Settlements_and_remissions by panniuniu

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									TAX CONTROVERSIES BY RON JORGENSEN FTIA, HARWOOD ANDREWS LAWYERS


Settlements and remissions

PREPARING A COMPREHENSIVE SUBMISSION REFLECTING THE ATO GUIDELINES
WILL MAXIMISE THE PROSPECTS OF A SUCCESSFUL REDUCTION IN LIABILITIES.




                                                a part or total reduction in liability and     It is essential for advisers to structure any
 You got to know when to hold em,
                                                to avoid litigation. Care is required in       settlement in accordance with the Code so
 know when to fold em,                          preparing submissions to distinguish           that the ATO is amenable to the settlement.
                                                clearly between the various powers and         The ATO may accept a taxpayer’s
 Know when to walk away and                     to ensure that submissions respond to          proposal, but the proposal may not be
                                                the ATO’s guideline requirements for the       susceptible to signing a formal settlement
 know when to run …1                            relevant powers.                               deed which would provide the taxpayer
INTRODUCTION                                    The ATO is entitled to continue recovery       with certainty and finality of the dispute.
                                                proceedings irrespective of whether there
The Australian Taxation Office                  is a tax dispute or outstanding settlement,
                                                                                               Settlement of tax disputes
distinguishes between settlement of the         compromise, remission and release              Only qualifying disputes are susceptible to
amount of a tax liability, compromise           application.6                                  settlement under the Code. A dispute can
of a tax debt, 2 remission of interest and
                                                This article discusses the available           relate to tax, penalties, payments, franking
penalties, release of a tax debt,3 and write-
                                                procedures and ATO published guidelines        credits and debits, foreign tax credits,
off of a tax debt.4 The ATO has published
                                                that are applicable to the settlement,         indirect taxes credits and refunds, interest,
extensive guidelines on the exercise of
                                                compromise, remission, release and write-      general interest charge (GIC), and shortfall
these discretions, the main body of which
                                                off of tax liabilities. The article does not   interest charge (SIC).11
is published in the ATO Receivables
Policy,5 the Code of Settlement Practice        discuss enforcement procedures or court        A dispute must relate to the compromise of
(the Code), and certain practice                defences to enforcement procedures.            the quantum of liability or the interpretation
statements.                                     Legislative references are to the Income       of a tax law. Accordingly, a compromise
The ATO is empowered to settle tax              Tax Assessment Act 1936 (ITAA36), the          in respect of factual circumstance or the
disputes over the quantum of liability          Income Tax Assessment Act 1997 (ITAA97),       interpretation of a law other than a tax
or interpretation of the tax law and to         the Taxation Administration Act 1953           law does not constitute a settlement.
compromise certain tax debts. The ATO           (TAA53), the Financial Management and          Further, acceptance by the ATO of the
is also empowered to remit penalties            Accountability Act 1997 (FMAA97), the          taxpayer’s treatment based on the factual
and interest, and release certain               Administrative Decisions (Judicial Review)     circumstances or interpretation of the
amounts of tax, penalties and interest, if      Act 1977 (ADJR77), the Bankruptcy Act          tax law does not constitute a settlement
payment of the liability will cause serious     1966 (BA66), and the Corporations Act          because there is no compromise.12
hardship to the taxpayer, and to write off      2001 (CA01).                                   A qualifying dispute must ordinarily be a
unrecoverable debt.
                                                                                               tax decision that is or would be subject to
The Minister for the Department of Finance      SETTLEMENT
                                                                                               objection and review or appeal under
and Deregulation (the Minister) is also
                                                Introduction                                   Pt IVC TAA53.13 Settlement can occur
empowered to release certain tax debts.
                                                                                               at any stage in the audit, assessment,
The objective of settlement, compromise,        The ATO is empowered to settle tax
                                                                                               objection, review or appeal process.
remission, release and write-off                disputes.7 In settling, the ATO must
                                                comply with the Code.8 Settlements of          The ATO will be amenable to settlement of
applications is to proactively present
                                                widely-based tax disputes have additional      a qualifying dispute where:
relevant facts, tax technical analysis and
policy considerations in a systematic           considerations and procedures.9 The            „ the taxpayer can establish a reasonably
manner that is consistent with the ATO          Code applies to all laws administered by         arguable position in respect of the
published guidelines in order to promote        the ATO.10                                       interpretation of a tax law;


