Chapter 5 - Current ATO Handling of MMS: Part IVA, Settlements and Debt Collection
5.1
When the Committee reported on mass marketed
schemes in March 2000 it believed that the ATO had moderated its original
hardline stance on participant culpability and was moving to take individual
circumstances, among other things, more into account. The Commissioner had
indicated that the ATO had reviewed its approach to handling the MMS issue and
learnt a number of lessons.[1]
5.2
The Committee’s view at the time was strongly
influenced by the ATO’s development of a draft code of settlement guidelines
specifically for mass marketed schemes. The Committee saw these guidelines as
an important sign that the ATO was willing to address participants according to
their circumstances and to make concessions.[2]
5.3
During this inquiry, the Committee has received
considerable evidence to cause it to reconsider its earlier impression of a
shift in the ATO’s handling of the matter. While the Committee acknowledges
that the ATO has shown flexibility in some cases by way of entering into
settlement negotiations,[3]
it remains concerned about the ATO’s approach towards individual circumstances
and advising taxpayers of the settlement provisions, debt recovery policy and
hardship relief measures.
5.4
These are operational matters which will be
discussed in more detail in the following sections. Before turning to these
issues, however, the Committee addresses the question of the relationship
between consideration of individual circumstances and the application of the
Part IVA provisions. There is evidence of considerable confusion among scheme
participants about this relationship.
Individual circumstances and
application of Part IVA
5.5
The Taxpayers’ Charter commits the ATO to
treating taxpayers fairly and reasonably under the law, a commitment that
implies that individual circumstances are recognised and taken into account.
Likewise, Part IVA of the Income Tax Act requires the Commissioner to make
determinations on an individual basis. While the requirement to address
taxpayers’ circumstances appears unambiguous, its implementation in practice is
not straightforward. In particular, the question of what kind of individual
circumstances are relevant to the determination of the application of Part IVA
provisions needs to be clarified.
5.6
As outlined earlier, whether or not Part IVA
provisions apply to particular mass marketed schemes depends upon features of
the schemes themselves. These features include matters such as the financing
arrangements, the involvement of participants in the business, the size of
up-front management fees relative to the scale of investment in the proposed
activity, and so on.[4]
The ATO advised the Committee that determining whether Part IVA provisions
apply is ‘an objective test’[5]
and involves a judgement about the extent to which the presence and combination
of various features of a particular arrangement work such that the ‘objective
dominant purpose’[6]
of the scheme is deemed to be that of tax avoidance. What that means is that
whether or not individuals who participated in certain schemes were subjectively
motivated by the desire to avoid paying tax is basically irrelevant to the
application of Part IVA provisions to them.
5.7
In other words, the circumstances of individual
motivation are not the kind of individual circumstance to which the ATO must
attend in its treatment of taxpayers. Rather, the individual circumstances that
would make a difference to the application of Part IVA provisions would be
things such as financial arrangements in which the investor really did bear the
risk of the investment.
5.8
Mr Michael O’Neill, Acting First Assistant
Commissioner, ATO, explained:
The way Part IVA works is that it sets out these eight factors ...
and it calls for the determination of an objective dominant purpose. In a
sense, the person’s subjective intention is not the key trigger for the
application of Part IVA. So while individual facts are important ... there is
very little in these standardised mass marketed schemes. It is very rarely the
case that there is any exception to the scheme – very rare indeed.[7]
5.9
In a similar vein, Mr Peter Smith, Assistant
Commissioner, Small Business, ATO, said:
Generally, the individual circumstances of the taxpayers will
not affect the conclusions that Part IVA applies. There might be some
instances, as I mentioned before, of where taxpayers put their own money in
rather than use the round robin non-recourse or whatever financing technique
was used to inflate the deductions. But having come to a view that Part IVA
does apply, the statute imposes the penalty at 50 per cent.[8]
5.10
In the light of this explanation of the rules
governing the application of Part IVA provisions to individuals, two kinds of
question arise. The first concerns the policy issue of whether the subjective
motivations of individuals should be deemed irrelevant to a Part IVA
determination.
