House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer and Minister for Financial Services, the Hon Stephen Jones MP)

Chapter 4: Increased Tribunal powers for small business tax decisions

Outline of chapter

4.1 Schedule 4 to the Bill amends the TAA 1953 to enable small business entities to apply to the Small Business Taxation Division of the AAT for an order staying, or otherwise affecting, the operation or implementation of certain specified decisions of the Commissioner that are being reviewed by the AAT.

Context of amendments

4.2 Section 41 of the AAT Act empowers the AAT to make an order to stay, or otherwise affect, the operation or implementation of a decision under review on request from a party to the proceeding. However, current section 14ZZB of the TAA 1953 relevantly provides that section 41 of the AAT Act does not apply to reviewable objection decisions (within the meaning of section 14ZY of the TAA 1953).

4.3 The current section 14ZZM of the TAA 1953 provides that a pending review of a taxation decision does not affect the decision and any tax may be recovered as if no review were pending.

4.4 The effect of these provisions is that the Commissioner can commence debt recovery action even if the taxpayer is seeking a review of the liability for, or quantum of, the tax debt. Small businesses seeking a review of a relevant decision are not presently able to request the AAT make orders relating to the operation or implementation of the decisions while they are under review (such as making an order preventing the Commissioner from using one or more of the Commissioner's powers to collect the disputed debt).

4.5 While the taxpayer can seek a court order to stay the operation or implementation of the decision, judicial review proceedings are expensive and the consequences for affected taxpayers may be severe, including business wind-up.

4.6 The Commissioner's approach to debt recovery, including factors that are considered in determining what debt recovery actions are taken and when, is outlined in a series of Law Administration Practice Statements that are published by the Commissioner on the ATO's website.

4.7 The Commissioner's published policy (i.e. the Law Administration Practice Statements) with respect to the collection and recovery of disputed debts outlines the various administrative options available to the Commissioner in relation to disputed debts and the factors that are considered when choosing between them. In particular, guidance on high-risk cases states that action may be taken to recover disputed amounts (without limiting other circumstances) where there are reasonable grounds to believe revenue is at risk (for example, funds or assets are being dissipated), or where the objection is considered to be frivolous or without merit. In practice, there are very few cases in which the Commissioner pursues recovery action in relation to a disputed debt. ^[1]

4.8 These amendments are not seeking to displace the existing principles underlying the Commissioner's published practice statements, but instead give taxpayers a means by which they can seek merits review of the Commissioner's decisions (including where there is an unreasonable departure from published guidance or there is a disagreement as to the facts). It is for this reason that the provisions restore section 41 in a modified form, with the AAT needing to consider further matters before making an order. This protects the Commonwealth's interests in high-risk cases and prevents the new power being misused as a mechanism to avoid the due payment of genuine tax debts.

Summary of new law

4.9 These amendments will enable the Small Business Taxation Division of the AAT to make an order (including varying or revoking an order that is already in force) under section 41 of the AAT Act in relation to a reviewable objection decision that relates to a small business taxation assessment decision.

4.10 A reviewable objection decision may relate to an aspect, or aspects of a small business taxation decision. The applicant will need to specify the part or parts of the decision in relation to which they seek the order, which must be confined to that part of the decision that falls within scope of a review being undertaken by the AAT.

4.11 If made, such orders could limit or modify actions of the Commissioner, under the Commissioner's discretionary powers, to recover a tax debt, in whole or in part, while the orders are in force. The amendments are not intended to permit orders that will permanently alter the rights and obligations as between the Commissioner and the taxpayer (e.g., orders should not require the Commissioner to defer the time at which a tax debt is or becomes due and payable or to remit general interest charge). The amendments do not affect or alter the powers of the courts in any way. The amendments also do not affect any action the Commissioner is required to take under an Australian law (including a taxation law) or in response to an order by the AAT or a court.

