Knnw v Commissioner of Taxation

[2014] AATA 691

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(Decision by: Senior Member F D O'Loughlin)

KNNW
vCommissioner of Taxation

Tribunal:

Member:
Senior Member F D O'Loughlin

Subject References:
Relief from taxation debt
serious hardship
whether there is serious hardship
if there is serious hardship whether discretion to release ought be exercised
decision affirmed

Legislative References:
Taxation Administration Act 1953 (Cth) - Schedule 1, s 340-5

Case References:
Balens and Commissioner of Taxation - [2013] AATA 203
Berryman v Commissioner of Taxation - [2005] AATA 918
Corlette v Mackenzie - (1996) 62 FCR 597
Fay and Commissioner of Taxation - [2013] AATA 504
Milne and the Commissioner of Taxation - [2005] AATA 633
Neimanis and Commissioner of Taxation - [2012] AATA 814
Nicholls v Commissioner of Taxation - [2011] AATA 189
O'Reilly and Commissioner of Taxation - [2009] AATA 235
Powell v Evreniades - (1986) 21 FCR 252
Re Adams, Stephen and Commissioner of Taxation - [2010] AATA 744
Re Bak and Commissioner of Taxation - [2008] AATA 630
Re Filsell and Commissioner of Taxation - [2004] AATA 1012
re Peter Alexander Lipthay and Commissioner of Taxation - [2005] AATA 224
Re Robert Fox and Commissioner of Taxation - [2005] AATA 766
Rollason v Commissioner of Taxation - [2006] AATA 962
The Federal Commissioner of Taxation v Milne - [2006] ATC 4503
Vagh and Commissioner of Taxation - [2007] AATA 32
Van Greieken v Veilands - (1991) 21 ATR 1639
Giris Pty Ltd v Federal Commissioner of Taxation - (1969) 119 CLR 365
Federal Commissioner of Taxation v GM Swift & Ors - 89 ATC 5101
Case U204 - 87 ATC 1138

Hearing date: 21 July, 8 August & 1 September 2014
Decision date: 22 September 2014

Melbourne

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Decision by:
Senior Member F D O'Loughlin

REASONS FOR DECISION

1. The Applicant seeks release from taxation debts pursuant to s 340-5 of Schedule 1 to the Administration Act ^[1] on grounds of serious hardship.

The Applicant's current debt

2. As at 17 July 2014, the Applicant had outstanding tax liabilities of approximately $26,045.22. That debt is the balance owing after an application to be released was allowed in part, to the extent of $70,000.00, and his objection to that decision was disallowed.

3. The Commissioner's summary of the Applicant's existing taxation liabilities as at 17 July 2014 is set out in Table 1 below.

4. No payments or setoffs have been made towards the Applicant's taxation liabilities since 26 February 2014.

5. This overview masks the true cost that the Applicant has borne, and continues to bear, for his participation in what he believed was a legitimate managed investment partnership scheme, a scheme promoted to him by a person with what can be seen to be Australian government accreditation of expertise sufficient for the advice given to be relied on - a registered tax agent. The debt owing is solely attributable to the tax owed when deductions were disallowed and penalties and interest were imposed.

6. The promoters of the schemes advised the Applicant that he was entitled to deductions of $87,044 and $95,293 for the years ended 30 June 2006 and 2007 respectively (the Scheme Deductions). The Scheme Deductions were claimed in accordance with that advice and refunds of $36,378.80 and $37,602.21, a total of $73,981.01, were paid by the Commissioner.

7. Of the $73,981.01, one of the scheme promoters took approximately 86 per cent of the 2006 year refund and approximately 90 per cent of the 2007 year refund and the Applicant was paid the balance each year. The Applicant's tax agent advised the Applicant that for the 2006 year, the shares of the refund expected were $31,546.87 for the promoter and $5,148.13 for the Applicant (a total of $36,695 which was slightly more than the amount that was refunded by the Commissioner). The tax agent also advised that for the 2007 year, the shares would be $29,902.18 for the promoter and $7,700.03 for the Applicant (a total of $37,602.21 which was an accurate forecast of the amount that was later refunded).

