Chapter 4 - The Evidence
Overview
4.1
The
Committee received in excess of 140 submissions, the majority of which were
from individuals, small businesses and accounting firms who had participated in
mass marketed tax schemes and other ‘boutique’ tax schemes. These individuals
and companies had received amended assessments and penalties from the ATO.
Other submissions were received from groups such as the Certified Practicing
Accountants of Australia and the Taxation Institute of Australia.
4.2
Many
submissions received welcomed the initiatives in the bill and were supportive
of the introduction of the new shortfall interest charge (SIC). The majority of
the individual submissions and many of those from accounting firms and advocacy
groups argued for the legislation to have retrospective effect, although not
all agreed with this view. Commonly, submissions argued for the SIC to be
backdated to the commencement of self assessment in the early 1990s, although
others contended that the changes should be put in place to have effect on any
amended assessments issued after the bills were introduced.
4.3
The
evidence received by the Committee and discussed in this chapter addresses the
following areas in the bills:
- the
date of effect;
- SIC and
GIC interest margins;
- the
threshold for objecting against remission decisions;
- grounds
for remission; and
- the
definition of reasonably arguable.
Date of effect – the
retrospectivity issue
4.4
The SIC will only apply to the 2004-05 income year and
later years. In cases where the ATO amends assessments for prior years, the GIC
premium (or uplift factor) of 7 per cent over the ninety day bank bill rate
will continue to apply.
4.5
Currently, the GIC is approximately 12.5 per cent, a
level which the Explanatory Memorandum acknowledges as a high rate. It is set
at this level ‘to encourage prompt payment of tax liabilities’.[19] The reasoning behind the decision to
introduce the SIC is that taxpayers are generally unaware that they have a
shortfall, and are not in a position to respond to the incentive to pay promptly.
4.6
The Treasury review notes that the uplift factor which
applies to the GIC ‘is not intended ... to serve as a penalty for having engaged
in blameworthy conduct’.[20]
Nonetheless, the effect of this interest rate over a protracted period of
re-assessment is significant, and as the review report acknowledges, more than
doubles a tax debt over a six year period. As such, it is seen by many as
punitive.
4.7
Submissions arguing for the bills to have retrospective
effect fall into two broad categories: those who argue that the introduction of
the SIC constitutes an acknowledgement by Treasury that applying the GIC to
taxpayers before they are notified that they have a tax debt is inequitable;
and those who consider that the application of settlement arrangements to many
mass marketed scheme participants has itself created inequalities between
taxpayers which can be reduced by applying the SIC retrospectively.
4.8
The National Tax and Accountants’ Association (NTAA)
argued that having recognised the inequity associated with the GIC, the
situation should be corrected with effect on any future assessments of prior
income years:
If these amendments only apply to the 2004-05 and later income
years then taxpayers will still be subject to the penal GIC rate for many years
to come ... Although the Government has recognised the inequity of the current
application of the full GIC rate the amendment will not have effect in many
cases for some years to come. Having recognised that the current application of
the GIC is inequitable the NTAA strongly recommends that the inequity be
removed now rather than progressively over the coming years. To continue with
the inequity is ... itself inequitable.[21]
4.9
The Corporate Tax Association was also among those that
believed that some consideration needed to be given to applying the SIC in
earlier assessments:
The proposed amendments, most notably the proposed SIC, will
only apply to amendment of assessments for the 2004–05 income year and later
years. For income years prior to 2004–05, the existing GIC regime will continue
to apply. Given this, we believe that further consideration needs to be given
to the impact of the existing GIC regime on those prior years, particularly in
the context of amended assessments in large case audits and the Commissioner's policy
regarding the remission of GIC.[22]
4.10
Many of the other submissions received by the Committee
were sent by people who had been involved in mass marketed and other tax
schemes, and who had received amended assessments which included a GIC
component which exceeded the original penalty. The effects on some of these
people of the GIC were unquestionably severe. Resolution Group Australia,
a taxpayer advocacy group, noted that:
...the burden of GIC has made it impossible for many businesses to
even contemplate payment and liquidation has been the only option.[23]
4.11
In
addition, a number of the individual submissions the Committee received gave
accounts of mental and marital breakdowns, homes and businesses being lost, and
cases of suicide.
