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Submission No. 53 Back to full list of submissions
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Submission To The Review Of Business Taxation:

Reform Of Payment Of Tax Pending Review Or Appeal

  1. Outline

This submission concerns the payment of income tax pending an appeal. We submit that the present system whereby tax must be paid by the taxpayer pending review or appeal is no longer in the public interest and should be reformed. Support for reform also comes from the fact that our present system is contrary to the systems for the collection of tax pending review in other common law countries. This submission deals with the following:

    • A proposal for reform
    • The law at present
    • Reasons for reform
    • The law in the UK, Canada, New Zealand and USA
    • Transitional Issues.
  1. A proposal for reform - Executive Summary
  2. We recommend that our system of collection of tax pending review be amended to follow the position in the United States. As discussed below, in the United States tax is generally not collected until there is a final determination of the appeal by the first level of court.

    At the very least, and in the alternative, we would submit that the position in New Zealand ought to be adopted. Generally speaking, in New Zealand half of the tax must be paid pending the outcome of an appeal.

  3. The law at present
  4. In Australia, liability to pay assessed tax, additional tax or any other amount is not suspended pending the outcome of an application for review or appeal (Tax Administration Act ("TAA") ss 14ZZM and 14ZZR ). Thus, once assessed tax or any other amount (eg Pt VII penalty tax, late lodgment penalty tax and interest, late payment penalty tax and interest and sec 170AA interest) becomes due and payable, the Commissioner is entitled to take whatever steps are necessary and appropriate to recover the tax or other amount.

    In addition, the Commissioner is not obliged to re-pay any tax paid until all of his appeal rights have been exhausted (see ss14ZZL and 14ZZQ of the TAA). Thus a taxpayer could have successive wins in the Administrative Appeals Tribunal, Federal Court and Full Federal Court, over a period of many years, and still have no tax repaid.

    The Commissioner has a discretion to extend the time for payment (see s206 of the Income Tax Assessment Act 1936 (Cth) ("ITAA")). In IT2569 the Commissioner has set out the circumstances in which he would currently exercise his discretion. Where the Commissioner is satisfied that payment of the entire amount will be financially oppressive, or that the appeal raises arguable questions of law or fact, the Commissioner may defer the payment of 50% of the tax. The taxpayer is still, of course, exposed to the payment of interest on the remaining 50%, and in the event or victory, would only obtain interest from the government set at 4 percentage points less the Treasury Note yield rate (see reg. 4, Taxation (Interest on Overpayments and Early Payments) Regulations) (ie interest at less than the market rate).

    The Courts also have an inherent jurisdiction in appropriate circumstances to stay proceedings by the Commissioner for recovery of tax. This jurisdiction may be exercised by granting a stay of execution following the entry of final judgment, by dismissing a bankruptcy petition or a petition for the winding up of a company based on failure to pay the assessed tax, or by simply granting an adjournment. As discussed below, this power is only exercised in very narrow circumstances.

  5. Reasons for Reform
    1. Overview
    2. The current income tax law reverses the ordinary position whereby the onus is placed upon the creditor to recover disputed monies. There is no presumption, at general law, that the debtorís defence is necessarily flawed. Such a presumption, however, does exist under our income tax laws. It serves a single purpose; namely the need to protect the revenue.

      In our submission the current tax law is flawed precisely because is serves only one purpose. It does not address the need to balance the public interest in protecting the revenue, against the public interest in protecting taxpayers against the impact of erroneous assessments. In our view that balance ought now be struck in favour of the taxpayer having regard to:-

      1. the current complexity of tax laws;
      2. the lengthy period required to recover money through the objection and appeals process;
      3. the threat of bankruptcy and/or liquidation;
      4. the development since the introduction of ss 14ZZM and 14ZZR of the rights of creditors under the general law;
      5. the fact that assessments which are wrongly issued still require payment within 30 days; and
      6. the difficulty in obtaining a stay in the Courts of the Commissionerís power to collect tax.