                                                                                                                                  It’s essential 221
    „ the ATO administration and litigation         submissions should be circumspect and              „ the taxpayer will be required to abandon
      costs are disproportionate to the             should not inadvertently turn the settlement         or waive objection, review and appeal,
      benefits of disputing the matter;             submissions into a debt compromise                   administrative review and freedom of
                                                    submission.                                          information disclosure rights, even if
    „ there are contentious factual or
                                                    Settlement of widely-based tax disputes              the terms of the settlement deed are
      quantum issues, evidentiary difficulties
                                                    have additional administrative and                   breached; and
      or genuine uncertainty regarding the
      interpretation of the law which make          procedural requirements because the                „ the directors of the taxpayer may be
      resolution by litigation problematic; or      terms and conditions will apply to at least          required to provide warranties about
                                                    20 taxpayers involved in the arrangement.            the terms and conditions of settlement
    „ the terms of settlement will achieve
                                                    Importantly, the terms and conditions of             which may expose the directors to new
      compliance with the ATO view for the
                                                    widely-based tax dispute settlements                 personal liabilities.
      current and future years cost effectively.
                                                    are reviewed and agreed by the Widely-             Determining and documenting the material
    The ATO will not be amenable to                 based Settlement Panel (the Panel).                facts so that the settlement deed is binding
    settlement of an otherwise qualifying           The determination of the Panel is not              may present problems during settlement
    dispute where:                                  binding on the decision-maker. However,            negotiations. Reasonable people can differ
    „ the compromise would be contrary to           experience suggests that it is usual               on what constitutes a relevant or material
      an articulated policy reflected in the law;   for the decision-maker to follow the               fact. Unless fully documented or stated in
                                                    recommendation of the Panel.                       the recitals to the settlement deed, it will
    „ the compromise would be contrary to
                                                    Taxpayers and advisers cannot attend the           be difficult to clearly identify whether new
      an established and articulated ATO
                                                    Panel. However, any settlement submission          material information has emerged which
      view, such as in a public ruling;
                                                    will be provided to the Panel. Accordingly,        would entitle the ATO to abandon the
    „ the compromise would involve                  the settlement submission should address           agreement.
      inconsistent treatment for taxpayers in       the issues that must be considered by the          Negotiations over the terms and conditions
      comparable circumstances;                     1BOFM JEFOUJÙFE JO 14 -"                    of the settlement deed can be contentious.
    „ the issue in dispute is clear cut;            The ATO’s model settlement deed
                                                    contains a number of terms and conditions
                                                                                                       COMPROMISE
    „ the issue in dispute is subject to
                                                    which require careful consideration and
      escalation to determine the ATO view;                                                            Introduction
                                                    explanation to the taxpayer as they affect
    „ the issue in dispute is being litigated       the extent to which the settlement deed is         The ATO is empowered to compromise
      through other court proceedings;              binding on the ATO. For example:                   certain tax debts.14 The ATO’s obligations
                                                                                                       to enforce the correct interpretation of
    „ the taxpayer’s case is weak and unlikely      „ the settlement deed is only binding on
                                                                                                       a tax law or collect tax liabilities restrict
      to be reviewed or appealed;                     the ATO if the taxpayer has disclosed
                                                                                                       the ATO’s ability to compromise debts
                                                      all relevant facts;
    „ determination of the issue by court                                                              on public policy or normal commercial
      proceedings is in the public interest         „ the settlement deed authorises                   or business considerations.15 The ATO
      to provide judicial clarification or to         recovery of the total tax and not the            gives priority to promoting voluntary
      facilitate flow-on public compliance; or        compromised amount for breach of the             compliance and deterring non-payment
                                                      payment arrangements;                            over the recovery of some additional
    „ the taxpayer has deliberately created
      circumstances resulting in the inability
      to pay a tax debt.
                                                         9 Tip: settlement
                                                         1. The settlement submissions should clearly specify the quantum or interpretation
    The ATO is generally resistant to global                issue at dispute which qualifies the matter for settlement procedures.
    settlements by payment of a lump sum
                                                         2. The settlement submissions should emphasis the administrative reasons favouring
    to finalise a number of unrelated issues
                                                            settlement.
    without determining liability for each issue
    based on the merit of each issue. However,           3. The settlement submissions should contextualise the administrative reasons possibly
    a global settlement may apply where the                 precluding settlement.
    issues are related, such as where there is           4. The settlement submissions for widely-based tax disputes should address the
    a common flow of funds, for example, on                 matters that the Panel must consider as identified in PS LA 2007/6.
    trust distributions.                                 5. The settlement submissions should clearly specify the quantum of tax, penalty and
    While the settlement submissions should                 interest to be paid.
    canvass the taxpayer’s capacity to pay               6. The settlement submissions should be without prejudice and deny liability or
    (particularly where the circumstances                   admission of fact to preserve the taxpayer’s position should litigation ensue.
    are beyond the taxpayer’s control) as
                                                         7. Ensure that the terms of the settlement deed are negotiated to protect the taxpayer
    UIJT BEESFTTFT UIF DPTUCFOFÙU BOBMZTJT
                                                            and officers of a corporate taxpayer from unnecessary settlement risks.
    of settling or litigating the matter, the


