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ICA starts legal battle with the ATO on two fronts

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At ICA, we’ve been complaining to the ATO for years about its bad treatment of small business people. We’ve made major submissions to tax inquiries. Look at this long list. We’ve tried to work with the ATO but there’s been no change!

So now, thanks to some brilliant lawyers, we’re off to court. Here’s an overview of the case we described in March this year.

Finally, we can give some details. It involves 55-year-old IT contractor Rod Douglass, his wife and their partnership and a demand from the ATO for $550,000 backdated to 2006 (10 years!). Rod is accused of tax evasion. Why? Because he complied with ATO tax advice published on the ATO website. Amazing!

This treatment by the ATO can hit anyone working for themselves. Even if you’re totally honest with the ATO, they can and do target you. We’re out to protect Rod. We can’t let him be beaten up by the ATO without helping. We’ve filed in the Federal Court and the Administrative Appeals Tribunal. There’s a lot of information that we’ll release as the lawyers authorize it.

However, Robert Gottliebsen has given some details and commentary in The Australian today. His article is here. Read the article so that you understand how anyone could be hit!

Robert says:

  • …the reason for the bad (ATO) culture is the fact the … tax officials are investigator, prosecutor, judge, jury and appeal court.
  • It was the inescapable intention of the tax officials to bankrupt him (Rod).
  • The precedent could … destroy many husband and wife partnerships around the land.
  • Chris Jordan (The Tax Commissioner) should consider admitting that he has a cultural problem in his middle ranking staff.

Robert’s article gives some details of Rod’s case. ICA will keep you updated and publish much more detail here as events unfold.

 

ICA launches Constitutional challenge to anti-truckie laws

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You’ll be aware of our campaign to stop the Road Safety Remuneration Tribunal.

We can now advise that, as of 4.10pm today in Sydney, the High Court confirmed the filing of Independent Contractors Australia’s constitutional challenge to the Road Safety Remuneration Tribunal Act. ICA is asking the High Court to consider that the Commonwealth does not have the power to fix prices and therefore that the RSRT Act is invalid and that any orders of the Tribunal are consequently invalid.

ICA has at the same time asked for an urgent injunction against the Tribunal and its orders that would effectively freeze the Tribunal’s orders until such time as the constitutional questions have been answered. We are in the hands of the High Court in terms of the timing of an injunction decision. We hope it will be soon.

Last week we asked for your owner-driver stories. We have been inundated. We have not been able to reply or process the huge number. But our massive thanks. We worked with several people to turn their stories into affidavits which involves a lot of work for filing with the High Court. We will ring these people to thank them.

This is the first phase of a lot of work. We may need to use many more stories in affidavits.

Thanks also to the huge number of people who have joined ICA. Your money is going to the legal fees but we will need to raise a good deal more. Lawyers for High Court challenges are expensive.

We will keep you informed.

 

Small business is losing confidence in the ATO

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How would you feel if — after years of filling out your tax return in strict accordance with the Australian Taxation Office’s written rules and having your tax returns accepted by the ATO — you discovered that the ATO was accusing you of fraud?

Further, that the basis of the fraud accusation was that you were complying with ATO written rules. Confused? Go figure!

But this is the scenario confronting small business people today in their dealings with the ATO.

Still, the Tax Commissioner has been complaining that his office is subject to too much scrutiny. And now, at the Treasurer’s request, a parliamentary committee is considering whether the ATO has too much oversight.

The fraud accusations are quite staggering. It transpires that for individual taxpayers, once tax returns have been accepted, the ATO is only able to undertake reviews going back two years. However, if fraud is involved, the ATO is able to go back some seven years or more.

In the cases that the Independent Contractors Australia have been investigating, on the basis of fraud allegations, the ATO is demanding several hundreds of thousands of dollars of additional tax and penalties from individuals.

The cases involve consultants. Some are being denied tax deductibility on their superannuation contributions normally allowed for any taxpayer. Others are being denied income distribution through partnerships that is quite clearly allowed according to the ATO website and long accepted practice by accountants.

In our submission to the parliamentary inquiry, we quoted legal opinion that the ATO is required to establish a fact of fraud before it can act upon it. Mere allegation is not enough.

The opinion says, “… a jurisdictional fact must be established before the ATO can revisit the assessment. If the ATO reasonably suspects fraud, and intends to follow that line of thinking, they must establish, by probative evidence, that there is a fraud.”

But what is happening is that the ATO is making the fraud allegation and chasing the taxpayer for payment without establishing proof of fraud. Further, the correspondence we have seen of the ATO allegations consists of circular, incomprehensible ‘twaddle’. And that’s being polite about the correspondence.