4.12
Following a report of the Senate Economics
References Committee on Mass Marketed Tax Effective Schemes and Investor
Protection which was tabled in the Senate on 11 February 2002, many mass
marketed scheme participants were offered settlement terms that fully remitted
GIC and penalties.
4.13
During the current inquiry, the ATO advised the
Committee that the totality of the
mass market investment scheme participants was 42,000, of which 87 per cent -
about 38,000 - settled on a nil penalty, nil interest arrangement with two
years to pay without any interest.[24]
4.14
However, there were other taxpayers who were involved
in other schemes who claimed not to have been offered such settlement terms, and
others who chose not to settle on those terms. For them the impact of GIC
remains significant. Many taxpayers in these categories see the application of
a lower interest charge for the period leading up to when the ATO reassessed
them as potentially reducing their problems.
4.15
Evidence received from Mr
Anthony Kalogerou
of Nexia Court and Co, a firm of chartered accountants which acted on behalf of
many taxpayers involved in mass-marketed schemes, explains why mass marketed
scheme participants and their advisers seek to have the legislation applied
retrospectively. Mr Kalogerou
submitted that the settlements offered to some taxpayers and not others meant
that, in his view, an inequity was created between those who benefited from the
reduced penalties and those who did not:
The issue is that certain
taxpayers are treated differently depending on the particular circumstances of
some of these tax based investments that they made investments in over various
years ... Taxpayer A may have invested in a ‘scheme’, if we can use that
terminology, whereby the Commissioner of Taxation has stated that that is a
scheme that would be eligible for the mass-marketed concessions and their
position would be that they would not be assessed for interest and penalties;
whereas that taxpayer may also have invested in another scheme in that
particular year whereby he does not get the mass-marketed obligations when, as
far as that taxpayer is concerned, both investments were marketed quite widely
to the public. Therefore, one scheme gets quite draconian amounts of interest
and penalties to pay, and yet if the same investor went into a different scheme
he gets no interest or penalties to pay.[25]
4.16
The
Committee questioned Mr Kalogerou about how he saw retrospective application of
the legislation as addressing the problem he identified. He responded that:
That would give some equity
as to the treatment that he [the taxpayer] would enjoy under the proposed bill.[26]
4.17
Mr Clive
Ross, representing Resolution Group
Australia, a taxpayer advocacy organization, made a similar point, arguing that
applying the legislation retrospectively would serve to ‘level the playing
field’. When the proposition was put to him that to do this could be hugely
expensive, he said that this might not be the case, as a large group had
already had their penalties and interest waived.[27]
4.18
Committee members asked Mr
Michael Dirkis
of the Taxation Institute of Australia
to respond to the calls for retrospective application of the legislation. He
pointed out that applying the legislation retrospectively could create a new
set of inequities between those who had concluded their assessments and those
who had not:
If there is a settled arrangement already that is in a
particular year of income and a different set of rules is applied to somebody
who is detected later making an omission, that creates a perceived inequity, in
that they happened to be assessed at the right point of time, which is in the
year following the introduction of the legislation rather than in a later year.
That makes it difficult when you talk about going back a bit retrospectively.[28]
4.19
Mr Paul
McCullough of Treasury told the Committee
that adopting an earlier date of effect would not assist many of those caught
up in tax schemes. He said that many of these had already received remissions
of penalties and interest to nil, and others to a rate below the proposed SIC:
Going through the
submissions, the first thing that comes up is the date of effect. There has
been a lot of discussion about that. Simply put, to adopt a date of effect of
1994 was in one of the submissions. That would not actually help many of the
taxpayers that evidence has been given about. One of the witnesses even made
the point that the tax office has already used its existing power under the law
to deal with remission of the general interest charge to remit a lot of the
penalties and interest in those cases to nil. Even in some of the other
mass-marketed scheme cases interest has been reduced to 4.72 per cent. Nil and
4.72 per cent are both below the benchmark rates of this new shortfall interest
charge. That is a logical problem that I have. I do not see how that is going
to affect those particular taxpayers.[29]
4.20
Ms Stephanie Martin of the ATO advised that of the mass
marketed scheme participants and subsequent boutique scheme and EBA
participants, around 80 per cent are better off under the settlement arrangements
they have been offered than had the SIC rate been applied to them.[30]
4.21
Ms Martin
provided the Committee with the following update about the current initiatives
in relation to outstanding cases:
Subsequent to the
Inspector-General of Taxation’s report on GIC, the commissioner announced four
improvements last November. These were focused primarily on EBA type
arrangements. One was the rewrite of the remission guidelines. Another was the
setting up of a settlement panel to oversight consistency for settlement
arrangements for widely based schemes. Another was a cap on the amount of GIC
for those EBAs, and the other was for a new set of guidelines for remission for
EBAs taking into account individual circumstances. We sent out letters to all
the participants and up to about mid-May we had received about 926
applications—this is at 17 May-for further remission of interest and/or
penalties. At that time we had completed 261 of those. For 110 of those we had
asked people for some information that they had not provided but they had not
responded. For 125 of those we had granted a further remission, while 26 had
received no remission. The others are still being processed. The sorts of
things that are looked at in there include the compliance history of
people-whether they have been involved with other schemes or whether this was a
one-off; the extent to which they may have sought to rely on advice and the
nature of that advice, whether it was to them or held more generally; and the
financial impacts. Those guidelines are public, and we also put on the web site
how we apply those guidelines.[31]
4.22
The Committee adopts the views expressed by Treasury
and the ATO. It is of the view that extending retrospective application of the
SIC, while desirable from some viewpoints, would of itself create new
inequities and also has a number of significant practical difficulties.