222 TAXATION IN AUSTRALIA Volume 45 No. 4 October 2010
funds in individual cases.16 Accordingly,        „ the debt is currently being disputed or      consideration and explanation to the
taxpayers are often bemused that the ATO           release or waiver applications are not       taxpayer.
has rejected an otherwise commercial               finalised;
settlement proposal.                                                                            Collections
                                                 „ the taxpayer’s return and activity
The ATO Receivables Policy provides                                                             The ATO will pursue collection proceedings
                                                   statement lodgments are outstanding;
guidance on exercise of the ATO discretion                                                      based on a risk assessment. Where there
to compromise debts,17 the deferral of           „ the taxpayer’s payment history is very       is little or no risk, collection proceedings
collection proceedings,18 and the payment          poor;                                        may be deferred. Deferment may be
                                                                                                conditional on entering into a 50/50
of a tax debt by instalments.19                  „ previous debts of the taxpayer have
                                                                                                payment arrangement by which:22
                                                   been compromised within the previous
Compromise of debt                                 five years;                                  „ the taxpayer pays all undisputed debts;
The ATO distinguishes between the taxes
                                                 „ the only benefit in accepting the            „ the taxpayer cooperates fully in the
and charges that it administers and the
                                                   compromise is the reduction of                 disputes process; and
taxes and charges that it collects on
                                                   enforcement costs attributed to the
behalf of other government agencies. For                                                        „ the ATO remits 50%23 of the GIC during
                                                   taxpayer’s obstruction of collection
example, the ATO collects amounts under                                                           the deferral period if the taxpayer is
                                                   proceedings;
the Higher Education Support Act 2003                                                             ultimately unsuccessful.
and the Student Assistance Act 1973,             „ the request for compromise is based
                                                                                                If the taxpayer does not accept the 50/50
but is not empowered to compromise                 on hardship (the release procedures
                                                                                                arrangement, collection proceedings are
debts under this legislation. Accordingly,         described below must be used); or
                                                                                                unlikely to commence during the objection,
it is necessary to ensure that the ATO is
                                                 „ the request for compromise concerns          review and appeal processes unless the
empowered to compromise specific tax
                                                   aggressive tax planning arrangements         circumstances of the case indicate an
debts.
                                                   or repeated compliance defaults by the       unacceptable level of risk. 24
In compromising a debt, the ATO will               taxpayer.                                    The ATO will likely consider that there is
consider the risks of litigation,20 including:
                                                 The ATO is practically restricted in           an unacceptable level of risk to collections
„ legal risks — specific legal, technical                                                       where:
                                                 compromising debts where payment of the
  and administrative issues;
                                                 compromised debt would be a voidable           „ there are reasonable grounds to
„ revenue risks — consequential effects          preference payment under the BA66 or the         believe that funds or assets are being
  on the revenue base from litigation;           CA01 because another dissatisfied creditor       dissipated;
                                                 might be entitled to void the payment.
„ operational risks — implementation                                                            „ the taxpayer does not comply with
                                                 The ATO does not consider it permissible         information and document requests; or
  of tax policies and laws to day-to-day
                                                 to compromise debts for public policy
  business operations issues;
                                                 reasons, including to avert closure of:        „ the ATO considers that the dispute
„ compliance risks — implementation              „ a business and the consequential loss
                                                                                                  is frivolous or without merit or not
  of systems, registrations, accounting,                                                          genuine.
                                                   of employment;
  lodgment and compliance issues; and
                                                                                                Alternatively, the ATO may not enforce the
                                                 „ a business serving the national or
„ reputation risks — business, industry            regional interests; or                       50/50 arrangement requirement where
  and personal reputation risks.                                                                payment would result in serious financial
                                                 „ charitable activities.                       hardship to the taxpayer.
The ATO will not be amenable to the
                                                 Care is required when preparing                The ATO will only accept security rather
compromise of an otherwise qualifying
                                                 compromise submissions as disclosures          than payment of an outstanding debt in
debt where:
                                                 made in support of the compromise may          limited circumstances, such as where
„ the compromise offers less than                                                               the taxpayer cannot obtain a bank
                                                 evidence insolvency which can be used
  the taxpayer’s total net assets in                                                            loan because of an inability to service
                                                 by the ATO in subsequent collection
  satisfaction of the debt;                                                                     repayments or meet lending requirements.
                                                 proceedings against the taxpayer or
„ the compromise would be a preference           related parties, such as under director        The collection by the ATO of cross-border
  payment and prejudice other creditors;         penalty notices. All communications            debts owed by non-residents or assets
                                                 should be on a without prejudice basis to      IFME JO PUIFS KVSJTEJDUJPOT IBWF TQFDJÙD
„ the compromise would prejudicially             restrict the use of the disclosures in other   complications. Chapter 38 of the ATO
  impact other recovery actions, such as         collection proceedings.21                      Receivables Policy provides guidelines on
  under director penalty notices;
                                                 The ATO’s compromise deed contains a           the collection of cross-border debts. The
„ the taxpayer could compromise the              number of terms and conditions (that are       collection of cross-border debts may be
  debt by a debt agreement under the             similar to those in the settlement deed        more limited than the ATO Receivables
  BA66 at reduced costs to the ATO;              discussed above) which require careful         Policy indicates. 25


