch over recent years. The Tribunal notes that the relevant tax assessments were issued to Mr Steele on 9 September 1993, 14 February 1994 and 17 June 1997.

23. Mr Steele submitted that his financial circumstances were very poor and that not only was he unable to purchase all the necessities of living but there was no way he could pay his tax debt over the next two or three years. He said he could not afford to live the way he was, and his car would have to go next month if " something doesn't happen " and he was upset that he could not give his children more money.

RESPONDENT'S SUBMISSIONS

24. Mr Chow, for the Respondent, submitted that Mr Steele had not provided sufficient substantiation to prove his assertions that he is suffering from " serious hardship ". It was contended that Mr Steele was managing to provide the basic necessities of living, that his job prospects were such that he would be able to meet his tax debt and even if satisfaction of his tax liabilities would cause serious hardship there were other factors which would preclude granting release from these liabilities. In this respect, Mr Chow submitted that Mr Steele put the acquisition of assets and payment of other creditors unreasonably ahead of meeting his tax liabilities. It was also submitted that Mr Steele has known of his tax liabilities over a lengthy period of some 10 years, that he has a poor compliance history and that he has avoided opportunities that existed during this period to direct monies toward the discharge of his tax liabilities.

25. It was submitted that the Tribunal should affirm the decision under review.

CONSIDERATION

26. The Tribunal accepts that Mr Steele's current tax liability is $30,978.79 and the first issue before the Tribunal is whether Mr Steele has the capacity to meet this liability from his current income.

27. The details provided by Mr Steele at the hearing in respect of his current income summary and expenditure summary, clearly indicate that he does not have any net income remaining after deducting total outgoings from the total income.

28. The Tribunal notes the Respondent's concern about the lack of details from Mr Steele about his financial circumstances, however, the Tribunal is satisfied that the expenditure and income details given by Mr Steele at the hearing are reasonably accurate.

29. The question then is whether all of the outgoings are necessary. The only issue here is Mr Steele's hire purchase repayments of $420 per month for his Toyota car (the Tribunal accepts the other expenditures are reasonable).

30. The ATO policy clearly states a person would not be expected to surrender or sell a motor vehicle to meet revenue debts subject to the proviso that the values are modest rather than extravagant. This raises the question as to whether Mr Steele should have entered into a hire purchase agreement to buy a new car, valued at approximately $20,000 at a time when he knew he had a large tax liability. In respect of assessing whether there is scope now to increase Mr Steele's income by disposing of his car, the Tribunal is of the view that while a four-year old Toyota can only be viewed as a modest asset, disposal of this asset would significantly improve his financial position. And indeed on his own evidence, Mr Steele has in effect agreed that his car must go if his financial circumstances do not improve.

31. The next question then is whether there is scope for Mr Steele to increase his net available income by other means.

32. The Tribunal was impressed by Mr Steele's experience and skills in theatre, film and television and his successful efforts to improve his qualifications and skills in respect of training and assessment. The Tribunal noted the Respondent's concern about the lack of medical reports about the Applicant's health, however, the Tribunal found the Applicant to be a credible witness and has no reason to not accept his evidence that he suffers (and has suffered for a long time) from a vascular condition in his legs and more recently gout in both knees. However, the Applicant has moved to a cooler climate on the South Coast of New South Wales because of his health issues and on his own evidence, his medical condition only imposes narrow limitations on his ability to work and he is not only keen to work but is quite confident that he will gain employment in the New Year. The Tribunal also notes that Mr Steele has moved to an area in which there is the prospect of nearby work and that in particular, he has a very good relationship with his current employer and hopes this will lead to continuing employment.

33. This then leaves the question as to whether there is a margin by which Mr Steele's income will exceed his reasonable outgoings, sufficient to meet his tax liability. In answering this question, the Tribunal is mindful that Mr Steele's current tax liability is quite large, namely in the order of $30,000. Accepting the ATO's general position of a maximum of a three-year payment span, and putting aside any further accruing interest charges, Mr Steele will need to find some $10,000 per annum or approximately $200 per week.

34. Taking into account what the Tribunal has said above, the Tribunal is of the view that it is more likely than not that Mr Steele will gain employment next year at a level of remuneration, which coupled with the possibility of ceasing his car hire purchase payments, will enable him to meet his tax liability.

35. Based on an assessment of the circumstances of Mr Steele's income and outgoing, the Tribunal is satisfied that Mr Steele has the capacity to meet his tax liability over a three-year payment span without suffering serious hardship.

36. For the sake of completeness, the Tribunal has considered Mr Steele's circumstances in respect of assets and liabilities. The Tribunal notes the Respondent's concern about the lack of substantiation from credit providers, that Mr Steele has no credit liabilities. However, as already indicated, the Tribunal has found Mr Steele to be a credible witness and the Tribunal accepts his evidence that he has no assets of any significance and the liabilities he has are not being pressed to the point of being relevant to the Tribunal's consideration of his circumstances. The Tribunal is satisfied that the Applicant has no capacity to pay his tax debt, based on his store of assets or equity in assets.

37. In respect of other factors, the only issue is whether Mr Steele has questionably or otherwise disposed of funds or assets without making proper provision to meet his tax liabilities.

38. On his own evidence, Mr Steele is a poor record keeper, is somewhat confused when it comes to understanding tax matters and over the past ten years has a poor tax compliance record.

39. The difficulty for Mr Steele in this respect is that he disposed of his property in Binalong in 2004, at a time when he was well aware of his tax liability and, on the evidence before the Tribunal, made no attempt to meet this liability, even though after paying out his mortgage he had some $65,000 available to meet his liabilities. The Tribunal is concerned that Mr Steele was unable to satisfactorily explain where this money went and why he had not seen fit to make arrangements to meet his tax liability when he had sufficient funds at the time to do this. The Tribunal's concern is heightened by the fact that Mr Steele some few years earlier decided to enter a hire purchase agreement, at $420 per month over five years to purchase a new Toyota vehicle. While this is not a luxury vehicle, it represents a significant financial commitment at a time when Mr Steele was aware of his tax liability and the Tribunal does not accept his explanation that it was more appropriate to purchase a new vehicle because of the benefits of a new vehicle warranty and low maintenance cost compared to a second-hand less expensive vehicle.

40. The Tribunal is mindful of the fact that ordinary tax payers are normally obliged to pay their tax liabilities in full and the Tribunal finds that Mr Steele's failure to use some of the funds he had available in 2004 to meet his tax liabilities cannot be seen as the action of a reasonable, responsible tax payer. On this ground alone, the Tribunal is satisfied that Mr Steele's tax liability must stand.

41. For the reasons given above, the Tribunal is satisfied that Mr Steele should not be released from payment of his tax liability and the Tribunal affirms the decision under review.