4.12 The amendments also do not affect a taxpayer's existing rights to appeal to the courts and obtain a court order if they are successful. The powers of the courts in restraining the Commissioner's ability to recover an outstanding debt are not affected by these amendments.

4.13 The purpose of the amendments is to provide small business entities with a cheaper, faster and simpler way to pause the effects of a decision to recover a tax debt during merits review of the decision as compared to applying to a court. However, this is balanced by the need to ensure that the tax law applies fairly to all and that taxpayers who do not have a genuine disagreement with their tax debts cannot simply lodge a request for review in order to seek interim relief and avoid the prompt payment of those debts as and when they fall due. Such an approach will unfairly prejudice those small businesses who try to do the right thing and pay their taxes on time.

4.14 In making orders under section 41 of the AAT Act, the AAT will consider the circumstances and progress of the application for review to which the orders will relate. In doing so the circumstances and competing objectives of facilitating the Commissioner's impartial administration of the tax system, and ensuring that undue hardships are not imposed on small businesses until decisions relating to them are final, will likely need to be balanced.

4.15 Importantly, these amendments enable the AAT to prevent the Commissioner from exercising powers to give effect to the decision, such as debt recovery and revenue protection powers, only until the AAT concludes its review of (and amends or remakes if necessary) the reviewable objection decision that relates to a small business taxation assessment decision. They do not affect the AAT's ability to review or remake the reviewable objection decision.

4.16 The AAT's approach to remaking any of the Commissioner's decisions in the case of genuine disputes remains unchanged. The AAT will be able to consider the same risk factors and circumstances as the Commissioner and can consider the principles underlying the Law Administration Practice Statements. The amendments do not affect the AAT's powers or scope of possible orders in relation to the Commissioner's decisions it reviews. They only enable the AAT to make orders staying or otherwise affecting the operation or implementation of the decision under review.

4.17 This means that while the reviewable objection decision that relates to a small business taxation assessment decision is under review the AAT will be able to make orders requiring the Commissioner to exercise his or her discretion in relation to debt recovery and revenue protection powers (including for example, directing the Commissioner not to pursue debt recovery of a disputed liability if the taxpayer agrees to pay a specified portion of the liability immediately or agreeing to payment by instalments) in a particular way if the necessary criteria are met.

Preserving the integrity of the taxation system

4.18 The amendments provide factors for the AAT to consider before making such orders unless the orders are sought by the Commissioner. These considerations are additional to the considerations already required by section 41 of the AAT Act (such as the interests of any entities who may be affected by the review and whether the Tribunal considers it appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review).

4.19 These additional considerations are intended to maintain the integrity of the tax system by mitigating the risk of applicants using an application for a stay order to frustrate the prompt recovery of genuine tax debts. These considerations are explicitly set out in the legislation to ensure that applicants requesting a stay order understand the additional requirements that must be met before the AAT can make such an order.

4.20 The AAT must consider these matters in the context of both the particular circumstances of the taxpayer whose decision is under review and on the overall taxation system.

4.18 The applicant will need to satisfy the AAT that these additional considerations are satisfied. This requirement is consistent with the general approach of placing burden of proof in taxation matters on applicants seeking relief and placing of the burden on applicants seeking interim relief on the applicant in matters before the AAT. The evidence that the applicant will be expected to produce is information within their knowledge or possession, for example, information about the basis of their dispute with the Commissioner, the history of their business, their compliance history, their creditworthiness, as well as their financial position and the impacts of debt recovery on that financial position, such as being deprived of meaningful review rights if the decision goes into effect. The applicant will be given time to prepare the required information.

Comparison of key features of new law and current law

Detailed explanation of new law

Definition of small business taxation assessment decision

4.22 Item 1 of Schedule 4 to the Bill inserts 'small business taxation assessment decision' as a new definition in section 14ZQ of the TAA 1953. This new term is used in the amendments in Schedule 4 to the Bill to describe the decisions in relation to which the AAT can make orders under section 41 of the AAT Act. [Schedule 4, item 1, section 14ZQ of TAA 1953]

Enabling the AAT to make an order under section 41 of the AAT Act in relation to certain taxation decisions

4.23 Currently, section 14ZZB of the TAA 1953 provides that section 41 of the AAT Act does not apply in relation to any reviewable objection decisions.