                                                                                                                                  It’s essential 223
    Jamieson v CIR26 held that Australian            proposals exceeding 12 months to finalise      position,39 and voluntary disclosure.40 For
    courts will not enforce the tax debts of         the debt are unlikely to be accepted by the    the purposes of discussion:
    foreign governments and Div 263 TAA53            ATO.32                                         „ reasonable care requires a taxpayer
    has no affect unless there is a double           The ATO may not be amenable to an                to exercise the care that a reasonable,
    tax agreement in force which contains a          instalment proposal where:                       ordinary person would exercise in the
    TQFDJÙD BSUJDMF SFMBUJOH UP BTTJTUJOH XJUI                                                        circumstances of the taxpayer to fulfil
                                                     „ the prospect of collections is diminished
    the collection of foreign tax debts. The                                                          the taxpayer’s tax obligations;
                                                       by the proposal;
    same principle generally applies in other
    countries to Australian tax debts. 27            „ the taxpayer does not acknowledge the        „ recklessness involves something
    The Finland, New Zealand, France, Norway           debt and give an undertaking to enter          more than mere inadvertence or
    and South Africa double tax agreements             judgment for the full debt for default of      carelessness. Recklessness is gross
    include a mutual assistance in the                 the payment proposal; or                       carelessness — the doing of something
    collection of taxes Articles. Importantly,                                                        which in fact involves risk (whether
                                                     „ the taxpayer does not agree for the            known by the taxpayer) and the
    the Japan, United States of America and
                                                       allocation of payments against different       taking of that degree of risk would be
    United Kingdom double tax agreements
                                                       outstanding accounts in an order to the        described as reckless or unjustifiable;
    do not include a mutual assistance in the
                                                       advantage of the Commonwealth.
    collection of taxes Article.                                                                    „ intentional disregard of a tax law
    Australian bankruptcy enforcement28 is           REMISSION                                        requires the taxpayer to be aware
    not limited by the revenue debts collection                                                       of the tax obligation and to choose
    prohibition. The BA66 can be used to             Introduction                                     to disregard the obligation and
    indirectly permit registration of a court-                                                        intentionally decide to bring about a
                                                     The ATO is empowered to remit penalties
    ordered request for assistance to enforce                                                         state of affairs by the taxpayer’s own
                                                     and interest. ATO publications provide
    cross-border collections once a person is                                                         act of volition; and
    bankrupt.                                        remission guidelines, including the basis
                                                     and the extent of the remission.               „ where a taxpayer adopts an
    Instalment payments                              The ATO can initiate a remission or the          interpretation of a tax law that is
                                                     taxpayer can request remission.                  “reasonably arguable”41 (which is
    The ATO is empowered to accept payment
                                                                                                      subsequently found to be incorrect),
    of a tax debt by instalments. 29 The ATO
    is empowered to accept an instalment             Penalty remission                                the taxpayer may be obliged to pay
    payment deed for certain remittance              The uniform administrative penalty               any unpaid tax and interest on that
    taxes.30 A director will become personally       provisions apply to statements made,             tax. However, penalties should not be
    liable for a breach of an instalment             returns lodged and schemes entered               imposed on that unpaid tax.42
    payment deed by a corporate taxpayer.            into from 1 July 2000.33 Administrative        The ATO has a general discretion to further
    An application for instalment payment            penalties include penalties for failure to     remit uniform administrative penalties.43
    should:                                          lodge or provide documents,34 and tax
                                                                                                    A remission of the base penalty amount
                                                     shortfalls relating to false and misleading
    „ explain the reasons for non-payment;                                                          may be appropriate where:
                                                     statements35 or entering into a tax
    „ provide supporting evidence                    avoidance scheme.                              „ the taxpayer has a good compliance
      substantiating the inability to pay by the                                                      history;44
                                                     The uniform administrative penalty
      due date;                                      provisions also impose penalties for           „ the taxpayer has made an isolated
    „ provide supporting evidence of the             failure to withhold36 or remit37 to the ATO      honest and unintended mistake not
      taxpayer’s current financial position and      amounts under the Pay-As-You-Go (PAYG)           associated with an extraordinary event
      the steps taken to raise funds to pay the      withholding regime.                              or transaction;45
      debt by the due date;                          The extent of the base penalty imposed         „ the shortfall amount arising from
    „ provide supporting evidence that other         is determined by the degree of care              lack of reasonable care represents a
      expenses are not being paid in priority        or culpability of the taxpayer and the           tax deferral rather tax permanently
      to the tax debt; and                           taxpayer’s advisers. For example, for            avoided;46
                                                     misstatements, the ATO can impose a
    „ provide a payment summary to                   penalty for failure to take reasonable         „ the taxpayer makes an unprompted
      discharge the debt in the shortest time        care to comply with a tax law (25%),             voluntary disclosure before review/
      frame possible while meeting future tax        recklessness as to the operation of a tax        audit;47 or
      liabilities.                                   law (50%), or intentional disregard of a tax   „ a shortfall amount omitted by one
    Generally, the ATO will require a                law (75%).                                       entity was included as assessable in
    lump sum initial payment with regular            The ATO has discussed the concepts               another group entity, so any penalty is
    instalments, and any collection costs to         of reasonable care, recklessness and             applied to the overall net shortfall for
    be reimbursed.31 Experience suggests that        intentional disregard,38 reasonably arguable     the group.48