8. Had the Applicant not claimed the Scheme Deductions, the refund entitlements that would have been paid to him were $2,731.86 and $2,428.98 for the 2006 and 2007 years respectively. While the Applicant did not enjoy the majority of the enhanced tax refunds caused by the claims for the Scheme Deductions, he did enjoy a part (in excess of $7,000.00) of those enhanced refunds.

9. Another consequence of participation in the schemes was that the Applicant's wife was paid family tax benefits by Centrelink of approximately $17,341 in excess of her entitlement. These amounts were repaid by her. ^[2]

10. The aggregate cash receipt by the Applicant and his family for participating in the investment schemes was approximately $25,000 (the $17,341 and the in excess of $7,000 tax refunds received by the Applicant beyond his entitlement).

11. The Commissioner subsequently amended the Applicant's 2006 and 2007 year assessments and imposed penalty and shortfall interest charges. The tax shortfalls were $33,646.94 and $35,173.23 for the 2006 and 2007 years respectively.

12. The promoters of the scheme are no longer around and are unable to be pursued by the Applicant. The Applicant has assisted authorities in pursuing the promoters within his abilities to do so.

13. Tables 2 and 3 below show how the 17 July 2014 balance owing has been arrived at.

14. In the period to December 2012, GIC of $23,657.66 had accrued and that was released as a part of the $70,000.00 release.

15. From the foregoing it is apparent that of approximately $25,000 in cash inappropriately enjoyed as a result of participation in the investment schemes, the Applicant and his family have paid back to government agencies approximately $35,261 and continue to have $26,045.22 in liabilities caused by those schemes and the penalties and interest associated with them.

16. This case is a not atypical example of the scourge of the phenomenon of mass marketed tax avoidance schemes that has been observed in Australia in the last 20 years.

17. In the present application, however, the imposition of penalty, SIC and GIC are not subject to review. They are to be taken as admitted liabilities and the principles applicable to a release that is permitted by s 340-5 of Schedule 1 to the Administration Act need to be considered.

The law

18. Subsection 340-5(3) of Schedule 1 to the Administration Act allows the Commissioner to release a taxpayer from all or part of some tax liabilities if the taxpayer would suffer serious hardship if he or she was required to satisfy those liabilities.

19. The term serious hardship is not defined in the Administration Act. The term has consistently been held to mean serious financial hardship. ^[3] In Powell v Evreniades, Hill J said:

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. ^[4]

20. The principles underlying former s 265 of the 1936 Assessment Act ^[5] apply to the proper consideration of s 340-5(3) of Schedule 1 to the Administration Act.

21. A household test is required when evaluating whether serious financial hardship exists. An applicant's financial affairs together with those of other members of his or her household and any family entities need to be considered. ^[6]

22. Hardship can be equated with an inability to provide for the necessities of life if relief were not to be granted. ^[7] However, for relief to be appropriate it is necessary for the circumstance to be more than hardship or inconvenience. ^[8]

23. Tests considered in earlier Tribunal decisions include:

(a)

whether there is financial hardship of a significant kind in terms of normal community standards; ^[9]

(b)

whether the position appears hopeless; ^[10]

(c)

whether there is scope for a person to reorganise affairs, consolidate debt and adjust lifestyle so that obligations can be met without serious hardship; ^[11] and

(d)

the assets and income of a spouse in an appropriate case ^[12] which this case is because the Applicant and his wife reside together, and are together key parties in a family unit.

24. Satisfying the serious hardship condition is only the first step in the present process. On satisfying that condition, it is then necessary to consider whether the discretion to release ought be exercised. That there is an independent discretion, the exercise of which needs to be considered after the threshold condition of serious hardship is satisfied, was made clear by Wilcox J in Corlette v Mackenzie in the following terms:

In my opinion, neither of the points advanced on behalf of the appellants has any merit. In relation to the first point, her Honour discussed at some length the question whether the power conferred by s 269 was mandatory. She reviewed the relevant authorities and I would respectfully agree with, and adopt, what she said. In particular, I am of the opinion that her Honour was correct in treating the decision in R v Trebilco; ex parte F.S. Faulkner and Sons Limited as an authority relevant to s 265. That case turned on s 66 of the Land Tax Assessment Act 1910 (Cth). The section was couched in language very similar to s 265, although the circumstances in which release was available were more tightly circumscribed. Nonetheless, the High Court held that, even if the circumstances were established, the Board established under that Act for consideration of release applications had a discretion as to whether or not it should exercise the power. ^[13] (Citations omitted)

25. One circumstance in which it is not appropriate to exercise the discretion and grant relief, is where a release will not relieve serious hardship and will only bring about an advantage to other creditors in an insolvency. ^[14] Other circumstances in which it is not appropriate to exercise the discretion are where an applicant:

(a)

has given preferential treatment to other creditors and/or has used available money on discretionary personal expenditure in lieu of attempting to make some payment against tax debts; ^[15]

(b)

has a poor compliance history;

(c)

is unable to demonstrate that he or she has made provision for future debts;

(d)

has not optimally structured his or her financial affairs and granting relief would not necessarily result in improving overall financial positions; and

(e)

has been a substantial contributor to his or her own financial difficulties. ^[16]

26. In light of the circumstances that have led to the Applicant's position outlined above, it should be noted that the s 340-5(3) relieving discretion takes a different structure to other discretions that have been used in Australian taxing legislation that focus on reasonableness and circumstances such as s 99A(2) of the 1936 Assessment Act considered in Giris Pty. Ltd. v. F.C. of T. ^[17] and s 5(4) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) considered in F.C. of T. v. G.M. Swift & Ors. ^[18] In the present case there is a particular need to focus on the existence of serious hardship, and if it exists then consider exercise of a discretion to relieve it. Wider concepts of reasonableness are not an express part of the present relieving statutory framework and can only apply within the serious hardship context which is a part of that framework.

The Applicant's circumstances

27. It is against the foregoing principles that the Applicant's circumstances need to be evaluated. And it is circumstances directed to capacity to pay and serious financial hardship that need to be addressed, not what might be seen as the unfortunate circumstances that have led to the Applicant's current predicament.

The Applicant's family situation

28. The Applicant is a middle aged married man. He and his wife have four children aged between 11 and 18 who are all students. The family of six live in a four bedroom house in a modest middle class suburb of an Australian capital city located close to schools and transport facilities that is owned by the Applicant's spouse and which secures various loan facilities by way of mortgage.

The Applicant's financial situation

29. At the Commissioner's expense, the Applicant sought independent advice concerning his relief application about that decision from M+K Lawyers. In their advice M+K Lawyers reviewed the Applicant's combined household income at $4,949 net per fortnight and household expenditure at $4,753.05 giving a fortnightly surplus of $196 and asserted that there were grounds for relief. The Applicant attached that advice to his application for review of the Respondent's objection decision in an application to the Tribunal dated 26 September 2013. That advice was not based on the most recent details of the Applicant's family's income and expenditure, nor did it have the benefit of knowledge of all of the reductions in debts owed to other creditors during 2014.

The Applicant and his family's income

30. The Applicant and his family have five sources of income: the Applicant's employment when he has it, the Applicant's wife's employment which is currently 0.5 full time equivalent employment with a major charitable public institution, the Applicant's elder two children's employment with a major take away food franchise outlet and the business fortunes of the Applicant's discretionary family trust.

31. In 2009, the Applicant caused a discretionary family trust to be created with a view to earning money through various means. It was not successful in generating income that would support a family and the Applicant remained in his full time employment in a skilled employment role until March 2014. In April 2014, the Applicant terminated his employment, was paid out his leave and bonus entitlements, and began a consultancy business trading through his family trust structure.

32. In the three months to March 2014, the Applicant earned approximately $23,367.00 after tax base salary ^[19] and after tax bonuses, annual and long service leave payouts totalling $14,426. ^[20]

33. In the period of April and May 2014, and as a consequence of the work of the Applicant, the Applicant's family trust earned $36,900 or $33,545.45 after GST. If this amount were to be received regularly, the after income tax fortnightly equivalent, assuming no family related tax reductions, would be $5,102.77.