5.11
This is a matter which the Committee intends to
take up in its final report, and which cannot be fully canvassed here. The
basic issue, however, turns on the question of the point at which a taxpayer’s
due diligence should enter as a consideration that mitigates liability under
Part IVA. At present, a taxpayer can seek advice in good faith from financial
professionals, tax experts, and so on about the tax propriety of an investment
scheme. If the advice leads that individual into actions which are subsequently
deemed by the ATO to fall foul of the Part IVA provisions, the taxpayer’s ‘due
diligence’ has no effect upon the application of those provisions. It may
affect the amount of the penalty imposed, but it cannot protect the taxpayer
from the initial determination. In this, the taxpayer’s situation contrasts
unfavourably with that of a company director under Corporations Law, whose
liability for ‘failure’ is wholly waived by considerations of due diligence.
The question arises as to whether this feature of the current arrangements
imposes an undue burden of risk upon the individual taxpayer.
5.12
The second kind of question that arises concerns
the ATO’s application of the Part IVA provisions to particular cases. The
following two matters have been raised under this heading:
- the ATO’s failure to communicate the distinction between
individual circumstances that are relevant and those that are irrelevant; and
- the ATO’s apparent failure to take full account of relevant
individual circumstances.
Failure to communicate the distinction
5.13
Evidence of the ATO’s failure to communicate the
distinction between individual circumstances that are relevant and those that
are irrelevant is discussed in the Ombudsman’s report of the ATO’s handling of
the Maincamp scheme.
5.14
The Ombudsman noted that the ATO invited scheme
participants ‘to provide information about their individual circumstances which
would help ensure the ATO resolved their case in a fair way’.[9] Many Maincamp participants took
up this invitation, but then found themselves issued with assessments ‘which
did not appear to take into account the information they had provided’.[10] According to the ATO, the
features of the Maincamp arrangement relevant to the Part IVA determination
were common to all participants and, as such, only participants who did not use
the limited recourse loan facility would have been treated differently.[11]
5.15
While the Ombudsman accepted this explanation
for the common treatment of participants, it criticised the ATO for its failure
to inform individuals of the reasons that additional personal information was
unlikely to have changed its view of the application of Part IVA. The Ombudsman
also stated:
It is the Ombudsman’s opinion that, irrespective of the numbers
of participants involved, the principles of fairness and accountability remain
paramount. This includes requiring the ATO to explain fully the basis of its
decisions. This lack of explanation to the individual participants, in the
Ombudsman’s opinion, amounts to a breach of the Taxpayers’ Charter.[12]
Failure to take full account of relevant circumstances
5.16
Many witnesses to the inquiry, including
participants and their tax advisers, have complained that their efforts to have
individual circumstances addressed have been met with standardised pro forma
ATO correspondence that glosses over or simply ignores personal factors. This
style of treatment indicates a process-driven ‘broad brush’ approach to dealing
with scheme participants – an approach that the ATO claims to have moved away
from in recent years because of its inherent inability to take individual
factors into account.
5.17
As a sign of the inconsistencies that a blanket
approach to schemes and participants can introduce, the Committee notes the
recent case of a vineyard scheme in which all participants received the same
ATO notice to disallow deductions, despite some participants having not availed
themselves of the limited recourse loan facility.[13]
5.18
The Committee also heard of a further situation
where the ATO disallowed deductions for a scheme on the grounds that it
involved non-recourse financing, although the scheme appears structured on the
basis of full recourse financing.[14] The Committee considers that
these examples of indiscriminate treatment probably stem from a tendency to tar
most schemes with the same brush.
5.19
The Committee finds it hard to reconcile, on the
face of it, the claim that the ATO ‘always’ considers individual circumstances
with the evidence presented to the inquiry. It seems to the Committee that the
ATO’s overall handling of many scheme participants is more influenced by the
view that variations are ‘relatively minor’ across schemes and participants
than the requirement to treat taxpayers on an individual basis. This view tends
towards prejudging scheme participants and appears to have introduced a bias in
the ATO’s approach that marginalises individual circumstances.