      These matters are discussed in more detail below. They are, of course, not unique to Australia. In the case of the major common law countries, consistently with our submission, the balance now favours the taxpayer. This of itself illustrates the need for reform in Australia.

    3. The unwillingness of the Court to exercise its jurisdiction to stay proceedings for collection
    4. The Courts have inherent jurisdiction to stay proceedings or stay an execution of judgment. However, the power to grant a stay is exercised sparingly. This is because the Courts have indicated that great weight should be attached to policy underlying ss 14ZZM and 14ZZR, which is to ensure that unscrupulous tax payers do not improperly delay payment of tax by lodging frivolous objections and appeals.

      In DFCT v Mackey 82 ATC 4571 Glass JA used a metaphor of scale and observed that the effect of the former s 201 (now ss 14ZZM and 14ZZR) was that the needle stood in the Commissionerís favour close to 100 and it required a weighty case to be presented by the taxpayer to depress it below the halfway mark (see also DFCT v Alvaro & Ors, Alvaro & Ors v FCT).

      This legislative presumption followed by the Courts in the exercise of their discretion is in our submission inequitable to the vast majority of taxpayers who bring appeals on legitimate grounds.

    5. The availability of safeguards to ensure collection of the tax is not jeopardised by deferral pending review
    6. The Commissioner has a range of powers of assessment and recovery which ensure that even if the reforms proposed in this submission are accepted, his ability to collect tax due and payable will not be jeopardised. These powers encompass both the powers of a normal creditor and also powers specific to his position.

      1. Powers/Rights specific to the Commissioner
      2. The special powers of the Commissioner in recovery proceedings may be summarised as follows:

        1. The Commissioner has wide-ranging access to information about the taxpayer;
        2. Interest accrues upon the tax debt from the date it falls due and at a punitive rate. Other creditors may generally only claim interest from the date of issuing proceedings;
        3. The Commissioner is generally able to obtain summary judgment for the tax debt by relying upon ITAA s 177(1). The effect of this provision is that, with rare exceptions, taxpayers have effectively no defence to a recovery action. The Commissioner need only tender a duly certified copy of the notice of assessment and prove that it was duly served upon the taxpayer, which can be achieved simply by affidavit evidence. He does not need to prove the underlying facts of the assessment, such as particulars of the taxpayer, assessable income, allowable deductions, rebates and credits etc. The due making of the assessment and the correctness of the particulars on the notice are conclusively presumed by force of ITAA s 177;
        4. In cases where a taxpayer is absent from Australia, or cannot be found after reasonable inquiry, service of process may be effected by post to the last known place of abode in Australia;
        5. The Commissioner is not subject to the normal time limits for commencement of debt recovery proceedings under various State legislation such as the Limitations of Actions Act (Vic);
        6. State legislation providing for payment of debts by instalments, such as the Judgment Debt Recovery Act (Vic), has been held not applicable to taxation debts;
        7. Where a third party owes money to the taxpayer, the Commissioner may issue a notice requiring the third party to make payment to the Commissioner;
        8. Where the Commissioner believes that a taxpayer is planning to leave Australia without paying a tax liability, the Commissioner may issue a departure prohibition order;
        9. When seeking to recover unremitted tax instalments from companies, the Commissioner may alternatively recover the amounts from a director of the company; and
        10. The Commissioner, representing the Commonwealth, is less likely to be deterred by the risk of damages awarded against him than a private creditor would be.

        The Commissioner also has a unilateral role in bringing the tax debt into existence and defining its amount (ss 166 and 167 ITAA). In particular, the Commissioner is not required to provide a detailed explanation of the legal basis of the assessment to the taxpayer and the burden of proving that the assessment is excessive is upon the taxpayer.

