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When the Taxman proves to be a monster

AUSTRALIAN BUSINESS REVIEW   November 14, 2018   Ken Phillips

Australia’s tax-collection system relies on the honesty of millions of Australians who pay their tax voluntarily and without fuss.

That happy co-operation is under threat because of the behaviour of the Australian Taxation Office.

Each year individuals and businesses remit about $390 billion in taxes. Meanwhile, the ATO chases just $20bn a year in tax it claims people owe.

The massive voluntary compliance hinges on the belief that our tax administration system is fair. No matter how effective the ATO claims its enforcement is, if voluntary payments dropped, even by a small percentage, the ATO would be swamped.

Belief in the fairness of tax administration is critical. And it’s in the “fairness” stakes that the ATO’s behaviour threatens voluntary compliance.

Top tax jurist and retired Federal Court judge Richard Edmonds, with 50 years’ tax law experience, summarises the problem well. He writes that the ATO sees taxpayers as “cheats and liars and anything (it) does to bring them to account can be justified”.

The ATO has powers beyond any standard authority, including the police. It is investigator, prosecutor, judge, and financial penalty enforcer combined. Its powers, in short, are despotic. Present parliamentary and watchdog oversight has only a marginal effect.

The evidence is that the ATO uses its powers too readily to extract tax from people where no tax may be owed. The following stories from court and case records of people with modest earnings illustrate some of the problems.

  • A woman claimed a document the ATO seized would prove her innocence. The ATO refused to produce the document;
  • A man was accused of evasion by the ATO because he didn’t use an accountant to submit his simple tax return. It took 16 months and a court order before the ATO admitted it was wrong and dropped the tax claim;
  • Another who’d worked and paid tax overseas years ago has the ATO seeking to double-tax him. He can’t get tax records from his former employers or the other countries. The ATO refuses to use its foreign tax treaty powers to obtain information; and
  • Yet another relied on ATO website advice to submit his tax returns. The ATO website referenced a court judgment verifying the advice. Ten years on, the judgment has disappeared from the ATO website. The ATO says the man’s tax returns are wrong. They accuse him of “recklessness” and have imposed penalties because he cannot quote the court judgment from the agency’s website (and others allege the ATO has fabricated or changed documents to support claims of tax debts owing).

The difficulty is getting such matters investigated impartially. The federal government has an Integrity Commissioner whose job is to investigate serious misconduct by law-enforcement agencies. However, there is no independent body to whom taxpayers can report questionable ATO behaviour, even though it can result in major financial harm.

Even when the ATO admits wrongdoing, claims for compensation are handled and decided by the ATO. The wrongdoer decides on the penalties for its wrongdoing. That is neither a system of reasonable compensation for poor conduct nor an effective deterrence against a repeat of such behaviour. Taxpayers can’t be confident in the fairness of a system that lacks independent oversight. This undermines Australia’s culture of effective and efficient voluntary tax compliance.

The perception of justice is essential to a good tax system. Reforms are needed. The ATO is both tax investigator and prosecutor. Tax prosecution should be moved from the ATO to an independent department of tax prosecution, possibly under the Attorney-General.

The key to good tax administration is voluntary compliance. Chasing alleged tax debts should not be allowed to override the perceived fairness of the tax system. If we lose confidence in the system, it hurts everyone.

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