5.20
In view of the tax burden participants face and
the mitigating circumstances in which many invested unwittingly in schemes, the
Committee considers that it is incumbent upon the ATO to adapt its operating
procedures to address individual circumstances in a manner consistent with the
Taxpayers’ Charter. This is necessary for the ATO to meet its obligations
under the Charter and the Income Tax Assessment Act. As the last two sections
of this chapter show, avoiding the tendency to broad brush taxpayers is also
important to ensure the ATO adheres to its own settlement guidelines and
provisions relating to debt recovery and hardship relief.
Reducing interest for ‘some investors’
5.21
On 26 April 2001, the ATO announced that it
intended to reduce the interest on tax debts for ‘some mass marketed “tax
effective” schemes debts’ to assist some taxpayers caught up in these
arrangements.[15]
It foreshadowed reducing the level of interest to an amount that more closely
approximates the ‘time value of money’, a reduction that could see the level go
from the current 13.86 per cent to 5.86 per cent. At the time of writing this
represented the most recent development in ATO treatment of scheme
participants. In the Committee’s view it reflects a shift in the right
direction towards taking the individual circumstances of taxpayers more into
account.
5.22
In announcing the measure, the ATO indicated in
general terms the profile of scheme participants likely to be considered for a
reduction in interest. Such participants would, in the ATO’s view, ‘not be
categorised as typical scheme investors’ but rather be seen as ‘unwitting captives
of aggressive marketing techniques and what we consider bad advice, often from
those who stood to profit from gaining their participation’. The ATO pointed to
four features distinguishing these participants:
This approach would be appropriate for what might be called
unsophisticated investors with generally good tax records who have been caught
by misleading claims made in respect of these investments and suffered a real
financial loss.[16]
5.23
The announcement also signalled those
participants who would not receive concessional treatment, with the ATO citing
as a nominal example a high wealth individual (‘gross income of $170,000 to
$200,000’) with a track record of aggressive tax income minimisation (reducing
taxable income to ‘$3000 in one year’) via scheme participation.
5.24
The ATO also stated that eligibility for an
interest reduction would be subject to participants entering into either a
settlement and/or an agreed payment arrangement. Participants who have already
paid their tax liability or who already have entered into a settlement would
benefit from the measure, provided they fit the criteria mentioned above.
5.25
While the Committee welcomes this as potentially
a significant breakthrough in the stand off between the ATO and scheme
participants, it also foresees some difficulties possibly arising unless both
sides take care in their approach to the measure. The potential stumbling block
is the proposed guidelines for determining who should be entitled to the
interest charge reduction.
5.26
The ATO’s indication that it will consult
community representatives and stakeholders is a positive sign in its own right.
A consultative approach is not only appropriate in view of the widespread
interest at the community level but should also check any tendency for the ATO
to adopt a rigidly legalistic or predetermined view (as outlined above in this
chapter). By the same token, scheme participants and their representatives
should be open to understanding the ATO’s position in relation to the integrity
of the tax system. If approached in a constructive spirit, the consultative
process could itself play a role in bridging the differences between the ATO
and participants and their representatives.
5.27
Nonetheless, the Committee believes that
deciding upon the appropriate criteria for determining entitlement will be
difficult. The general criteria the ATO has already nominated –
‘unsophisticated investors’, ‘generally good tax records’, ‘captives of
aggressive marketing techniques’ and/or ‘bad advice’ and facing ‘real financial
loss’ – are not without problems. For one, it is not clear whether to be
entitled to an interest reduction a participant must satisfy all four criteria.
Basing entitlement on all four criteria would, in the Committee’s view, be too
restrictive. It would be unfair, for instance, if a participant with a sound
tax record who acted in good faith on the basis of poor advice were ineligible
for the reduction because he or she was deemed not to be facing a real
financial loss. This would result in inconsistent treatment of participants.
The Committee believes that those with good tax histories who acted in good
faith should be entitled to the interest concession irrespective of their level
of loss or tax debt.
5.28
How each criterion is to be defined also raises
questions. What will constitute ‘aggressive marketing techniques’ or ‘bad
advice’? Would this mean that those participants, who acted in good faith on
professional advice that was well intentioned but ultimately mistaken, would be
excluded from the interest cut?
