Driscoll v Commissioner of Taxation

[2013] AATA 886

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(Decision by: Senior Member G Lazanas)

Driscoll
v Commissioner of Taxation

Tribunal:

Member:
Senior Member G Lazanas

Subject References:
TAXATION
Application for release from tax debt refused
whether applicant would suffer serious hardship if required to satisfy tax debt
applicant incurred child support costs and significant travel costs to see his children overseas
whether discretion to release debt in part or in full should be exercised
no provision made for tax liabilities
Decision under review affirmed

Legislative References:
Taxation Administration Act 1953 - Schedule 1 s 340-5(1); s 14ZZK(b)

Case References:
Powell v Evreniades - (1989) 21 FCR 252
Federal Commissioner of Taxation v A Taxpayer - (2006) 63 ATR 450
Re Ferguson and Federal Commissioner of Taxation - [2004] AATA 779
Corlette v MacKenzie and Others - (1996) 62 FCR 597

Hearing date: 8 August 2013
Decision date: 13 December 2013

Sydney

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Decision by:
Senior Member G Lazanas

REASONS FOR DECISION

INTRODUCTION

1. Mr Driscoll owes a taxation debt of approximately $87,000. He applied to be released from his releasable tax debts ($35,089.39) (the relevant tax debt) on the basis that he would suffer serious hardship if he were required to pay the relevant tax debt. Mr Driscoll argued that the Commissioner should exercise his discretion to release him in whole or part from paying the relevant tax debt.

2. The main reason for Mr Driscoll's fiscal predicament is that he incurred substantial overseas travel costs over the past decade. His frequent travels overseas have also meant that he is absent from work and unable to undertake income producing activities. The primary purpose for his overseas trips is to see his children. He has also travelled overseas for other purposes, including holidays and work.

3. I was not persuaded that Mr Driscoll would suffer serious hardship if he was required to pay his relevant tax debt as he did not satisfy me of this by reference to his financial information. Also, while I accept his commitment to see his children and to maintain contact with them and the personal difficulties that he would have endured over the past decade, I was not convinced that this was an appropriate case warranting the Commissioner exercising his discretionary power to release him from his relevant tax debt.

THE ISSUES BEFORE THE TRIBUNAL

4. The two issues before the Tribunal are as follows. First, would Mr Driscoll suffer serious hardship if he was required to pay his tax debt? Secondly, if Mr Driscoll would suffer serious hardship, should the Commissioner exercise his discretion to release him, in whole or in part, from that tax liability?

THE LEGISLATIVE FRAMEWORK AND PRINCIPLES

5. Section 340-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides as follows:

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.

(3)

The Commissioner may release you, in whole or in part, from the liability if you are an entity specified in the column headed "Entity" 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.

6. Section 340-10 of Schedule 1 to the TAA sets out the liabilities to which s 340-5 applies. Significantly, the list does not include taxation liabilities due to GST, director's penalty notices, general interest charges and penalties.

7. As evident from the terms of Item 1 of subsection 340-5(3), the Commissioner's decision to provide discretionary relief relevantly rests on an individual taxpayer showing that the payment of the tax would result in the individual taxpayer suffering serious hardship. In Powell v Evreniades (1989) 21 FCR 252 (a case which concerned the operation of the former s 265 of the Income Tax Assessment Act 1936), Hill J observed that there was no legislative definition of the term "serious hardship" nor, His Honour suggested, would one expect to see such a definition. His Honour explained, at 258:

There is no definition in s 265 of what is meant by "serious hardship" nor would one expect there to be. Each of the words in the phrase is an ordinary English word having a well understood meaning. The context in which the words appear makes it clear that the Relief Board is to consider whether the exaction of the full amount of tax would involve the dependants of a deceased taxpayer in financial difficulty which in all the circumstances can be said to be serious. The financial difficulty will be such that the dependants will be in significant need warranting action by the Relief Board to relieve their condition.