Apparently, it’s not sufficient to believe what the ATO say on their website. A taxpayer must ask further details of the tax office otherwise fraud is committed, according to the ATO.

This fraud allegation process of the ATO is just one example of why the organisation requires more scrutiny not less as requested by the Tax Commissioner.

The Commissioner’s ambitions for the ATO is that he wants it to be “ … a leading taxation and superannuation administration known for our contemporary service, expertise and integrity”. And he recognises that to do this requires “cultural change” within the ATO. He also proudly claims that this is underway.

But in the ATO’s treatment of small business people, if anything the culture of the ATO has worsened, not improved. The ATO consistently demonstrates that, in its dealings with small business people, it cannot be trusted to act fairly and with due and proper process. In some cases, arguably, it appears that it cannot be trusted to act within the law, for example in relation to fraud allegations.

Small business people are in a highly vulnerable position when the ATO makes accusations against them. The ATO has huge resources to prosecute its case whereas small business people lack the resources (information, financial and legal) to defend themselves. It is often the case that the ATO prevails because small business people cannot defend themselves. The result is injustice. Because of the huge inequality in bargaining power, independent oversight and scrutiny of the ATO is required to ensure that a measure of justice prevails.

More scrutiny is required in two critical areas.

Since May 2015, the Inspector-General of Taxation has had the power to oversee the processes of the ATO in relation to individual cases. Those powers need to be beefed up and the IGT’s resources improved.

A Small Business Tax Tribunal is required that has oversight of the ATO’s interpretation of the legal facts and its application of tax law to self-employed small business people.

The fraud allegation problem is just one example of where the ATO is arguably in breach of due process at least. A viable tax collection system relies on community confidence that the ATO is applying clear law in a consistent transparent manner.

This is not happening in relation to small business people. Increased scrutiny of the ATO is required to ensure confidence in the tax system.

[First published in Business Spectator, March 2016]

A welcome disruption to the economy

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Wednesday, December 02, 2015

The Unfair Contracts Act for small business people was proclaimed on November 12 this year and will go through a 12-month implementation period. The Australian Consumer and Competition Commission has immediately began reviewing commercial contracts for compliance.

The Act is a significant microeconomic reform, holding promise as a driver of innovation and jobs.

Economies are experiencing on going innovation upheaval. As a taste, banks are likely to halve their costs (and staff numbers) through technological innovation over the next decade. Automated cars  will start eliminating taxi driver jobs in the near future. Kenya has revolutionised financial transactions through phone-to-phone transfer, eliminating banks.

It’s not just the type of jobs but the very structure of how work is organised that is subject to wide-ranging change. The predictions I made in Independence and the Death of Employment,  published a decade ago, are coming to pass.

But the new jobs potential is primarily with small business people. Big business innovates to create wealth, but this involves removing jobs. Small businesses innovate all the time, and this nearly always involves job creation.

In the last four years in the UK, self-employment has grown by 570,000 accounting for all new jobs in the UK (says the Bank of England). This drove the UK unemployment rate down to 5.5 per cent.

In Australia, around 45 per cent of workers are engaged in businesses with fewer than 20 workers. That increases to 62 per cent for businesses up to 50 workers. It’s with self-employed, small business people that innovation and jobs growth opportunity lies — in the ‘guts’ of the economy.

The Unfair Contract Act is similar to ‘disruptive’ technology; it forces innovation and improvement. Australian big business opposed the law, fearing constraints on them. Instead, they should welcome the law.

The command-and-control ‘employee’ model of a firm is under competitive challenge. The processes of ‘business’ are increasingly being organised through ‘outsourcing’, using ‘as needed’ networks of (mostly) skilled individuals operating through commercial rather than employment contracts. In effect, this is the free market (for labour) penetrating the internal operations of firms.

To manage the new business model, large firms use ‘standard form contracts’ offered as ‘take it or leave it’ contracts. However, it is common practice to ‘skew’ these contracts so that they give the large firm near-total control of the contract structure. For example, the large firm can change the terms or price of the contract or transfer unreasonable risk at whim without the other party’s consent.

Such ‘skewing’ breaches the structural integrity of commercial contracts found at common (and Roman) law. It’s a free-market (in labour) avoidance mechanism.

The skewing of ‘standard form’ commercial contracts was recognized as damaging to trust and market activity in the consumer space. In 2010, unfair contract laws were created for consumers. This effectively codifies common law. For example, it requires that if one party can unilaterally change the terms of a contract, the other party must have the same right. Further, one party cannot unilaterally avoid or limit the performance of the contract.

The full list of ‘fairness’ requirements is here. It’s about a power balance under the structure of the contract. This facilitates trust, in that the contract has integrity.