5.29
In determining whether scheme participants have
‘good tax records’ or a history of involvement in abusive arrangements, the
Committee considers that it would be inappropriate if the ATO were to decide
that participation in schemes over successive years during the 1993-1998 period
amounted to a ‘history’ of scheme participation. As this period was marked by
the lack of certainty coming from the ATO over its position on Part IVA and
schemes, it would be unreasonable for the ATO to deem a taxpayer as a serial
scheme participant on the basis of involvement during this time. Other factors
might count against such a taxpayer, but involvement in schemes over successive
years during this period should not, in itself, be seen as a mark against a
taxpayer’s record.
5.30
Neither should participants be condemned for
acting on the advice of tax professionals. Seeking and following professional
advice does not categorise a scheme participant as a ‘sophisticated’ investor
or tax ‘game player’.[17]
Under a self assessment tax system characterised by complex law, many taxpayers
including those with relatively straight forward financial affairs feel
compelled to seek the advice of tax agents and financial advisers. This is a
prudent step in many cases. While there is doubtless an element among the
community who seek advice in order to beat the system, many go to tax
professionals because they are unsophisticated investors and dependent
on experts. This fact of the self assessment tax system should be taken into
account in defining whether investors are sophisticated or not.
5.31
The Committee also notes that the ATO’s
announcement is silent on the time period to which the interest reduction would
apply. Is it to be based on the compromise formula adopted in the context of
the Ombudsman’s investigation of Maincamp or will a different basis be used?
Furthermore, will the interest period be decided upon on a case by case basis
as specified in the Addendum to the Code for Settlement Practice (in particular
paragraph 6.3.3)? Or will a blanket approach be used based on a set time
period?
5.32
How these questions are resolved will have an
important bearing on the outcome of this initiative. All parties involved in
the consultations on the guidelines will need to approach those discussions
with the goal of seeing the measure implemented uppermost in their minds. It
should not be used as a point scoring exercise by any party. A spirit of
compromise will be needed to ensure the interest concessions come to fruition
and to avoid the measure being derailed as the test case program has been until
recently (see chapter 6).
Settlements
5.33
As mentioned above, the Committee originally
interpreted the Commissioner’s decision to introduce a specific code of
settlements for mass marketed schemes as signalling a move towards resolving
the matter with participants in a conciliatory way. As the guidelines state:
The ATO is now at a stage where formally settling with an
increasing range of promoters and scheme participants may be appropriate as a
broad strategy to consolidate the gains made in the ATO’s overall strategy
[towards mass marketed schemes]...[18]
5.34
While the ATO advised the Committee that it has
entered into settlement negotiations and arrangements in some cases, there is
little indication of this approach in the evidence to the inquiry. This may
reflect that those engaged in settling with the ATO are satisfied with the
process and outcomes and therefore felt no need to approach the inquiry. On the
other hand, some witnesses indicated that the ATO approach to settlements
needed to be more flexible,[19]
while others complained that the ATO notices to disallow deductions referred to
possible settlement arrangements in ‘vague and unnecessarily bureaucratic’
terms.[20]
5.35
One witness recommended that ‘[i]f the Taxation
Office is prepared to settle, then a full and open proposal should be offered
uniformly to all growers’.[21]
Likewise another said:
It is extremely unfair that the ATO are trying to differentiate
projects in the way they allow or disallow settlement. We have the ludicrous
situation of having most clients in one or more of six projects. Of these, the
tax office will not agree to settlement for three but will agree to a cash
basis settlement for the other three, with a penalty of 10 per cent for one of
those and five per cent for the other two. To the taxpayers, there were no
differences between these projects from a tax perspective. The ATO should be
required to allow consistent settlements on all projects.[22]
5.36
These remarks reflect a view broadly similar to
the Ombudsman’s, that the ATO should advise taxpayers upfront about the scope
for settlements in relevant cases:
The Ombudsman is of the opinion that it is vitally important
that the Commissioner provide the community with a general indication of his
views and his preparedness to settle cases.[23]
5.37
The Ombudsman goes further in also warning that
it would be ill-advised of the ATO not to inform taxpayers in a timely manner
of the potential to settle:
Taxpayers should not be threatened with amendments and large tax
bills, only to find out later the Commissioner was always prepared to consider
a settlement offer for a significantly lesser amount.[24]
5.38
The ATO says that it is, however, cautious about
making public offers to settle where the primary tax to be settled is for a
lower amount than if there was no settlement. This reflects concerns about the
possible legal ramifications following a recent Federal Court decision (Young
versus Commissioner of Taxation). The ATO indicated to the Ombudsman that its
preferred approach is to write to taxpayers notifying them of the settlement
provisions and encouraging them to approach the ATO with an offer.[25]
5.39
The Committee is strongly of the view that the
ATO should seek to be proactive in promoting its code on settlements to
participants. It sees the code as a key mechanism for taking individual
circumstances into account, particularly for the many taxpayers that invested
in good faith and whose culpability seems negligible.