8. Furthermore, Hill J suggested at 259 that "[i]it is inappropriate to endeavour in the abstract to state tests of what will and what will not constitute serious hardship ...Clearly there would be severe financial hardship if the dependants of a deceased person were left destitute without any means of support. That is not to say that in any particular case something less than that will not constitute serious hardship."

9. In the case of Federal Commissioner of Taxation v A Taxpayer (2006) 63 ATR 450, Stone J held at 454 that a taxpayer would suffer serious hardship if left "without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements", but also acknowledged that something less than destitution would constitute serious financial hardship. Her Honour further explained at 454 that the Tribunal had previously noted what was needed for proper maintenance and support was a relative question "that could only be answered with regard to the whole of the taxpayer's circumstances."

10. It is clear from the authorities that in considering "serious hardship", the concern is as to the financial difficulties which will be suffered by the taxpayer if the taxpayer were required to pay the tax debt. Also, those financial difficulties have to be serious, in the sense of quite demanding, although not necessarily at the level of destitution.

11. Whether serious hardship is established in a particular case is, moreover, gauged by reference to normal community standards, rather that the individual taxpayer's personal circumstances. This was made clear in Re Ferguson and Federal Commissioner of Taxation [2004] AATA 779 where the Tribunal analysed whether there was "hardship of a significant kind in terms of normal community standards."

12. A conclusion that there is "serious hardship" does not determine the matter because, as Stone J held in Federal Commissioner of Taxation v A Taxpayer, there are two steps, as follows (at 462):

The Tribunal's conclusion as to "serious hardship" does not conclude the matter. The decision to release the respondent from his tax obligations is clearly discretionary.

13. The considerations that the Tribunal has regard to, in relation to the proper exercise of discretionary relief include an examination of the circumstances out of which the hardship arose. In Corlette v MacKenzie and Others (1996) 62 FCR 597 at 598, Wilcox J also observed as follows: -

It would be extremely odd if a taxpayer who was the author of his or her misfortunes, through imprudent or extravagant expenditure, was entitled, as a matter of right to a release of unpaid income tax.

14. The Commissioner has issued a Practice Statement titled PS LA 2011/17: Debt Relief which provides useful guidelines in relation to the application of s 340-5. At paragraph 41 the Commissioner states that the steps by which the ATO evaluates the merits of individual cases, in determining serious hardship, can be addressed in three segments:

•

Income/Outgoing Tests

•

Assets/Liabilities Tests

•

Other Factors

15. These tests are concerned with quantifying the person's capacity to meet their tax liability from their current income. With reference to the Assets/Liabilities tests, PS LA 2011/17 notes at paragraph 45 that the Commissioner is concerned primarily with whether the person's equity in assets is indicative of their capacity to pay. The Commissioner may consider various additional factors besides the financial factors. In relation to the considerations to be taken into account in the exercise of the discretion the Commissioner relevantly states the following:

51. If the ATO decides that payment of a releasable liability will cause serious hardship, it will then move to a second decision making process to decide whether or not to grant a release. If serious hardship is established, the ATO is not bound to grant release (Corlette v. Mackenzie 96 ATC 4502; (1996) 32 ATR 667). Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. Examples of situations in which the ATO may decide against granting release, even though implications of serious hardship may be drawn, are:

•

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

•

where the granting of release would not result in reduction of hardship, such as where the person has other liabilities or creditors to such an extent that release from the tax debt will not relieve hardship

•

where the person has used available funds to discharge debts due to other private creditors in preference to debts due to the ATO

•

where the person has used available funds to discharge debts due to other business creditors where those payments are not considered reasonably necessary to maintain the viability of the business and could be considered as unfair preference payments to the detriment of the ATO

•

where the person, for less than adequate reasons, has failed to pursue debts due to them, or to seek possible contributions from insurers, or persons with joint responsibilities for debts

•

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

•

where the person has a poor compliance history, and

•

where the person is unable to demonstrate that they have made provision for future debts.