4.24 The Bill amends section 14ZZB of the TAA 1953 to apply section 41 of the AAT Act but only in relation to those reviewable objection decisions that relate to small business taxation assessment decisions. However, this application is subject to the modifications to section 41 of the AAT Act. [Schedule 4, item 2, section 14ZZB of TAA 1953]

Modification of section 41 of the AAT Act

4.25 Item 3 of Schedule 4 to the Bill modifies the application of section 41 of the AAT Act in relation to reviewable objection decisions that relate to small business taxation assessment decisions. The amendments require the AAT to only make an order under section 41 of the AAT Act if:

•

the proceeding is in the Small Business Taxation Division of the AAT; and

•

where the party seeking the order is not the Commissioner, the AAT is satisfied that, when considered in the context of both the particular circumstances of the decision under review and the overall taxation system, the application for review and the request for making the order is not frivolous, vexatious, misconceived, lacking in substance or otherwise intended to unduly impede, prejudice or restrict the proper administration or operation of a taxation law. [Schedule 4, item 3, section 14ZZH of TAA 1953]

4.26 When deciding whether to make an order under section 41 of the AAT Act, the conventional considerations set out in Scott and Australian Securities and Investment Commission [2009] AATA 798 (13 October 2009) will continue to apply. They include:

•

the prospects of success of the underlying application for review;

•

the consequence for the applicant of the refusal of a stay (which includes, most obviously, the financial consequences and the impact on business, employees, family, customers, etc);

•

the public interest;

•

the consequences for the Respondent in carrying out its functions depending upon whether a stay is granted or not;

•

whether the application for review will be rendered nugatory if a stay were not granted; and

•

other matters the AAT considers relevant.

4.27 The public interest consideration encapsulates the interests of creditors as well as the systemic concerns about the orderly operation of government. In cases where the stay has revenue implications - for example, where the AAT is asked to stay a decision to cease paying a benefit - the AAT will consider the prospects of recovery in the event the applicant is unsuccessful at the final review; e.g., Re Repatriation Commission and Delkou (1985) 8 ALD 454.

4.28 The additional considerations set out in the TAA 1953 are intended to mitigate the real risks that aggressive taxpayers, such as phoenixing operators, promoters of tax avoidance and evasion schemes, and others without a genuine dispute about an assessed quantum of tax, could use applications to the AAT to frustrate the prompt recovery of genuine tax debts, make such debts practically irrecoverable by delaying recovery action, make the Commissioner a source of relatively cheap financing giving them an unfair advantage over their competitors, or continue trading while insolvent adversely affecting the Commonwealth and other creditors by accruing further debts. The additional considerations balance the objective of allowing small businesses to seek a review of the Commissioner's decisions before being subject to debt recovery actions with potentially severe impacts against the broader objective of ensuring that objections and applications for review are not misused to delay or avoid the payment of taxes as and when they fall due.

4.29 Using the powers given to it by these amendments, the AAT will be able to make orders staying, or otherwise affecting, the operation or implementation of the reviewable objection decisions (or parts of those decisions) that relate to small business taxation assessment decisions for the purpose of securing the effectiveness of the hearings and determination of the application for review. [Section 41 of the AAT Act]

4.30 The notes under section 14ZZH provide examples of the kind of orders that can, and cannot, be made by the AAT. The kind of orders that can be made by the AAT include an order directing the Commissioner to offer payment instalment arrangements, an order directing the Commissioner not to sue in a court to recover a specified amount relating to the reviewable objection decision, and an order directing the Commissioner not to issue one or more written notices to specified third parties who owe or may later owe money to the applicant as a means of recovering liability relating to the reviewable objection decision.

