Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 Release from particular liabilities in cases of serious hardship
Outline of chapter
4.1 Schedule 9 to this bill amends the ITAA 1936, FBTAA 1986, TAA 1953, ITAA 1997 and the Administrative Appeals Tribunal Act 1975 to streamline the procedures under which an individual taxpayer can be released from a tax liability where payment would entail serious hardship. The existing authority to grant release will be transferred from tax relief boards to the Commissioner.
4.2 The amendments will also introduce a new right to have tax relief decisions reviewed internally under the ATO objections process, and externally by the AAT sitting as the Small Taxation Claims Tribunal. Also, the scope of the release arrangements will be expanded to cover instalments of PAYG and FBT.
Context of amendments
4.3 Tax relief boards are established under section 265 of the ITAA 1936 and section 133 of the FBTAA 1986. The boards have discretion to release taxpayers from their liabilities under those Acts if payment would entail serious hardship. Boards comprise the Commissioner, the Secretary of the Department of Finance and Administration and the Chief Executive Officer of the Australian Customs Service - although, in practice, substitutes generally represent the 3 office holders.
4.4 Other important features of the relief procedures are:
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- the Commissioner takes the place of the boards for debts up to $500;
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- boards may refer any relief application to the AAT, but only to examine and report on a taxpayer's affairs. Referral is mandatory for debts exceeding $10,000; and
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- there is no provision for merits appeals on board decisions.
4.5 The current arrangements, with their requirement for convening regular meetings of tax relief boards, are unduly resource intensive and inflexible. A significant ongoing commitment by the 3 represented agencies is required in order to avoid the recurrence of backlogs and the associated delays in responding to applicants.
4.6 Further, the single stage relief board process is out of step with contemporary review practices. The interests of applicants are better served by a genuinely independent merits review.
4.7 The scope of the release arrangements needs to be updated to cover the instalment system applying under A New Tax System. The current release arrangements apply principally to tax assessments; however, for instalment payers seeking release, the bulk of their tax liabilities would usually be instalment debts.
Summary of new law
4.8 The tax relief boards will be abolished, along with the AAT's role of investigating and reporting to the boards on certain release applications. The Commissioner will receive applications and make the initial decision on applications for release. Serious hardship will remain the sole criterion for deciding whether release can be granted. Release will become available for instalments of PAYG and FBT (and any associated penalties and charges).
4.9 Applicants dissatisfied with the Commissioner's decision will have a right of objection and consequent review of the decision by the Commissioner. This objection and review process would be the same as that for objections to other taxation decisions, as provided in Part IVC of the TAA 1953.
4.10 Applicants will have a further right to apply for an independent merits review by the AAT, sitting as the Small Taxation Claims Tribunal.
4.11 The new arrangements will commence on the later of 1 September 2003 and the date when the amending legislation receives Royal Assent. All applications undecided at that time will be treated under the new arrangements.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| An individual taxpayer may apply for release from eligible tax liabilities on the grounds of serious hardship. | An individual taxpayer may apply for release from eligible tax liabilities on the grounds of serious hardship. |
| The tax liabilities eligible for release are income tax, FBT, PAYG instalments, FBT instalments, and penalties and charges associated with those liabilities. | The tax liabilities eligible for release are income tax, FBT, and penalties and charges associated with those liabilities. |
| The Commissioner decides the outcome of applications. |
A board consisting of the Commissioner, the Secretary of the Department of Finance and Administration and the Chief Executive Officer of the Australian Customs Service (or their substitutes) decides the outcome of applications above $500. The Commissioner decides the outcome of applications no greater than $500. |
| (Investigation powers not necessary) | The AAT investigates and reports to the board on applications of $10,000 or more, and for smaller amounts should the board request. |
| Unsuccessful applicants can lodge an objection under the usual ATO internal review processes. | No merits review of the outcome of applications. |
| Merits review by the AAT sitting as the Small Taxation Claims Tribunal available if objection is unsuccessful. | No merits review of the outcome of applications. |
Detailed explanation of new law
4.12 A new Part 4-50, consisting of Division 340, is inserted into Schedule 1 of the TAA 1953, to provide a new process by which individuals facing serious hardship can seek release from certain tax liabilities [Schedule 9, item 1] . The existing provisions in the ITAA 1936 and FBTAA 1986 are repealed [Schedule 9, items 5 and 15] .