      3. Powers of a normal creditor
      4. In addition to the special rights and powers listed above, the Commissioner also has the general rights of a creditor. Since the introduction of ss 14ZZM and 14ZZR, these rights have been well developed, and would, without more, seem to adequately address the public interest in the need to protect the revenue. For instance:-

        1. where there is a risk that a taxpayer will dispose of his/her assets to frustrate the collection of tax, a mareva injunction may be obtained in the Federal Court. This remedy did not exist when ss 14ZZM and 14ZZR were first introduced;
        2. where there is a serious risk that a taxpayer will destroy incriminating material in order to frustrate the collection of tax, an Anton Piller order may be obtained in the Federal Court. Again, this remedy did not exist when ss 14ZZM and 14ZZR were first introduced; and
        3. where an appeal to the Federal Court is made by a vexatious litigant, the Commissioner can always seek summary judgement. In addition, an unmeritorious appeal lodged with the purpose of only delaying the payment of tax, would be an abuse of the court process, and would be liable to be struck out.

      We have only listed a few of the general rights of a creditor. The point to be made is that they are now quite extensive, and in each case, seek fairly to balance the competing interests of the creditor and debtor.

       

    7. The length of determinations of reviews and appeals

    The complicated nature of taxation litigation ensures that tax disputes are seldom resolved quickly. To give just one recent example, Orica v FCT was started in 1991 and was only finally resolved this year. Consequently, this raises the possibility that a taxpayer might have to wait for a substantial length of time in order to recover the tax paid. There are provisions in the ITAA for interest to be paid on the tax when the taxpayer is finally reimbursed by the Commissioner. However, if a taxpayer has had to borrow money in order to pay the tax, the interest rate paid on the borrowed money will be substantially higher than the interest paid by the Commissioner. Further, the interest rate does not take into account lost "opportunity cost" of the money used to pay the tax.

  6. The law in other common law countries governing payment of tax pending an appeal
    1. Canada
    2. In Canada the Minister for National Revenue is generally not entitled to collect amounts assessed while an appeal is outstanding until the dispute is determined by the first level of court which hears the appeal. An exception exists for large corporations. Canada formally had the same law as Australia and required payment within 30 days of assessment notwithstanding any appeal by the taxpayer.

      The Revenue can immediately collect the disputed tax if the Minister can show that the ability to collect would be jeopardised by delay in collection. A penalty of up to 10% of the amount in issue may be levied if a taxpayer brings a frivolous appeal and one of the main reasons for the appeal was to delay the payment of amounts owing.

      If the taxpayer loses in the Tax Court of Canada, the Minister is free to utilise the collection powers notwithstanding the fact that the taxpayer lodges a further appeal.

    3. New Zealand
    4. The amount of tax which must be paid pending an appeal is determined by whether the objector has made a "competent objection" or a "non-qualifying objection".

      Objectors with competent objections may defer payment of half the tax in dispute (called deferrable tax) until the day on which the objection is resolved. However, they must pay all tax not in dispute plus half of any tax in dispute (non-deferrable tax) by the original due date on the assessment.

      The Commissioner may waive payment of non-deferrable tax relating to any tax in dispute if the Commissioner considers that the payment of the tax will unduly prejudice a taxpayerís business or personal circumstances and there is no risk to the revenue in waiving the payment.

      Objectors with a non-qualifying objection must pay all the tax in dispute by the original due date.

    5. United States
    6. In a case where a proper petition has been filed in the Tax Court no assessment of a deficiency and no levy or proceeding in court for collection can be made until the decision of the Tax Court has become final. The Internal Revenue Code further provides that "the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is enforced may be enjoined by a proceeding in the proper court".

      There are several exceptions to this general position. The most important is if the revenue finds that a taxpayer intends to quickly depart from the United States or to remove his/her property or to do any other act which would render ineffectual proceedings to collect income tax.

    7. United Kingdom

    A taxpayer may apply for postponement of payment of the tax in dispute where an appeal is made to the Commissioners against an assessment. The application must state the amount in which the appellant believes that he/ she is overcharged and the grounds for that belief. The application for postponement is heard by the Commissioners who determine the amount to be postponed. This amount may also be settled by agreement between the appellant and an inspector.