224 TAXATION IN AUSTRALIA Volume 45 No. 4 October 2010
A taxpayer that makes a voluntary              ATO is empowered to remit all or part of the   „ for the period before the taxpayer
disclosure in the approved form to the         interest, GIC57 or SIC.58                        amends an original return or activity
ATO may have tax shortfall penalties and       PS LA 2006/8 provides the remission              statement where the amendment was
scheme shortfall penalties reduced,49 or       guidelines for income tax shortfalls.            necessary because of a future event and
administrative penalties reduced by 80% if     Chapter 93 of the ATO Receivables Policy         the taxpayer did not know and could
made or deemed to be made before audit         provides remission guidelines for SG             not have known that the shortfall would
or 20% if made during audit.                   charge, excess contributions tax, PAYG           arise (such as a compensation payment
In addition to the taxpayer making             withholding, and other taxes and charges.        received in a subsequent tax period
submissions regarding the culpability of the   Remission of interest, GIC and SIC apply         which is referable to an earlier tax period
taxpayer and the taxpayer’s advisers, the      the same rules.59                                or a retrospective change in legislation).66
taxpayer can request further remission of
the base penalty.
Other relevant ATO publications on penalty
remission (which are not discussed in this
article) include:                                                All communications should be on
„ remission of penalties during                                  a without prejudice basis to restrict
  implementation of the new tax system
                                                                 the use of the disclosures in other
  for the period to 30 June 2002;50
                                                                 collection proceedings.
„ remission of penalties for failure to
  register for GST;51

„ remission of penalties for failure to
  withhold under PAYG withholding;52 and                                                      A remission of GIC or SIC to the base rate
                                               The ATO has a general policy to remit the
„ remission of superannuation guarantee        GIC rate to the SIC rate on and from 1 July    is provided for the period of delay where:
  charge (SG charge) and SG charge             2005 in respect of all income tax shortfalls   „ the ATO did not commence any audit
  choice shortfall.53                          accruing before 1 July 2005.60                   within a period equivalent to half of the
                                               A full remission of GIC or SIC is provided:      relevant review period;67
While these other ATO publications on
penalty remissions are consistent with the     „ for a period of ATO inactivity of at         „ the ATO exceeded the notified audit
ATO’s general remission policies, there are      least 30 days both before and after the        completion date (as adjusted);68
subtle differences because of the structure      notified expected audit completion date
                                                 (as adjusted);61                             „ a large corporate audit extended
of the particular taxes.
                                                                                                beyond two years;69
All communications should be on a without      „ for the period of taxpayer delay
prejudice basis.54 It is unclear whether                                                      „ the ATO or the taxpayer experienced
                                                 attributed to natural or other disasters,
without prejudice discussions can be                                                            delay in obtaining information from a
                                                 the serious illness of the taxpayer or
used when determining culpability under a                                                       third party not otherwise available to the
                                                 key personnel, or absences from the
subsequent remission request.55                                                                 taxpayer;70
                                                 jurisdiction outside the taxpayer’s
                                                 control;62                                   „ the ATO (and arguably the taxpayer)
Interest remission
                                                                                                experienced delay in analysing complex
                                               „ for the period of ATO delay in
The ATO charges interest on outstanding                                                         issues underlying the shortfall which
                                                 processing and issuing amended
tax debts to encourage the timely payment                                                       resulted in the case exceeding the
                                                 assessments for self-amendments or
of tax debts and to remove the financial                                                        notified expected audit completion
                                                 voluntary disclosures that exceeded the
advantage and compensate the community                                                          date;71
                                                 ATO processing time standards;63
for late payment.
                                                                                              „ the taxpayer has been granted
Interest (periods up to 30 June 1999           „ for the period after payment of GIC or
                                                                                                an extension of time to provide
inclusive), GIC (1 July 1999 to 30 June 2004     SIC and before issue by the ATO of the
                                                                                                additional information or to make legal
inclusive) and SIC (periods on and from 1        amended assessment;64
                                                                                                professional privilege claims;72
July 2004) apply to income tax shortfalls in   „ for the period before the ATO has
respect of those periods. GIC applies for                                                     „ the taxpayer has made a voluntary
                                                 changed relevant authorities and
GSJOHF CFOFÙUT UBY
 JOEJSFDU UBYFT BOE 1":(                                                     disclosure of a shortfall amount and:
                                                 precedential material (cases, rulings,
withholding shortfalls.                          ATO publications) that the taxpayer             Ž   the voluntary disclosure was made in
Broadly, GIC is a variable base rate plus        has relied on, provided the taxpayer                a timely manner after the error was
7%,56 and SIC is a variable base rate plus       has lodged an amended assessment                    first detected;
3%. Interest, GIC or SIC is charged from         application within a reasonable time
the date that the tax debt was payable. The      after the change;65 or


                                                                                                                                It’s essential 225
       Ž   the voluntary disclosure was made          return or an activity statement. Any GIC        or standard are not considered necessities.
           before notification of an audit or a       that has not previously been deducted           For example, outgoings on education
           voluntary disclosure initiative;           is deductible at the time an amended            are a necessity, but not if the outgoing
       Ž   the previous failure to disclose           assessment is issued.                           represents private school fees.
           was contributed to by the                  If the taxpayer has previously claimed a        The ATO may review or investigate the
           Commonwealth;                              deduction for the GIC, and GIC is remitted      quantum of income and outgoings or
       Ž   the size of the shortfall is relatively    by the amended assessment, the taxpayer         value of assets and nature of liabilities
           modest; or                                 must include as income in the taxpayer’s        in exercise of the release discretion.
       Ž   taxpayer has a favourable tax              assessment that amount as a recoupment          Modest equity held in residential property,
           compliance history; and                    to preserve the equitable operation of the      non-luxury cars, household furniture and
    „ the taxpayer has a related credit               provisions for deduction.82                     chattels, tools of trade and cash deposits
      or overpayment due from the ATO                 4PNF DBTI ÚPX BEWBOUBHFT NBZ CF                 are usually excluded from being realised
      concurrently with the tax shortfall             achieved by amending assessment to              to pay the debt.86 These exclusions must
      amount and it is fair and reasonable to         deduct GIC in an earlier income year. SIC is    be reconciled with statements made in
      provide a remission.73                          deductible on a similar basis.                  compromising debts.87