4.13 Applications will be considered in the first instance by the Commissioner. Dissatisfied applicants will be entitled to an internal ATO review, with further recourse to a merits review by the AAT, sitting as the Small Taxation Claims Tribunal.
From which tax liabilities can release be granted?
4.14 The following are liabilities from which an individual may be released:
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- income tax - including Medicare levy, Medicare levy surcharge, withholding tax and tax payable where an infrastructure borrowing certificate is cancelled;
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- FBT;
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- an FBT instalment;
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- a PAYG instalment;
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- penalties associated with the above liabilities; and
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- charges associated with the above liabilities.
[Schedule 9, item 1, section 340-10]
4.15 For ease of explanation, these liabilities will be referred to in this chapter as releasable liabilities.
4.16 In order to determine the amount of releasable liability, the Commissioner might need to determine which, among a number, of a taxpayer's liabilities have been paid. This will require payments to be matched against particular tax liabilities that existed at the time of the payment.
4.17 It should not be assumed that payments would be pro-rated across outstanding liabilities, as taxpayers would be expected to remit to the Commissioner amounts collected on behalf the Commissioner (e.g. tax withheld from employees' wages and GST) before paying their own personal liabilities (e.g. their own PAYG instalments).
Example 4.1
John Smith owns a bike store as a sole trader. His first quarter BAS identifies tax withheld from his employee's wages of $3,000 and a GST net amount due of $10,000. In addition, his PAYG instalment for the quarter is $6,000.
He sends a cheque for $15,000.
The payment would be applied firstly to the tax withheld and GST amounts, leaving $2,000 to be applied against his PAYG instalment.
4.18 In order to determine the amount of releasable liability, the Commissioner might also need to decide that particular amounts of interest charges that a taxpayer has incurred derive from particular tax liabilities.
4.19 Taxpayers cannot apply under the release provisions for the return of taxes previously paid.
4.20 An individual taxpayer can apply for release from a releasable liability where they would suffer serious hardship were they required to pay the liability. [Schedule 9, item 1, subsection 340-5(3), item 1 in the table]
4.21 A taxpayer who is a trustee of the estate of a deceased person can apply where those dependents would suffer serious hardship were payment of the liability required. [Schedule 9, item 1, subsection 340-5(3), item 2 in the table]
4.22 An application must be in the form required by the Commissioner. [Schedule 9, item 1, subsection 340-5(2)]
4.23 A taxpayer's circumstances - including their tax liabilities - can change quite rapidly. Accordingly, taxpayers are not prevented from applying merely because they have previously been unsuccessful or partially successful in seeking release, including release for the same liabilities. This applies even where the taxpayer has unsuccessfully objected to a decision or undertaken further appeals. [Schedule 9, item 1, subsection 340-5(4)]
What is the basis for granting release?
4.24 As under the current legislation, the sole criterion for granting release will be that serious hardship would result from requiring payment of the releasable liability. [Schedule 9, item 1, subsection 340-5(3)]
4.25 Release can be wholly or in part [Schedule 9, item 1, subsection 340-5(3)] . Release from the full amount of the liability would not generally be appropriate where partial release is sufficient to avert hardship.
4.26 Release would not normally be granted where it would not relieve hardship. A common example would be where the existence of other creditors made bankruptcy inevitable and granting release from tax liabilities would merely assist those other creditors at the expense of the Commonwealth.
Who decides whether to grant release?
4.27 The Commissioner may release an eligible taxpayer (wholly or in part) from a releasable liability where the hardship criterion is satisfied. [Schedule 9, item 1, subsection 340-5(3)]
4.28 The onus will be on an applicant to furnish sufficient information for the Commissioner to be satisfied that a release from liabilities would be appropriate. [Schedule 9, item 2]
4.29 The Commissioner must notify the applicant of the decision in writing within 28 days of making the decision [Schedule 9, item 1, subsection 340-5(5)] . Failure to give the notification does not affect the validity of that decision [Schedule 9, item 1, subsection 340-5(6)] .