Debt recovery and hardship
provisions
5.40
The Committee heard evidence suggesting that
there was a general lack of awareness among participants of the ATO’s debt
recovery measures and hardship relief provisions. In view of the heavy tax
burden many participants face, the Committee would expect that a sound
administrative approach would include notifying participants of ATO measures
designed to assist taxpayers manage their tax bill. Such an approach would not
only help taxpayers meet their tax debts and minimise the risk of financial
ruin and other personal stress, but would also increase the chances for
repayment and the ATO’s ability to recover large-scale debt.
5.41
The Committee takes particular note of the
Ombudsman’s findings and perspective on the ATO’s debt recovery procedures for
Maincamp participants. As with the evidence to this inquiry, many of those who
complained to the Ombudsman’s investigation expressed concerns about their
ability to repay the tax debt raised by the ATO. Although ATO correspondence to
participants included information about standard ATO recovery procedures while
debts remain in dispute, the Ombudsman stated that ‘it provides no guidance
about the possibility of considering longer-term settlement of debt’.[26]
The Committee heard similar criticism which suggested that notices to disallow
deductions did not reflect ATO public statements regarding repayment schemes
and other debt recovery options.[27]
5.42
In response to these criticisms, the ATO
informed the Committee that taxpayers are first notified of outstanding debt
through a Notice of Assessment. The ATO conceded that, while this Notice
includes payment details and a contact number if the taxpayer is unable to pay
by the due date, it does not explicitly outline advice about alternative
payment options, possible release from the debt in cases of hardship and the
Taxpayers’ Charter. These are provided in the Final Notice, issued when an
assessment is not paid by the due date.[28]
5.43
However, the ATO did advise that before it
issues the first Notice of Assessment ‘there will often be prior communication
with the taxpayer or their representative’.[29]
In the specific case of mass marketed schemes, the ATO sent more than 49, 000
investor packages to taxpayers which gave individuals the opportunity to take
up voluntary disclosure provisions and which discussed the availability of
payment and hardship relief options.[30]
5.44
Nevertheless, the ATO acknowledged that it:
has recognised that the communication strategies to date may not
have met the needs of all taxpayers. In response to this, additional and
improved communication strategies are being introduced to help taxpayers caught
up in tax effective scheme arrangements.[31]
5.45
The Ombudsman’s recommendation, in the Maincamp
inquiry, that the ATO adopt an ‘empathetic’ approach to payment arrangements
was based partly on the Commissioner’s assurance that such an approach would be
adopted for businesses making reasonable efforts to implement the New Tax
System, to ensure that tax debts did not lead to bankruptcy. The Ombudsman
considered that this attitude should be extended to Maincamp participants:
In the Ombudsman’s opinion it should be an extraordinary case
for the Commissioner to commence bankruptcy proceedings against a taxpayer with
a tax debt from investment in this scheme. He is also of the view that an
investor should not be forced to sell his or her principal place of residence
to pay off such debts, where that is the only asset, except where it can be
shown that there is an unacceptable risk to collection.[32]
5.46
The Committee has heard of several cases of
participants in other schemes having to sell off major assets including their
homes and cars in an attempt to meet scheme-related tax debts. Equally
disturbing, some evidence suggested an aggressive ATO approach to chasing debt,
including threats of garnisheeing wages.[33]
The Committee also notes that some scheme promoters and managers are placing
duress on participants to pay loan commitments, regardless of the fact that the
‘loan’ was financed wholly from now disallowed tax deductions (ie, the loan was
contrived and contingent on participants’ tax refund).
