It’s official. The Australian Taxation Office discriminates against small business people. It treats them unjustly and unfairly.
That’s the conclusion that can be drawn from the Inspector-General of Taxation’s report on The Management of Tax Disputes. (Click here for more information and a link to the Inspector-General’s report.)
The report released early this month details an ATO system that fails to meet the standards of impartiality and independence operated by the United States and United Kingdom tax authorities for example.
Based on the evidence, the Inspector-General says that it’s ‘not surprising that many taxpayers felt that … the system was not treating them fairly and equitably’. He reports that ‘the cost of disputes for taxpayers, … may take the form of financial, emotional and/or reputational…’ damage.
In my experience, where the ATO operates at its most unjust is in disputes with small business people over ATO interpretations of the law. Take a typical example.
A self-employed consultant will for years put in tax returns as a business person claiming normal business expenses, such as phone costs and so on. They put money into their own superannuation fund claiming the usual deductions to which everyone is entitled.
But the ATO has a change of mind and decides to declare the person an employee. The ATO then goes back five years and retrospectively denies the person their business tax deductions and even their superannuation contributions as deductions. Penalties and interest are added and the person will receive a tax bill for (frequently) hundreds of thousands of dollars.
The interpretation of the law by the ATO is complex, opaque, confusing and indecipherable. The small businessperson has no chance of understanding why they are being hit or how to respond. Usually the cost of defending themselves runs into tens of thousands of dollars requiring specialist accountants and lawyers that they can’t afford.
I know people who have lost their homes because of this situation. There are currently hundreds of self-employed contractors being attacked under just this scenario in what’s known as the ‘Freelance’ case.
The Inspector-General details how the ATO ‘review’ system works. It’s a process that any reasonable person would see as bullying
People are frequently forced to pay the alleged debt or a big part of it before they are allowed to appeal. This strips them of any money to pay for an appeal. The appeal must first go to the ATO itself. The ATO officers often won’t discuss the issues and/or don’t know the rules that are supposed to be applied.
I’ve had several people come to me with this problem. I’ve been able to point out the ATO’s own rule that says they don’t owe money. When they’ve shown the rule to the ATO officer, the officer dropped the allegation and debt against them. But in each case the small businessperson had already spent thousands on accounting and legal advice.
The Inspector-General further details that ATO officers will require huge amounts of information to be provided in very short time frames. Yet the ATO officers will take months to follow up and respond. Cases routinely go on for years. The officers take a ‘guilty until proven innocent mindset’.
The process is described as ‘frustrating steps to the doors of the Court’. Once in Court, even a small dispute, say over $5,000, will cost the taxpayer around $4,500 to defend.
Some 97 per cent of tax disputes involve small businesspeople and ordinary taxpayers, that’s some 21,756 individuals considered in the report. The report says ‘As a matter of fairness and equity, effective dispute resolution should be available to all taxpayers regardless of resources.’ This is clearly not happening. The ATO is failing the community.
The Inspector-General calls for a major reform to the ATO creating an independent internal review process. However, recommendations and promises for internal change have been happening since the 1980s. The ATO has done nothing for 40 years. That’s 40 years of, in my view, scamming and screwing over people who can’t defend themselves.
If a tax system is to work, people must have confidence in its fairness. The ATO has proven that it isn’t fair. It can’t be trusted. The report confirms that.
There’s only one solution. The ATO must have imposed upon it by Parliament a process of independent external review of disputes in which people can be confident of fairness. Let’s hope that for the sake of all Australians and the integrity of the tax system that reform of this sort is initiated and happens quickly.