THE FACTUAL BACKGROUND AND THE EVIDENCE OF MR DRISCOLL

16. The following findings of fact are based on the T-Documents, the evidence of Mr Driscoll at the hearing and a supplementary bundle of documents tendered by counsel for the Commissioner at the hearing, including recent Business Activity Statements (BASs) lodged by Mr Driscoll for himself and for a company through which Mr Driscoll was also providing consultancy services. Most of the evidence was not in dispute; however, as discussed below, Mr Driscoll's evidence in relation to his financial information was confusing.

17. Mr Driscoll is 47 years of age. He is divorced and has two children, aged 16 and 18 who live with their mother overseas, currently in Spain. Mr Driscoll has visitation rights and must make child support payments to his former wife for the maintenance of their children.

18. Mr Driscoll lives in rental accommodation in a unit at Bondi Beach, and has been at the same place for approximately one and a half years. Previously, he had stayed at hostels and friends' homes for various periods.

19. Mr Driscoll referred to various stressful court proceedings, including those commenced in the Family Court in Australia, as well as in the USA, in relation to obtaining access to his children, however, he advised the Tribunal that there are no current court orders or proceedings in progress. He said that the absence of his children had caused him severe personal hardship, including depression. He was generally "not coping well" with his family situation, and he had also sought counselling from a church in the USA. He also stated that financial hardship arose as a result of his inability to work continuously, in part, because he was travelling so frequently to visit his children overseas.

20. For the past decade, since he separated from his wife, Mr Driscoll has been travelling, on average, four times a year to visit his children overseas (or for related court proceedings), initially in the USA and Guam, and more recently in Spain. He has also travelled overseas for recreation including trips to China, Bali, Paris, London and Fiji. He said that he was sometimes travelling to different cities in Europe as an affordable means of arriving at his desired destination in Spain. Additionally, he sometimes stopped over for holidays at places, such as Bali and Thailand, on his return from overseas. He also travelled for other purposes. For example, at one stage, he had an interest in a direct selling organisation and travelled in 2008 for the organisation's conference in Malaysia.

21. Mr Driscoll is a self-employed chartered accountant and tax agent. His sources of income are predominantly from accounting and consultancy work. In his Application for Release form dated 6 August 2012, he stated that he had fortnightly income (after expenses) of $5,000, and that his income after tax was $2,000 (but see further below). Additionally, Mr Driscoll listed his fortnightly expenditure as $3,195, which included rent of $680; child support expenses of $325; and travel expenses of $1,400. That is to say, he claimed that his total travel related costs to see his children were approximately $36,400 per year.

22. Mr Driscoll's Application for Release form did not disclose any funds that could be applied or any assets that could be sold. While he had a debt owing to him of approximately $55,000, he said he did not expect to be able to collect it. He personally owed $27,500 to family members for funds borrowed for child access related travel expenses. Additionally, a trust that he used to conduct the business (from which he derived a salary) had a debt of about $86,000, representing unpaid income tax withholding, even though Mr Driscoll had claimed PAYG credits in his tax returns for these amounts in the 2009, 2010 and 2011 tax years.

23. In his personal income tax return for the 2012 tax year, Mr Driscoll disclosed gross income of $60,000, with PAYG credits of $13,000 and car expenses of $3,700, indicating that he had about $43,000 available for household expenditure. This equates to approximately $1,665 per fortnight and is consistent with his Application for Release form. However, much of the other information in his form was inconsistent with the other documentation available to the Tribunal. During Mr Driscoll's cross-examination by counsel for the Commissioner it also emerged that there were a number of discrepancies in the information provided on the form. For example, Mr Driscoll conceded that the figure of $5,000 - being the amount left after expenses - was incorrect in the form because, plainly, Mr Driscoll did not have only $2,000 per fortnight after income tax, and because income tax is not imposed at such a high rate.