4.30 The Commissioner may take such action as is necessary to give effect to a decision taken under subsection 340-5(3) to grant release to a liability covered by section 340-10 [Schedule 9, item 1, subsection 340-15(1)] . This may include amending an assessment [Schedule 9, item 1, subsection 340-15(2)] .
4.31 Where an individual is released (wholly or in part) from liabilities arising from an assessment, that release will be final (subject to the overriding power of the Commissioner to amend assessments - see paragraph 4.40).
4.32 Where an individual is released (wholly or in part) from instalment liabilities, the instalment liabilities are extinguished, but permanent release from the amounts in question will require further consideration of the full year's assessment against the taxpayer's circumstances at that time. This treatment recognises the interaction between the instalment system and the assessment system. [Schedule 9, item 1, sections 340-20 and 340-25]
4.33 Normally, instalment liabilities are offset by a credit against the ultimate assessment for the tax year in question. This prevents 'double taxation' by ensuring that the amount the taxpayer is required to pay upon assessment is net of the amount collected through the instalment system. The amount due at assessment is often referred to as the 'washup' amount. Ideally, this amount will be small, because the total of the instalments for the income year is intended to reflect the ultimate assessment (see section 45-5 of Schedule 1 of the TAA 1953).
Example 4.2
John Smith has quarterly PAYG instalments of $6,000. His final year assessment is $25,000.
The 4 instalments are credited against the annual assessment, leaving him with a washup amount of $1,000.
4.34 Instalment liabilities are not extinguished by the final assessment. Where instalments are unpaid, a taxpayer would still face instalment debts, along with the liability for the washup amount.
4.35 Even where an instalment liability is unpaid, the credit still applies against the assessment. This ensures that the taxpayer is not pursued twice for the same amount, through both the instalment and assessment collection systems.
Example 4.3
After losing a court case with a neighbour, John Smith is only able to pay $2000 against his first 3 quarterly PAYG instalments of $6,000, and nothing against his 4th instalment. His final year assessment is $25,000.
The 4 instalment liabilities total $24,000 and (whether paid or not) are credited against the annual assessment, leaving him with a washup amount of $1,000.
His outstanding tax debts would then total $19,000 comprising $18,000 of instalment liabilities (i.e. $4,000 + $4,000 + $4,000 + $6,000) and a washup amount of $1,000 (i.e. $25,000 - 4 x $6000).
4.36 However, where hardship 'release' is granted from a PAYG or a FBT instalment, the credit against the assessment will be disallowed to the extent of that release [Schedule 9, item 1, note in subsection 340-20(2); item 1, note in subsection 340-20(3); item 1, note in subsection 340-25(2); item 1, note in subsection 340-25(3)] . The absence of instalment credits means the amount due at assessment time would be more than a washup amount. Effectively, this means that the liability to pay the amount in the instalment is deferred until assessment time.
Example 4.4
Continuing from Example 4.3, suppose John Smith were to receive partial hardship release of $4,000 (the unpaid amount) on each of his first 3 quarterly instalments and full release on his 4th instalment.
At assessment time, his washup amount would be $19,000 (i.e. $25,000 - $2000 - $2000 - $2000 -$0).
His outstanding tax debts would then total $19,000 comprising no unpaid instalment liabilities and a washup amount of $19,000.
4.37 The taxpayer is then potentially able to apply for release from the overall liability arising from the year's assessment.
4.38 Where a person is still in a position of hardship at the time the ultimate assessment is issued, permanent release could then be available from the assessed liability, including amounts originally reflected in the released instalment.
Example 4.5
Continuing from Example 4.4, John Smith faces ongoing hardship and receives full release from his outstanding income tax of $19,000 (i.e. the washup amount). The unpaid instalment amounts would then have effectively been given permanent release, albeit in the form of assessed income tax.
4.39 It is not intended to grant permanent release from the amount in the instalment prior to consideration of the full year's assessment against the taxpayer's circumstances at that time. Where a person's circumstances have improved by the time the final assessment is issued - such that the year's assessment can then be paid without hardship - then it is expected that the full assessment would be paid. In these circumstances, temporary relief - by removing the liability to pay at the usual instalment date - will have been sufficient to alleviate hardship.