5.47
Evidence from the ATO, on the other hand,
maintained that it does not take such an aggressive approach to recovering tax
debts. Ms Erin Holland, Acting Deputy Commissioner, Client Account Management,
ATO, said: ‘We manage debt collection on a case by case basis taking into
account the individual circumstances of the client. We try to take a fair and
reasonable approach’.[34]
She continued:
On the issue of bankruptcies and the issue you raised about
people’s homes, where the taxpayer is genuinely cooperating with us and the
only tax that is outstanding is disputed, we will not take bankruptcy or
liquidation action, nor will we require the sale of a person’s home or assets ...
Where there is genuine hardship involved in relation to a taxpayer being able
to make those payments, we suggest that they approach the Tax Relief Board for
release of that debt. Basically, the criterion there is one of hardship. A
fundamental interpretation would be where there would be some inability to pay
for the necessities of life.[35]
5.48
The ATO defined ‘genuinely cooperating with us’
in the following terms:
That is if the taxpayer is prepared to meet with us, talk to us
about their financial situation and the difficulties they are having and come
to some arrangement with us around the payment of their debt.[36]
5.49
It further categorically rejected the
suggestions that it had initiated bankruptcy action against any participants in
mass marketed schemes, initiated action to sell homes or other assets, or
engaged private debt collectors to pursue debts.[37]
5.50
Nevertheless, the Committee received evidence
indicating that some of the actions of the ATO are not so conciliatory on the
ground. For example, Mr Lawrence Ryper told the Committee:
On 1 October 1999, I had an interview with tax officer Mr Mark
Beadle from the ATO’s small business section in Cannington. The ATO were
extremely reluctant to see me in person. My wife, me and my two children aged
six and four had driven the 1¼ hours from south Mandurah to the ATO in
Cannington. When we arrived at the ATO the security guards refused to let my
son use the lavatories unless were were met by an ATO officer first. After some
debate, my son and I were escorted to the facilities by a security guard ...
After this we were interviewed by Mark Beadle, who, when face to face, was far
more helpful than over the telephone. He said he was concerned as well, but
this was being driven from high up and he could offer no real solutions. I
detailed to him all the facts that I have previously detailed. Our only option
was to pay or go voluntarily bankrupt. We were offered no clemency.[38]
5.51
In information recently provided to the
Committee, the ATO said that it had informed Mr Ryper on 10 April 2001 that the
interest accrued on his debt from the due date of assessment until 10 April
2001 would be remitted ‘in full due to personal hardship, stress, efforts to
repay debt, working two jobs and selling personal assets’.[39] Future remission of interest
is to be based on the circumstances at the time. The Committee notes that Mr
Ryper’s request for remission was granted after his appearance before it, and
after the Committee raised his case directly with the ATO at its hearing on 3
April 2001.
5.52
Based on evidence of this kind, the Committee is
of the view that, at the very least, there seems to be a significant gap
between the ATO’s stated policy and its implementation by regional offices.
5.53
The Committee notes the recent announcement by
the Commissioner of Taxation of a new communication strategy designed to
address this ‘gap’. The strategy involves sending tax officers to towns where
mass marketed schemes have been heavily promoted, such as Kalgoorlie, so that
affected investors will be able to get appropriate advice ‘face to face’.[40] It further involves:
- allocating a case manager to each taxpayer with scheme related
debts;
- sending information to all investors addressing misinformation
and informing investors of the ATO’s processes; and
- increasing people’s awareness of the ATO’s helplines for
investors.[41]
5.54
While the
Committee welcomes this announcement, it is critical of the fact that the ATO’s
original letters to investors do not appear to have addressed some of these
basic issues and have thus allowed confusion and fear to take root. The new
communication strategy has seemingly been implemented late in the day, after a
significant personal and emotional toll has already been taken of investors
caught up in the ATO’s actions and after the establishment of this inquiry. The
Committee is concerned that this more conciliatory and helpful approach is
being taken only in reaction to this inquiry rather than as part of the
coherent and consistent implementation of the ATO’s stated policies.
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