4.23
The Committee questioned officers about whether the
measures that were in the bills and other announced measures would address the
problems that had been encountered in the mass marketed schemes episode. Mr
McCullough responded:
I do not think anything would stop mass marketed schemes. People
are going to try and avoid tax from now till kingdom come.[32]
SIC and GIC interest margins
4.24
While welcoming the SIC initiative, a number of
submitters argued that the SIC rate was still punitive and should be reduced to
zero. Taxpayers Australia
was among those who contended that the 3 per cent premium was still too high:
In respect of the SIC there should be no premium built into the
rate. Until the taxpayer’s increased liability, if any, is established, then
such a premium cannot act as an incentive to resolve the case except in those
instances where the taxpayer knowingly is aware of their underpayment of tax.
In those cases it is the opportunity to have a lower culpability penalty
through co-operation and voluntary disclosure that acts as the incentive to
resolve the case quickly. In all other instances the taxpayer has to await the
outcome of the audit or review before their increased tax liability, if any, is
known.[33]
4.25
Resolution Group Australia
made a similar point, pointing out that the Commissioner already has the power
to impose culpability penalties of up to 75 per cent. It argued that the
penalty provisions already provide sufficient disincentive to those who seek to
take advantage of the system [by incurring tax debts instead of borrowing], and
that accordingly, the rate should be the same as the bank rate.[34]
4.26
Mr Ross
maintained that even at 3 per cent, the uplift factor still constitutes a
penalty:
In our submission, the
uplift factor of three per cent is a penalty. I note that in the explanatory
memorandum Treasury goes to some pains to say it is not a penalty, but surely
it is. There is no other reason for having it there.[35]
4.27
The Taxation Institute of Australia
also submitted that the SIC uplift factor was too high, arguing that it should
not exceed two per cent.[36]
4.28
The Corporate Tax Association viewed the proposed
amendments as being very positive. However, it too highlighted the punitive
aspect of the uplift factors applied, particularly in relation to the GIC:
The crux of the issue is that the GIC does not integrate
properly with the policy for tax penalties, primarily because it includes a
substantial effective penalty component, particularly for large taxpayers, as
its rate is far in excess of their marginal borrowing rate. This, combined with
significant time delays in completing large case audits, has resulted in the
imposition of GIC having a very broad punitive-like effect for large taxpayers.[37]
4.29
The question of whether setting the uplift factor at
too high a rate could be counterproductive also arose, and was explored with
the Taxation Institute of Australia
witness, Mr Dirkis.