24. Counsel for the Commissioner tendered the BASs that Mr Driscoll had lodged for services rendered in his personal capacity for the period 1 July 2012 to 30 June 2013, as well as the BASs for a new company through which Mr Driscoll had also rendered services in the period from 1 October 2012 to 30 June 2013. They showed total sales in respect of the period ending 30 June 2013 of approximately $165,000 including GST (referable as to approximately $101,000 for Mr Driscoll and $64,000 for the company). The total non-capital purchases for the same period were approximately $72,000 including GST (referable as to approximately $44,000 for Mr Driscoll and $27,000 for the company). The result, the Commissioner says, is that Mr Driscoll has more in available funds for household expenditure than the $43,000 amount referred to above. Mr Driscoll claimed that there was probably some double counting of the sales figures in the BASs (so that the amount that the Commissioner said was available to him was inflated), but he could not specify to what extent. Mr Driscoll also failed to explain the reason for the difference in the amounts reported in the BASs for the tax periods ended 30 June 2013 compared with the lesser amounts in the prior year. In any event, the Commissioner argued that Mr Driscoll had access to funds sufficient to allow him to discharge his relevant tax debt of $35,089.39 without causing him serious hardship, particularly as the Commissioner was open to a flexible payment arrangement.

25. The cross examination of Mr Driscoll also focused on his travel costs. For example, it emerged from an analysis of his summary of his overseas trips and his bank statements that in or about October and November 2012, he went to visit his children in Spain, and then went with them to Switzerland. He then flew to Las Vegas to see his girlfriend who was appearing in a show at that time, and apparently stayed there for about a week before then going to the church in Los Angeles where he was getting counselling. In response to questions by counsel for the Commissioner about his excessive travel costs, Mr Driscoll stated that he had obligations as a father, and wanted to continue to see his children on a periodic basis, and that he was also following court orders. Mr Driscoll also stated that he needed to preserve his own sanity, which is why he took holidays overseas.

26. His overseas travel costs included the costs of flights, accommodation, car hire, meals and entertainment. Some of the expenses shown in his bank statements, as highlighted by counsel for the Commissioner, were for meals at casinos in Las Vegas and others at cafes and restaurants around Sydney, which appear to be discretionary spending. As noted above, Mr Driscoll has, on average, travelled four times per year to see his children overseas and spent approximately ten weeks per year with them. He also travelled for other purposes not related to seeing his children.

27. Mr Driscoll applied for release from his relevant tax debt on 6 August 2012. The Commissioner refused the application for release on 15 October 2012. Mr Driscoll objected to the Commissioner's release decision on 24 October 2012, and argued that if he had to pay his current tax debt and his historical tax debt he would face financial problems, which is why he wanted to be released from his relevant tax debt.

28. As at 2 August 2013, Mr Driscoll's taxation liability was as follows:

29. Only the amounts in the column with the heading 'Eligible Liability' are releasable tax debts pursuant to s 340-5 and the subject of these proceedings. The balance (approximately $50,000) is not releasable under s 340-5.

WOULD MR DRISCOLL SUFFER SERIOUS HARDSHIP?

30. Mr Driscoll did not satisfy me that he would suffer serious hardship if he were required to pay the relevant tax debt. He did not discharge his burden of proving that the taxation decision concerned, namely, the Commissioner's refusal to provide debt relief, should not have been made or should have been made differently (s 14ZZK(b)(iii) of the TAA) . In the main, Mr Driscoll failed because he gave confusing financial information.

31. Based on the figures in his Application for Release form, his available income would be fully expended in meeting the required child support payments, and in paying for the travel costs associated with visiting his children. He would apparently pass the Commissioner's Income/Outgoings test referred to in PS LA 2011/17 as he would have no capacity to meet his tax liability without detriment to his living standards. He would also apparently pass the Commissioner's Assets/Liabilities test referred to in PS LA 2011/17 given he possesses no assets (or at least none realisable) yet bears some liabilities, including debts owed to family members. However, the BASs which were lodged with the Commissioner, and which were prepared by Mr Driscoll presented a different picture of his financial position.