  7. Transitional Issues
    1. Deferment of the payment of contested tax may affect government revenue in the early years of administration. The size of the impact is difficult to determine given that we are only concerned with the deferment of contested tax, and not revenue collected generally ie under the PAYE system or through self assessment. It should also be noted that in a significant number of cases, 50% of the contested tax is currently deferred anyway as a result of IT2509. Ultimately, the amount of additionally deferred tax will depend upon the Commissionerís audit activity for the year of introduction, and his proposed adjustments. Clearly, though, steps will need to be taken to ensure that the Commonwealth is not unduly prejudiced as a result of the introduction of a US style system.
    2. One positive step will be the streamlining of the appeals and objections process. This might include:-
      1. the ability to directly appeal an assessment or amended assessment to the AAT/Federal Court, thus avoiding the need for an objection stage. The objection process is for many taxpayers an unecessary and time consuming process, especially where the dispute is the outcome of a lengthy audit where the ATO findings have been subject to internal ATO review or have been confimred by ATO Counsel. Of course the objection process could be retained as an alternative for those taxpayers (usually individuals) who have not had the benefit of some form of internal ATO review. In addition, safeguards could be introduced (usually through cost orders/penalties) to ensure that the AAT/Federal Court is not overwhelmed with frivolous applications (see below at 6.5)
      2. Assuming that there is no objection stage, the appeal document would then take the form of ordinary pleadings (a form of pleadings are currently contained within the objection) which would set out both the taxpayerís contentions of fact, contentions of law, and the relief sought. The Commissioner would be obliged to file a reply within which he would be required to either admit or deny each of the contentions pleaded. This process of admission and denial is designed to increase the efficiency of the litigation process by requiring the parties to narrow their dispute. Presently, the Commissioner is not obliged to narrow his case in this way either in his objection decision or in his Statement of Facts, Issues and Contentions. The filing of this later document by each side would be rendered redundant upon the adoption of pleadings.
      3. Consideration could also be given to the abolition of discovery as of right. Discovery is a time consuming process, is rarely sought against the revenue, and in the case of tax disputes is both inefficient and costly. This is especially the case where the dispute is the outcome of an audit where the relevant evidence has already been examined by the Commissionerís officers. Abolishing discovery as of right is consistent with the developing practice of the Federal Court with respect to tax disputes, and would not in our opinion, prejudice the revenue which could still apply for discovery where this was shown to be necessary (the revenue can also rely on its powers under ITAA as well as the use of subpoenas).
    3. Together with the introduction of a tight timetable for the filing of affidavits/witness statements, these reforms should reduce the period of deferment.
    4. We have also considered additional devices to ensure that taxpayers do not abuse the new system by exploiting every delay in preparing a case for trial. Such devices might include the establishment of a tight timetable for completion of all inter-locutory steps with penalties for non-compliance and rebates or credits for exceeding the timetable. The use of such devices would need to be carefully thought through. They can, for instance, prejudice taxpayers who have genuinely difficult and time-consuming cases.
    5. Another step would be to allow the Court and/or Tribunal to award punitive damages (calculated as a percentage of the total of principal tax, interest and penalties), in favour of the Commonwealth, as well as costs on a party/party basis, if the Court/Tribunal is satisfied that the taxpayerís case was in all the circumstances frivolous. This should act as a significant deterrent against taxpayers seeking to defer tax for illegitimate means. It should also minimise the impact of the new system.
  8. Conclusion
            1. For the reasons set our above, we are of the view that the current law is outdated because:-
      1. it does not balance the relevant competing public interests; and
      2. it does not acknowledge the significant developments in the rights of creditors under the general law.
            1. Our own view is that the general law adequately addresses the need to protect the revenue. No empirical evidence exists to support the proposition that the Commissioner continues to need special treatment. Americaís fiscal position has certainly not been prejudiced over the years. We therefore submit that ss 14ZZM, 14ZZR, 14ZZL and 14ZZQ be repealed consistently with the approach taken in the United States.
            2. At the very least, consideration should be given to codifying IT 2569 or to the adoption of the New Zealand Model. Again, in the absence of empirical evidence which reveals the need for special treatment, we do not ourselves prefer either approach.
            3. Mallesons Stephen Jaques
            4. 31 December 1998.