34. The Applicant's wife has an after tax equivalent wage (having regard to the fact that she receives cash and fringe benefits package typical of employees of institutions like her employer) of approximately $1,225.00 and the Applicant's children earn between $200 and $400 per fortnight as the extent of work available varies.

35. The Applicant's wife's employment is not secure. She works for a large public institution and not on a full time basis. Her hours have been reduced, not of her choosing, to approximately 50 per cent of normal full time workload.

36. Since June 2014 the Applicant has not secured any work and currently his family earnings are between approximately $1,425 and $1,625 per fortnight represented by his wife and his elder children's casual earnings. An average of $1,525.00 per fortnight is adopted for the purposes of the projections required for this decision.

37. The Applicant's evidence is that he expects that he will be able to secure ongoing consulting earnings in the order of what the family trust earned in April and May 2014.

38. Two alternative assumptions can be made about the family disposable income going forward for the purposes of this decision: that those earnings are to be recognised as $1,525 ^[21] per fortnight or $6,627.00 ^[22] per fortnight.

The Applicant and his family's expenditures

39. The Applicant has provided information and spreadsheets which record his household's fortnightly expenses over the period January 2014 to March 2014 ^[23] and adjustments to those amounts to reflect what the Applicant believes is an appropriate estimate of his family's projected commitments and needs. Table 4 below is that projection after adjustments.

40. The information provided concerning expenditure that supports the Table 4 projections shows that there is a degree of what appears to be discretionary expenditure which is such that projected needs could be reduced by approximately $400 per fortnight, with some inconvenience and/or possibly hardship, but not serious hardship impact. Tables 5 and 6 below are incidents of these discretionary expenditures.

41. Included in the foregoing expenditures were the costs of:

(a)

the Applicant's wife's participation in a religious group retreat/camp away from home;

(b)

the Applicant's wife's salary sacrifice facility that needs to be used to meet the cost of catering and/or restaurants and which is so used. This facility is an optional facility and the Applicant's wife could, as an alternate, enjoy higher amounts of cash salary; and

(c)

two of the Applicant's children participating in a youth camp in Queensland run by a religious group with whom the Applicant is associated.

42. Apart from the foregoing, the evidence of the Applicant's family's expenditures after he was aware of his tax debts also reveals that:

(a)

the Applicant and his family have enjoyed annual holidays at places away from the capital city in which they live at accommodation rented with other families;

(b)

one of the Applicant's children participated in two competitions involving the same sport each of which are at cost to the Applicant's household income;

(c)

one of the Applicant's children has music lessons at a cost to the household income;

(d)

the Applicant and/or his wife regularly purchase, admittedly modest, amounts of modestly priced alcohol for personal consumption;

(e)

the Applicant and/or his wife contribute to the cost of gifts for family and/or friends;

(f)

the Applicant and the family trust which he controls have between them two cars which are available for family use. The Applicant's household purchased the second car for approximately $4,500.00 and spent approximately $3,500.00 in repairs to it shortly thereafter;

(g)

the Applicant and/or his wife met the cost of an 18th birthday celebration (albeit not extravagant) in 2013;

(h)

one of the Applicant's children travelled interstate in 2013 to visit a friend at household expense; and

(i)

in 2013, the Applicant and/or his wife purchased a replacement television for an for approximately $3,200.

43. The Applicant contends that all of his family's expenditures are not discretionary by ordinary community standards.

44. With the exception of the television and possibly the second car, all of these expenditures are probably best characterised as discretionary but not extravagant expenditures of a family living a comfortable middle class life style in a comfortable middle class suburb of an Australian capital city.

45. The television is probably best characterised as something above 'not extravagant' as there are many models of television receivers that could be acquired for much less than $3,200.

46. A second car, even one that costs $8,000, is something that is also best characterised as a little above 'not extravagant'.

47. There are probably many in the community who cannot afford a lifestyle that includes spending money on the items listed above who do not receive government assistance and concessions.

48. Without serious hardship, the evidence reveals that the Applicant and his family need approximately $5,560.00 per fortnight.