32. I do not accept that the figures in his Application for Release form were correct and I prefer the information in the recent BASs as being more reliable. In particular, Mr Driscoll did not provide a satisfactory explanation for the differences such that he failed to satisfy me what were his income and expenses. This was unacceptable in circumstances where Mr Driscoll is an accountant and tax agent.

33. Moreover, I concur with the Commissioner's position that the level of Mr Driscoll's expenditure on overseas travel costs is imprudent having regard to his tax liabilities, even taking into account his family commitments. I was not persuaded that he would suffer serious financial hardship if he had to pay the relevant debt of $35,089.39. After all, this amount was less than the amount that Mr Driscoll estimated that he spent on travel related costs for his children per annum. He made a decision to put these travel expenses (including those of his holidays) ahead of paying his tax liabilities. He also made a decision to live in the eastern suburbs of Sydney and to spend money dining out. In the circumstances, and having regard to his family situation, I still do not think it can be said that he would suffer serious financial hardship by reference to normal community standards.

SHOULD THE DISCRETION TO RELEASE MR DRISCOLL BE EXERCISED?

34. As I have concluded that Mr Driscoll did not satisfy the onus of proof in relation to establishing that he would suffer serious hardship, it is unnecessary for me to consider the exercise of the discretion. However, for completeness, I note that if I had found that Mr Driscoll would suffer serious hardship if he had to pay the relevant tax debt, I would have concluded that his case is not an appropriate one to grant discretionary relief. The factors that I considered to be relevant in relation to the exercise of the discretion are as follows:

(a)

Mr Driscoll is an experienced accountant and tax agent and earns fees for providing accounting and consultancy services. It can be reasonably expected that he will continue to earn income in the future. As he is 47 years old, he still has an income earning capacity ahead of him.

(b)

As a tax agent, he would be aware of his obligations to meet his tax liabilities and it is expected that he would organise his financial affairs to do so.

(c)

He is responsible for not meeting his tax liabilities. He also made no effort to enter into a satisfactory instalment arrangement with the Commissioner for the payment of his tax liabilities even though the Commissioner had suggested that one would be available to him.

(d)

Mr Driscoll's tax liabilities include GST and directors penalty notice liabilities which are not releasable debts under s 340-5. These are debts which would still be owed and, in any event, as noted above, would exceed the relevant tax debt.

(e)

Mr Driscoll's tax compliance was also unacceptable. In particular, the non-payment of GST to the Commissioner suggests a cavalier attitude to compliance with tax obligations, particularly for a tax agent. Mr Driscoll provided no satisfactory explanation as to why the GST had not been paid to the Commissioner.

(e)

While he had some serious family issues which he says required frequent travel, the expenses incurred in doing so are, on any reasonable view, excessive. Mr Driscoll did not appear to be concerned about being careful or frugal with his spending, for example, he did not suggest that he had attempted to book more suitable accommodation so that he could cook there, or to catch public transport, to contain some of his expenses. On the contrary, he occasionally indulged in his own overseas holidays and sought special counselling in the USA because, according to his evidence, no-one in Australia could help him.

(f)

Mr Driscoll has access to the necessities of life. He has, for example, been living in rented accommodation in Sydney's eastern suburbs for more than eighteen months, paying $680 rent per fortnight.

CONCLUSION

35. Mr Driscoll has not discharged the onus of proof necessary to establish that he would suffer serious hardship if he were required to pay the relevant tax debt. Even if Mr Driscoll had established that he would suffer serious hardship, this is not a case, in my view, where the discretion should be appropriately exercised to release the relevant tax debt. Accordingly, I affirm the decision under review.