    Specific remissions may be provided for                                                           The ATO will not be amenable to the
                                                      RELEASE
    particular compliance programs, such as                                                           release of an otherwise meritorious debt
    the offshore voluntary disclosure initiative.74                                                   application where:
                                                      Introduction
    The ATO will not provide remission of GIC                                                         „ the taxpayer has disposed of funds or
                                                      The ATO is empowered to release certain
    or SIC in fraud or evasion cases75 or where                                                         assets without making provision for tax
                                                      amounts of tax, penalties and interest if
    the taxpayer has unreasonably delayed,                                                              debts;
                                                      payment of the liability will cause serious
    obstructed or obfuscated the progress of          hardship. The minister is empowered to          „ the release would not alleviate the
    the audit.76                                      waive certain debts on equitable grounds.         hardship because there are significant
    The ATO has a general power to remit GIC                                                            other debts;
    or SIC where it is fair and reasonable to         ATO serious hardship release
    remit.77                                                                                          „ the taxpayer has made preference
                                                      The ATO is empowered to release an
                                                                                                        payments to other creditors;
    The taxpayer may object to certain SIC            individual or a trustee of a deceased estate
    remission decisions78 but can only obtain         from certain tax liabilities, penalties and     „ the taxpayer has not reasonably
    review of GIC remission decisions under           interest if payment would cause serious           pursued collections of receivables;
    ADJR77.                                           hardship.83 The ATO Receivables Policy
                                                      provides guidance on exercise of the ATO        „ the hardship is expected to abate within
    A taxpayer can deduct the GIC incurred                                                              a short term;
                                                      discretion to release debts.84
    from their assessable income.79 GIC is
    nJODVSSFEo JO UIF ZFBS UIF UBYQBZFS ÙSTU          The ATO can release income and fringe           „ the taxpayer has a poor compliance
    becomes liable to pay it, not in the year it      CFOFÙUT UBY
 1":( BOE GSJOHF CFOFÙUT UBY          history;
    is actually paid.80 GIC is incurred daily and     instalments, Medicare levy and surcharge
                                                                                                      „ the taxpayer has not lodged all returns
    before payment.81 Accordingly, GIC can            and additional tax, administrative penalties,
                                                                                                        and activity statements; or
    be deducted annually by amendment of a            penalties and general interest charge
                                                      in respect of those liabilities. Generally,     „ the taxpayer has not made adequate
                                                      withholding and remission-type taxes              provision for future debts.
     9 Tip: remission submission                      and charges (PAYG withholding, indirect
                                                      taxes and superannuation charges) are           The ATO may defer rather than release
     1. The remission submissions should
                                                      not susceptible to release because the          payment where the taxpayer is likely
        address penalty and interest.
                                                      amounts are withheld and remitted as a          to derive future income (such as
     2. The remission submissions should
                                                      custodian on behalf of another taxpayer.        compensation, insurance proceeds or
        refer to the relevant ATO publications
                                                                                                      deferred sale proceeds).
        for particular tax types.                     The ATO will consider the net income/
                                                      outgoings and net assets/liabilities of the     The taxpayer can apply for an ATO internal
     3. The remission requests should
                                                      taxpayer to determine whether payment           review or a merits review by the Small
        identify the basis for exercise of the
                                                      would result in serious hardship such           Taxation Claims Tribunal of an unfavourable
        remission discretion and the extent
                                                      that payment would deprive the person           release decision. Further release
        of the remission provided by the
                                                      of necessities according to normal              applications can be made where a change
        relevant ATO publications.
                                                      community standards.85 Necessities              in circumstances can be demonstrated.
     4. The remission submissions
                                                      include the reasonable acquisition of
        should identify other extenuating                                                             Minister’s waiver
                                                      food, clothing, accommodation, medical
        circumstances that may justify a
                                                      supplies, education for children and other      The minister is empowered to waive a tax
        greater remission than provided by
                                                      basic requirements of life. Excessive           debt due to equity or ongoing financial
        the relevant ATO publications.
                                                      outgoings or outgoings of a luxury nature       hardship considerations.88 The ATO