Example 4.6
As an alternative to Example 4.5, John Smith wins an appeal on the court case with his neighbour, and no longer faces hardship.
He is now expected to pay his outstanding income tax of $19,000 (i.e. the washup amount).
When John Smith pays this amount he will have paid a total of $25,000 in tax for the year (i.e. $2000 + $2000 + $2000 + $0 + $19,000). The total amount paid for the year will equal that paid under 'normal' circumstances in Example 4.2.
The release provisions have provided the temporary relief he needed, by releasing him from the obligation to pay the full instalment amounts at the times they would normally have been due.
4.40 Granting release under these hardship provisions does not limit the power of the Commissioner to amend an assessment in accordance with any provision of the ITAA 1936 or FBTAA 1986 (e.g. where a deduction was disallowed following a tax audit). [Schedule 9, item 1, subsection 340-15(3)]
Objecting to the Commissioner's decision (internal review)
4.41 If a taxpayer is dissatisfied with the decision the Commissioner makes on their application, they may object to the decision. Such objections would be made in the usual manner, set down in Part IVC of the TAA 1953 for taxation objections, reviews and appeals [Schedule 9, item 1, subsection 340-5(7)] . Section 14ZW(1)(c) of Part IVC of the TAA 1953 requires such objections to be lodged within 60 days of the Commissioner serving notice of the decision.
4.42 If a taxpayer is dissatisfied with the decision the Commissioner makes on their objection, then, under Division 4 of Part IVC of the TAA 1953, they may request the AAT, sitting as the Small Taxation Claims Tribunal, to review the merits of that decision. The Administrative Appeals Tribunal Act 1975 is amended to allow the Small Taxation Claims Tribunal to review hardship release cases, including where the liabilities in question exceed the Small Taxation Claims Tribunal's usual ceiling of $5,000. [Schedule 9, items 3 and 4]
Application and transitional provisions
4.43 The new release provisions will commence on the later of 1 September 2003 or the date the amending legislation receives Royal Assent.
4.44 Applications made, but not finally determined, prior to that commencement date will be considered under the new provisions. [Schedule 9, item 18]
4.45 Taxpayers dissatisfied with decisions made by Tax Relief Boards under the old arrangements will be free to lodge fresh applications for consideration by the Commissioner under the new arrangements. [Schedule 9, item 19]
Consequential amendments
Repeal of existing hardship release provisions
4.46 The existing hardship release provisions in section 265 of the ITAA 1936 and section 133 of the FBTAA 1986 are repealed. [Schedule 9, items 5 and 15]
4.47 References in the ITAA 1936 to the repealed hardship release arrangements are deleted. [Schedule 9, items 6 and 9 to 14]
Rebates under Division 6AA - Income of Certain Children
4.48 Division 6AA of the ITAA 1936 may increase the tax payable on the income of certain children.
4.49 Section 102AJ of ITAA 1936 currently allows the Commissioner to rebate that extra tax where it would cause serious hardship. By not requiring consideration by a tax relief board, this rebate provision provided an alternative, streamlined route by which those liable to this extra tax could obtain hardship release. Applicants could not receive release under both provisions.
4.50 The amendments now provide the same streamlined route to all applicants for hardship release. Accordingly, the section 102AJ rebate provision and references to it are repealed. [Schedule 9, items 7, 8, 16 and 17]
4.51 The new hardship provisions should not diminish the rights of those who would have been eligible to seek release under section 102AJ, as release will continue to be available from the Commissioner against the criterion of serious hardship.
Appeals to the Administrative Appeals Tribunal sitting as the Small Taxation Claims Tribunal
4.52 The Administrative Appeals Tribunal Act 1975 is amended to allow the Small Taxation Claims Tribunal to review Commissioner decisions on applications (following internal ATO review - see paragraph 4.41). The Small Taxation Claims Tribunal will be able to review a decision regardless of the amount involved. [Schedule 9, items 3 and 4]