4.31 An order which will materially and permanently alter the underlying decision for review will not be an order staying or otherwise affecting the operation or implementation of such a decision for the purpose of securing the effectiveness of the hearing and determination of the application for review, as required under section 41 of the AAT Act. This is because a material or permanent alteration of the decision for review could materially affect the application for review or render it futile.

The amendments are not intended to allow the AAT to require the Commissioner to take an action which will permanently or materially change the decision for review, such as to directing the Commissioner to remit general interest charge on unpaid liabilities or to defer the time at which a tax liability is or becomes due and payable. [Schedule 4, item 3, notes 1 and 2 under subsection 14ZZH(3A)]

4.32 The AAT will not be able to affect the automatic operation of Commonwealth laws, such as the accrual of the general interest charge, or affect the operation of any judicial remedies obtained by the Commissioner (such as warrants or freezing orders). However, the AAT will be able to prevent the Commissioner from taking discretionary actions (both curial and non-curial) such as commencing winding up proceedings, or the issuing of garnishee notices.

4.33 The AAT will not be able to make orders requiring the Commissioner to take actions that are not relevant to securing the effectiveness of the hearing and determination of the application for review (for example requiring the Commissioner to pause the issuing of automatically generated statements of accounts or the usual administrative communications with the taxpayer about general interest charge that is accruing in relation to the disputed debt while it remains unpaid). [Subsection 41(2) of the AAT Act]

4.34 The AAT will not be able to make an order requiring the Commissioner to alter the calculation mechanism or the accrual of general interest charge on debts that are payable (because such actions by the Commissioner will be inconsistent with the law). However, the AAT can direct the Commissioner not to pursue specified debt recovery actions if the taxpayer agrees to pay a specified portion of the liabilities immediately or agrees to provide appropriate security for the payment of those debts.

4.35 Permanently altering the rights and obligations as between the taxpayer and the Commissioner may also have the effect of pre-judging the outcome of the AAT's review of the reviewable objection decision. Requiring the Commissioner to remit general interest charge or to defer a debt's due date will be inconsistent with the intention of both preserving the Commissioner's debt recovery options and averting the business risk to the taxpayer (because if the Commissioner collects the debt, in cases where ultimately the amount is found to not be payable, the taxpayer is effectively unwillingly lending the Commonwealth the disputed amount).

4.36 The amendments do not affect the powers and operation of the courts themselves or access to them. They only allow the AAT to make orders limiting the Commissioner's discretionary actions to seek orders from them in some circumstances.

4.37 In making orders enabled by these amendments, the AAT is expected to specify the particular provisions of the taxation law that enable the Commissioner to exercise discretion in the manner ordered by the AAT.

4.38 The AAT is also expected to refrain from making orders under section 41 where a taxation law provides an alternate remedy in relation to the review of a decision of the Commissioner, such as in relation to the issue of departure prohibition order. The tax law establishes standalone mechanisms for review of those decisions, and it is intended those mechanisms remain the means by which dissatisfied taxpayers seek review of those decisions.

Enabling an order under section 41 of the AAT Act to affect implementation of taxation decisions

4.39 Currently, section 14ZZM provides that a pending review in relation to a taxation decision does not affect the implementation of the decision and any tax may be recovered as if no review were pending.

4.40 Item 5 of Schedule 4 to the Bill provides that in relation to reviewable objection decisions that relate to small business taxation assessment decisions, the operation of section 14ZZM will be subject to orders made under section 41 of the AAT Act (as modified by section 14ZZH of the TAA 1953) in relation to that decision if any such orders are made. This amendment ensures that amendments to section 14ZZB and 14ZZH of the TAA 1953 made by other items operate as intended. [Schedule 4, items 4 and 5, section 14ZZM of TAA 1953]

Application, and transitional provisions

4.41 The amendments made by Schedule 4 will apply in relation to applications for review made on or after the commencement of the Schedule. [Schedule 4, item 6]