226 TAXATION IN AUSTRALIA Volume 45 No. 4 October 2010
Receivables Policy provides guidance on             ATO write-off                                  submission should be made to the ATO for
exercise of the minister’s discretion to            The ATO is empowered to write-off a            the period that the debt was written-off.
waive debts.89                                      debt where the amount is irrecoverable
                                                                                                   CONCLUSION
The Minister has an unfettered discretion           or uneconomical to pursue.90 As the debt
to waive a tax debt including, for example,         is written-off and not released, it may        Settlement and remission applications
where:                                              subsequently be reinstated and recovery        require substantial disclosure of information
„ the ATO’s administration of the tax laws          proceedings commenced where the                and provision of supporting evidence to
  have caused the taxpayer to incur an              taxpayer’s circumstances change. The           discharge the taxpayer’s onus of satisfying
  unintended debt;                                  ATO Receivables Policy provides guidance       the preconditions to exercise of the ATO’s
                                                    on exercise of the ATO’s discretion to         discretions.
„ the operation of a tax law has caused             write-off debts.91                             Some applications can be quite complex,
  the taxpayer to incur an unintended
                                                    A debt is irrecoverable at law, for example,   with detailed submissions justifying the
  debt the recovery of which would
                                                    where the amount is a provable pre-            exercise of the ATO’s discretions. Alternate
  produce an anomalous or inequitable
                                                    sequestration debt of a discharged             compromise, remission and waiver
  result; or
                                                    bankrupt or the balance was compromised        applications may be necessary to ensure
„ repayment of the debt would cause                 under a court scheme of arrangement            that all of a debt, penalty and interest are
  genuine and significant financial                 or creditor deed of arrangement for a          dealt with in the application.
  hardship.                                         company.                                       Care is required when preparing
A submission to the minister is often made          A debt is uneconomical to pursue where         applications to distinguish clearly between
concurrently with an ATO serious hardship           the likely costs of recovery actions and any   the various powers and to ensure that
submission. The ATO will coordinate                 awards of costs exceed the anticipated         submissions respond to the ATO’s guideline
with the minister the determination of the          return of collections or where the debtor      requirements for the relevant powers. All
submission.                                         cannot be located.                             applications should be drafted carefully
                                                    Generally, withholding and remission-type      to avoid inadvertent admissions against
The taxpayer should give the ATO express
                                                    taxes and charges are not susceptible to       the taxpayer’s interests and, in any event,
authority to exchange information with the
                                                    release because the amounts are withheld       should be on a without prejudice basis to
minister (despite any secrecy provisions)
                                                    and remitted as a custodian on behalf of       restrict the use of the disclosures in other
in order to facilitate consideration of the
                                                    another taxpayer.                              collection proceedings.
submission to the minister.
The taxpayer should request a copy                  The debt is likely to be reinstated where
                                                                                                   Ron Jorgensen FTIA, Principal
of the ATO’s report to the minister and             UIF UBYQBZFS ÙMFT B TVCTFRVFOU JODPNF
                                                                                                   Harwood Andrews Lawyers
the minister’s decision (which is usually           tax return with a tax credit or to set-off
                                                                                                   Accredited Specialist in Tax Law
provided in any event), and request the             a subsequent running balance account
                                                    credit.                                        References
opportunity to provide submissions
in response to the ATO’s report to the                                                             1    Kenny Rogers, The Gambler, The Gambler, United Artists, 1978.
                                                    Where a debt is reinstated, GIC and SIC
minister.                                                                                          2    PS LA 2007/5 at [7].
                                                    will be reinstated so a GIC or SIC remission
                                                                                                   3    ATO Receivables Policy, ch 24.
                                                                                                   4    ATO Receivables Policy, ch 26.
 9 Tip: release and waiver submission                                                              5    law.ato.gov.au/atolaw/view.htm?locid=’RMP/RP/
                                                                                                        ATOTOC’#ATOTOC (viewed 1 September 2010).
 1. All release submissions should be on a without prejudice basis.
                                                                                                   6    DFCT v Niblett (1965) 8 FLR 134; and DFCT v Mackey 81
 2. The release submissions should address the serious hardship consequences of the                     ATC 4571.
    debt.                                                                                          7    S 8 ITAA36; and Grofam P/L v FCT (1997) 36 ATR 493 at 503
                                                                                                        and 512.
 3. The release submissions should refer to the relevant ATO publications.
                                                                                                   8    PS LA 2007/5 at [5].
 4. The release submissions should identify other extenuating circumstances that may               9    PS LA 2007/6.
    justify a release of the debt.                                                                 10   Code at [4].
 5. The release submissions should include a detailed:                                             11   Code at [13].

    Ž   income and outgoings statement for the last 12 months;                                     12   Code at [15], [16].
                                                                                                   13   Code at [12].
    Ž   current assets and liabilities statement;
                                                                                                   14   For example, s 8 ITAA36 (income tax), s 3A TAA53 (PAYG),
    Ž   statement of property disposals in the preceding 3 years;                                       and s 356-5 TAA53 (indirect taxes).

    Ž   statement of anticipated or future interests in income or property (such as                15   ATO Receivables Policy at [27.40].

        deceased estates)                                                                          16   ATO Receivables Policy at [27.67].
                                                                                                   17   ATO Receivables Policy, chs 27, 39.
 6. The release submission should be made under the ATO serious hardship release and
                                                                                                   18   ATO Receivables Policy, chs 28, 38.
    the minister’s waiver.
                                                                                                   19   ATO Receivables Policy, ch 10.
 7. The release submissions should include evidence of attempts to obtain funds to pay             20   ATO Receivables Policy, ch 39.
    the debt (eg bank loan refusals).                                                              21   Bruse v FCT [2010] AATA 404.