The Applicant and his family's net income flow position

49. From the financial information provided, and based on a continuation of the earnings enjoyed by the Applicant's family trust, the Applicant's household would be in a net surplus position of approximately $1,067.00 per fortnight calculated as follows:

50. Based on the Applicant's current income position, the Applicant's projected deficit position per fortnight is as follows:

51. It is not clear, based on the information available, how the household will meet the ongoing deficit between its income and outgoings if the Applicant's income continues to be NIL. The only apparent source of funds to service the deficiency is through facilities available and banks.

The Applicant and his family's assets and liabilities

52. The Applicant has credit card and bank facilities. Part of the bank facilities, a $100,000.00 line of credit, has been portioned off and used to finance the operations of his family trust which has purchased a car and endeavoured to earn income in various pursuits, and which currently provides consulting services which are undertaken by the Applicant.

53. The amounts earned by the family trust were paid directly to the family trust portion of the bank facilities available and reduced the amount owing accordingly. The balance owing on the family trust portion of the facility reduced from $96,000.00 at 27 March 2014 to $64,392.96 at 27 June 2014. During this period the Applicant and his family lived off the termination payment he received when he ceased employment.

54. Based on the information provided by the Applicant, the Applicant's assets and liabilities are as follows:

55. On the information available, the Applicant has sufficient assets to meet his eligible liabilities albeit the Commissioner does not ask for people to lose their equity in modest homes. The Applicant's home is a modest home for a family of six in a modest suburb of a state capital city. There are insufficient other liquid assets to meet the debt owed. It should be stressed that this decision does not call upon the Applicant to sell the family home. There are other matters that he can explore with the Commissioner.

56. In relation to the Applicant's assets and liabilities, the evidence discloses that that the acquisition of unnecessary assets and reduction of amounts owed to creditors has been put ahead of meeting tax liabilities.

(a)

The Applicant's household purchased a second car for $4,500 ^[38] and its subsequent repairs of approximately $3,500.

(b)

The Applicant's household purchased a replacement television for approximately $3,200.00.

(c)

The Applicant's trust line of credit has been reduced by $31,607.04 between 27 March 2014 and 27 June 2014 as noted above.

Should any discretion be exercised?

57. The Applicant's projection as to earnings cannot be ignored. Accordingly the present matter needs to be addressed on the alternative hypotheses:

(a)

first, assuming that the Applicant's current family income, and family deficit will continue and whether relief ought be granted in those circumstances; and

(b)

second, the family earnings are restored to April and May 2014 levels which produce surpluses (excluding tax liabilities accruing) and whether relief ought be granted in those circumstances.

58. Dealing with the first hypothesis, the Applicant's deficit would continue to be significant even if all discretionary expenditure is ignored - and the Applicant and his family would undoubtedly be regarded as suffering serious hardship. The law in these circumstances is that it is not appropriate to grant relief because it would not relieve the serious financial hardship. Such a refusal would mean that the Commissioner (and therefore the community) would not be deprived of participating in any distribution of a bankrupt estate.

59. In the alternative, which cannot be ignored, a surplus is projected which would clear the debt within two years. In these circumstances it is not appropriate to exercise a discretion as the serious hardship condition has not been established.

60. Even if serious hardship could be shown, assuming the surplus earnings projection, this is a case where attention to reduction of other liabilities and acquisition of unnecessary assets, in total exceeding the outstanding balance, can be seen. In addition there is discretionary expenditure. There are probably many in the community who cannot afford a lifestyle that includes spending money on these items or in these ways who do not receive government assistance and concessions. Such circumstances weigh heavily against exercise of any discretion.

61. A release of a tax debt is a release of an obligation to the community where insistence on payment of the debt would cause serious hardship by ordinary community standards.

62. Where there has been a reduction in other liabilities commensurate with the tax debt owed, maintenance of a lifestyle that can be seen as enjoying the comforts of middle class Australian life with a degree of discretionary, albeit not all extravagant, expenditure, the correct and preferable conclusion is that a relieving discretion ought not be exercised.