Senator WATSON: I just have a concern from the point of view of small taxpayers who have
no capacity to pay. I acknowledge the generous change, as it appears, and the
introduction of SIC with a three per cent margin. But in terms of taxpayers who
have limited resources and a limited capacity to pay the penalty and the tax as
a result of an inadvertent error, I think we are tending to have two classes of
taxpayers: those who can pay, who will pay the rate plus three per cent; and
those who have no capacity to pay, who have to pay at the general rate plus
seven per cent. So we do tend to distinguish between those taxpayers who have
the means and those who do not have the means. I wonder about this from an
ethical point of view.[38]
Mr Dirkis
responded that in a lot of cases, people were forced into a longer term
arrangement with the ATO to pay off their debt. He pointed out that the tax law
is complex and that this leads to mistakes, as opposed to fraud or evasion. For
example, in relation to the fee that agencies may charge nurses or other
workers when making job placements:
So we would say that a lot
of people, given the nature of our current work force with people seeking
agency employment and the fees being charged, would not realise that that fee
that they have handed over is not deductible. That is the sort of example that
you are getting at, where people just do not understand the law. The law is not
clear-and that is what we originally argued in our first submission here-and on
those grounds you really need to look very carefully at imposing any charge.[39]
4.30
Taxpayers Australia
also addressed the difficulty that taxpayers who are unable to respond to the
incentive to pay promptly face:
... if the taxpayer does not have the capacity to pay nor the
ability to borrow then it has the opposite effect. The end result is that
taxpayers without the capacity to pay are locked into an ever increasing tax
debt.[40]
4.31
Mr McCullough
of Treasury explained the reasoning behind the setting of the uplift factors:
The reasoning is very
simple: why should making an honest mistake put a taxpayer in a more beneficial
situation than that of a taxpayer who got it absolutely right? That is the
effect that the submissions which go to reducing the rate below what has been
chosen at the moment could have. If it came down to nil you would have a
situation where a taxpayer who got something wrong had a better situation—in
not having to pay that money, not having to borrow that money and not having to
incur any interest—than a taxpayer who did absolutely the right thing. That is
the reason for setting it at the base rate plus three. It is designed to
neutralise loan benefits for a benchmark case. It will not neutralise loan
benefits for an individual who otherwise could not have deducted the interest.
They will still be significantly better off. On the other end of scale, it is
set at a benchmark rate for business. Some businesses that are very large and
are able to borrow at lower rates might be able to do better than the
benchmark, but the point of a benchmark is that it has got to be applied to the
whole tax-paying population.[41]
The threshold for objecting
against remission decisions
4.32
The
amendments provide for a right of objection appeal where the unremitted
shortfall interest charge exceeds 20 per cent of the tax shortfall. Several
organisations contended that this threshold was inappropriate and argued that
the taxpayer should always have a right of appeal, or for a monetary threshold
to be set.
4.33
The
Taxation Institute of Australia (TIA) submitted that the absence of appeal
rights where the SIC is less than 20 per cent of the shortfall is ‘harsh and
unjustified’. The TIA contended that there should be no monetary
limit to a review of the Commissioner’s discretion, just as there is no
monetary limit in respect of an objection to an ordinary assessment. By way of
example, the TIA pointed out that '19 per cent of one
million dollars is a substantial amount that should always be open to review'.[42]
4.34
Mr Dirkis elaborated on this point at the public hearing:
If you request a review or
object to a shortfall interest charge and it is remitted back and it happens to
fall to 19 per cent or 19.99999 per cent, then you should have the right to
take that process forward and seek resolution. Obviously, you are going to make
that decision based upon the cost of going through that process versus the
amount of money that is involved, but it does not seem to make a great deal of
sense or equity that you cannot seek further redress if you believe that you
were in a situation that required full remission.[43]
4.35
Mr Ross of Resolution Group Australia also argued that the threshold had been
set too high. He told the Committee that the threshold should be specified as a
dollar amount, $500 or $1000:
It needs to be a fixed
sum, because then it will be a real right of review. I will add to that that
taxpayers are reasonable people. They are not going to go to appeal or review
for $500 or $1,000. The excuse of cost is not something that is really going to
happen.[44]
4.36
Addressing
concerns about the appeal threshold, Mr McCullough of Treasury pointed out that this right of review was a new right. The
Explanatory Memorandum similarly points out that under the current law, a
taxpayer can only challenge a remission decision through certain judicial
review mechanisms in administrative law. Mr McCullough explained that having too low a threshold would create an undue
administrative burden on the ATO:
In summary, on the 20
per cent point it is the introduction of a new right. Practically, there are so
many remission cases where the commissioner could potentially remit the tax
that to have an unfettered objection right would be an undue burden on the
administration, and there is a good reason for not having a remission right
down to dollar one in the first place. This is based on the fact that individuals
should not have a zero interest component even in inadvertent situations
...