                                                                                                                                                     It’s essential 227
    22              ATO Receivables Policy at [28.38].                                 42   S 284-75 TAA53.                                              72   PS LA 2006/8 at [76], [80].
    23              This may be 75% where the matter is subject to test case           43   S 298-20 TAA53; PS LA 2006/2 at [150]; MT 2008/3 at [27].    73   PS LA 2006/8 at [93].
                    funding.                                                           44   PS LA 2006/2 at [137].                                       74   PS LA 2006/8 at [88]; see also R Jorgensen, “Voluntary
    24              ATO Receivables Policy at [28.35]-[28.36].                         45   PS LA 2006/2 at [139].                                            disclosures”, (2010) 44(9) Taxation in Australia 519.
    25              M Dirkis, “Being caught up by the past: the enforcement            46   PS LA 2006/2 at [143].                                       75   PS LA 2006/8 at [70].
                    of foreign revenue debts”, (2009) 19 Revenue LJ, issue 1,                                                                            76   PS LA 2006/8 at [74].
                    article 3.                                                         47   PS LA 2006/2 at [149].
                                                                                       48   PS LA 2006/2 at [153].                                       77   For example, s 8AAG(2)-(5) TAA53.
    26              Jamieson v Commissioner for Internal Revenue
                                                                                       49   S 284-225 TAA53; MT 2008/3 (formerly TR 94/6).               78   S 280-170 TAA53.
                    [2007] NSWSC 324.
                                                                                       50   PS LA 2000/9; PS LA 2002/8.                                  79   S 25-5 ITAA97.
    27              Government of India v Taylor [1955] AC 491.
                                                                                       51   PS LA 2007/4.                                                80   ATO ID 2002/757; Nilsen Development Laboratories Pty Ltd
    28              S 29(4) BA66.
                                                                                                                                                              (1981) 144 CLR 616; and W Neville & Co Ltd v FCT (1937) 56
    29              S 255-15 TAA53.                                                    52   PS LA 2003/11.                                                    CLR 290.
    30              S 222ALA ITAA36.                                                   53   PS LA 2006/1; PS LA 2006/13; and PS LA 2006/6                81   S 8AAE and s 8AAC TAA53.
    31              ATO Receivables Policy at [10.10].                                 54   Bruse v FCT [2010] AATA 404.                                 82   ATO ID 2002/758 (withdrawn because it was a
    32              The ATO acknowledges that an instalment payment may                55   Brown v FCT [2002] FCA 318.                                       straightforward application of the law).
                    extend beyond one, two or more financial years; ATO                56   ATO Receivables Policy at [93.11], but may have been 8% at   83   Div 340 TAA53.
                    Receivables Policy at [10.18].                                          [93.13].                                                     84   ATO Receivables Policy, ch 24.
    33              Pt. 4-25 TAA53.                                                    57   S 8AAG TAA53.                                                85   ATO Receivables Policy at [24.21].
    34              Div 286 TAA53.                                                     58   S 280-160 TAA53.                                             86   ATO Receivables Policy at [24.30].
    35              Div 284 TAA53.                                                     59   PS LA 2006/8 at [31].                                        87   See ATO Receivables Policy at [27.26] which states that the
    36              Div 12 TAA53.                                                      60   PS LA 2006/8 at [43].                                             fact the debtor must dispose of a home to pay the debt does
                                                                                                                                                              not justify accepting less than the full amount of the debt.
    37              Div 13 TAA53.                                                      61   PS LA 2006/8 at [58]-[59].
                                                                                                                                                         88   S 34 FMAA97.
    38              TR 94/4 (withdrawn 14 May 2008) and replaced by MT 2008/1          62   PS LA 2006/8 at [72]-[73].
                    (12 November 2008).                                                                                                                  89   ATO Receivables Policy, ch 25.
                                                                                       63   PS LA 2006/8 at [86]-[87].
    39              TR 94/5 (withdrawn 14 May 2008) and replaced by                                                                                      90   S 47 FMAA97.
                                                                                       64   PS LA 2006/8 at [89].
                    MT 2008/2 (12 November 2008).                                                                                                        91   ATO Receivables Policy, ch 25.
                                                                                       65   PS LA 2006/8 at [113]-[118].
    40              TR 94/6 (withdrawn 14 may 2008) and replaced by
                    MT 2008/3 (12 November 2008).                                      66   PS LA 2006/8.
                                                                                       67   PS LA 2006/8 at [49]-[50].
    41              S 284-15 TAA53; MT 2008/2; and Walstern v FCT (2003) 54
                    ATR 423 at [108]. A matter is “reasonably arguable” if it          68   PS LA 2006/8 at [52]-[56].
                    would be concluded in the circumstances, having regard to          69   PS LA 2006/8 at [65]-[69].
                    relevant authorities, that what is argued for is about as likely
                    to be correct as incorrect (or more likely to be correct than      70   PS LA 2006/8 at [60].
                    incorrect).                                                        71   PS LA 2006/8 at [64].




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