Changes give taxman licence to monster small business
AUSTRALIAN BUSINESS REVIEW February 26, 2019 Ken Phillips
The Morrison government is setting up a much-wanted small business tax tribunal, but even before it starts we see efforts to white-ant its operation.
Just how much small business needs an independent tax tribunal was revealed in court by Michael Cranston, the former top Australian Taxation Office official. He was recently found innocent of using his high office to benefit his son, who is facing separate charges of alleged tax corruption.
Cranston’s testimony about the ATO’s internal culture was devastating. He stated under oath that tax audits are so often wrong that his job was to try to protect high-wealth individuals from flawed ATO audits. He described an ATO culture of “aggressiveness” against taxpayers.
His evidence supports the tsunami of allegations that the ATO is prejudicial in its audits of small businesses. However, there is no white knight in the ATO to defend small business operators from harmful ATO behaviour.
The ATO’s aggressive audit practice is well established. It will allege a debt — say $20,000. It loads the debt with penalties and interest, “blowing out” the amount owed to, say, $80,000. Rather than focusing on the facts of a dispute, the ATO plays legal process and time-delay games.
It demands payment before the facts of a case have been determined. It exhausts the small business operator emotionally and financially, driving them into submission, and sometimes worse. The ATO may then offer to settle for, say $50,000. Tired and drained, the small business operator gives in.
Cranston’s acquittal came just a few days after the Morrison government announced its new tribunal will start this Friday. The tribunal is the government’s response to escalating evidence of bad ATO treatment of small business people.
As Scott Morrison said last year, the tribunal is intended to create a level playing field for small business in its dealings with the ATO.
The government released draft rules for how the tribunal will operate. But the Prime Minister’s intentions for a level playing field have already been trashed in the wording of the tribunal rules.
The ATO already has overwhelming power against small business operators. To balance that, Morrison’s government promised that generally no lawyers would be allowed. In exceptional cases where the ATO was permitted to use lawyers it would have to fund lawyers for the small business to an equal amount.
The draft guidelines instead allow the ATO to use lawyers as it sees fit. No restrictions. Nor do the regulations impose any obligations on the ATO to fund a lawyer for the small business.
Most small business tax disputes are fact-based. For example, is a deposit into a bank account income or a transfer from one account to another and hence not income? Or is a claimed business expense a legitimate tax deduction? These issues are resolved by common-sense investigation of facts. An ATO auditor and a small business operator are perfectly capable of putting such facts to an independent tribunal.
ATO internal and external lawyers serve only to replace speed with delay, creating legal complexity and expense.
In a small number of cases an interpretation of tax law may be required. The tribunal regulations could permit ATO lawyers to make written submissions.
In such cases, as promised by the government, the ATO should then be required to fund lawyers to make written submissions on behalf of the small business. That’s a level playing field.
The draft tax tribunal rules pose a further problem. They say the ATO can continue enforcement, say, forcibly collecting payment, while a case is being heard. That mocks the rule of law. It pushes the balance of power hard against the taxpayer. It reinforces the ATO’s capacity to pressure people into submission.
But what if someone uses a non-enforcement period to strip their business of assets? Where the ATO has such concerns it should be able seek urgent tribunal approval to take action.
Finally, the government is setting up university-based tax clinics to help small businesses with ATO disputes. But the ATO is controlling their funding and establishment, making them look like an arm of the ATO.
If the rules for the small business tax tribunal proceed as drafted, the government’s pitch to small business about the tribunal being “proof we’re on your side” risks looking like a lie.