It recognises that there has
to be some interest, otherwise people who do the wrong thing, even
inadvertently, get a benefit. Practically, it has got to focus on where the
amount of the interest could have a penalty-like effect on a taxpayer. It does
not occur at one percent, two per cent or three per cent, and so a figure was
chosen to represent what would be a figure over a few years.[45]
Grounds for remission
4.37
Schedule 1, item 1 subsections 280-160(1) and (2)
provide the Commissioner with a discretion to remit part or all of the SIC
where the Commissioner considers it fair and reasonable to do so, and set out
the principles that the Commissioner must have regard to in making such a
decision.
4.38
The Taxation Institute of Australia
argued that the illustration of cases that would satisfy a remission should
also include ATO inaction, where the ATO was aware of a problem but failed to
take any action; and that remission should also be considered where there is a
retrospective change in ATO interpretation.[46]
4.39
Australians for Tax Justice also raised an issue in
relation to this section, arguing that a body independent of the ATO should
consider remission requests.[47]
4.40
Paragraph 2.68 of the Explanatory Memorandum points out
that the cases given in relation to remissions are not intended to be
exhaustive, and that the Commissioner has a broad discretion to remit.[48]
4.41
The Committee was also advised that the ATO remission
guidelines are under review.[49]
The definition of reasonably
arguable
4.42
For large items,[50]
taxpayers must not only take reasonable care, but must also adopt a reasonably
arguable position. A position is reasonably arguable if it would be concluded
in the circumstances, having regard to relevant authorities, that it is at
least as likely to be correct as incorrect.[51]
4.43
The Corporate Tax Association supports the amendment:
Clarification around the words 'reasonably arguable' is
important as those taxpayers who can establish a 'reasonably arguable' position
for a large item are not subject to the penalty for a tax shortfall resulting
from taking a position that is not reasonably arguable.[52]
4.44
In evidence, Mr McCullough
of Treasury advised that the changes to the 'reasonably arguable' provisions change
the balance on the reasonably arguable position to the taxpayer's favour.[53]
4.45
The Committee also notes that the change does not
appear to represent any change in ATO practice. (see paragraphs 3.14 and 3.15).
4.46
However, the Taxation Institute of Australia
(TIA) suggested that rather than having the same meaning as in section 222C of
the Income Tax Assessment Act 1936,
the amendment alters the meaning of 'reasonably arguable' because it
establishes a more stringent test whereby the prospects that the taxpayer's
treatment of a matter as being the correct treatment must be greater than 50
per cent.[54] The TIA
does not consider that the change goes far enough. The TIA recommended that the words in s 284-15(1)
('or is more likely to be correct than incorrect') be deleted to restore the
clear s222C meaning. The Institute maintained that the correct interpretation
of what is 'reasonably arguable' has been clearly set out by Hill J in Walstern
v FCT [2003] FCA 1428, and was confirmed on appeal.
4.47
The Committee
notes that the Treasury review also referred to this case.[55] The matter was not pursued at the
public hearing.
Conclusions and Recommendation
4.48
The Committee notes that these bills are the first in a
series that will, over a period of time, implement the recommendations of the
Treasury review of income tax self assessment. They are of limited scope.
4.49
The initiatives in the bills and the bills to follow
will not satisfy everyone. As the large number of submissions the Committee
received indicates, there are still outstanding matters to be resolved in
relation to mass marketed and other tax schemes, and disagreements within the
taxpayer and financial community about how the ATO should approach its task. However
these are not matters that can be dealt with in this legislation. There was
also a degree of discontent on the part of organisations that made submissions
to the Treasury review, and who were disappointed to see that their views were
not taken up. As Mr McCullough
of Treasury noted in evidence about one particular submission, views to that
inquiry were not overlooked, they were considered in detail, but they were not
accepted by the Government.[56]
4.50
Nonetheless, the Committee considers that these bills
represent a positive step in giving taxpayers more certainty in relation to the
operation of tax self assessment, and improve a number of the perceived
shortcomings of this system.
4.51
The introduction of the SIC recognises that taxpayers
who are unaware that they have had their liabilities reassessed are not in a
position to respond to incentives to settle quickly that are part of the
current GIC. The Committee also regards the abolition of penalties for failing
to follow a private ruling and the introduction of a requirement for the
Commissioner to provide reasons for penalties and for not remitting penalties
as significant improvements.
Recommendation
The Committee
recommends that the Senate pass the bills without amendment.
Senator George
Brandis
Chair
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