Commercial activity is dependent on trust between parties. The law’s role is to embed ‘trust’ in the contract structure. Common law does this. Much current practice with standard form contracts undoes this embedded trust.

The 2015 Unfair Contracts Act extends the consumer protections to cover small business. If self-employed, small business people are to thrive, innovate, create, explore and thus create jobs, they must have confidence in the integrity of their contracts and the law that supports contracts.

The law is ‘radical’. It is, to my knowledge, a world first in having fair contract terms apply to business-to-business transactions. But it does no more than embed in statute what applies in common law.

However, the law is also cautious because it is narrowly applied. The unfair contract laws reinstate trust, but in a defined way. The law only applies to businesses with fewer than 20 staff and where standard form contracts are used. It applies to contracts up to $300,000 in value or for contracts extending beyond one year, $1 million in value. The laws do not go to the price of a contract or the actual things to be done under a contract.
It’s a delicate but important balancing act. It should, over time, create for better business at the base (small business end) of the economy.

[First published in Business Spectator, December 2015}

Yes! Massive win for Australian business, small and big

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Wednesday, October 14, 2015

Yesterday afternoon, the new Small Business Minister Kelly O’Dwyer announced that the Turnbull government would accept the Senate’s amendments to the ‘unfair contracts protections’ Bill for small business people.

ICA is DELIGHTED!

This means that self-employed, independent contractors and small business people with fewer than 21 employees will have access to the same unfair contract protections currently available to consumers. The protections will apply to contracts up to $300,000 in value for one year and to $1,000,000 in value for contracts longer than one year.

Let’s be clear about what those protections actually are. It’s about a balance in the structure of ‘standard form’ contracts. That is, one party cannot, for example, change the price of the contract without the other party’s agreement. That’s fair and sensible. Here’s a list of the contract ‘balance’ requirements under the Bill.

The Senate has proven its worth. Last month, we said that Senators ‘saved the Bill’. They have demonstrated the value of an independent Senate as a genuine house of review. Robert Gottliebsen in Business Spectator made the same point yesterday.
But, to the Turnbull government’s credit, they have responded positively, with Kelly O’Dwyer arguing the case. This is a win not only for small business people but for large businesses as well.

Senate rescues small business. The inside story

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Thursday, September 17, 2015

On Tuesday we noted how, on Monday morning, the Senate saved the Unfair Contracts Bill from the Abbott government’s neutering of it. Of course, on Monday night Tony Abbott was deposed and now Malcolm Turnbull is Prime Minister.

ICA Executive Director Ken Phillips provided a fuller rundown of events in the Senate in Business Spectator. The article is here.

In part, Ken said:

In fact, its (Senate) amendment to move the contract protection limit to $300,000 was based on a pragmatic assessment (by the Senate) of what the government might accept. We wanted no limit, so we didn’t get what we wanted, but the Senate outcome is a big improvement.

Amazingly, the government rejected this outright. Big business interests must have exerted considerable massive influence over the Abbott Government. The amended Bill has now returned to the House of Representatives. The Turnbull Government has an immediate test before it. Will it side with big business over the Coalition’s small business constituency?

Ken was interviewed yesterday afternoon by Ross Greenwood Radio 2GB Sydney on the issue. Ross is well known as a ‘money’ commentator on TV and radio and a defender of small business. He sees this issue as a key battle between big and small business in Australia. You can listen to their 10-minute segment here.

The Senate’s sensible small business stance

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Wednesday, September 16, 2015

This is a tale that dispels the myth about a dysfunctional Senate. If anything, my recent experience with the current crop of senators indicates a grouping of real professionals performing diligently in a pressure-cooker environment.

Monday, of course, was an extraordinary day with the successful party room spill against Tony Abbott. What’s not well known is what preceded the spill on Monday morning in the Senate.

We (Independent Contractors Australia) have been campaigning vigorously against the then Abbott Government’s double dealing of small business over the unfair contracts Bill. Robert Gottliebsen had been following this for some time including his exposure of the successful neutering of the Bill by the Franchise Council of Australia, chaired by the 7-Eleven chief executive (The 7-Eleven affair could hit the Coalition at the next election, September 11). (7-Eleven chief executive Warren Wilmot has stood down from the Franchise Council following their worker underpayment scandal.)

The unfair contracts Bill supposedly extends the unfair contract protections currently available to consumers to small businesses. But Abbott’s Small Business Minister Bruce Billson inserted a clause limiting the protections to contracts under $100,000. This is a total victory for the Franchise Council, as no franchise agreement would conceivably be covered.

We had declared our opposition to the Bill in this form asserting it to be a sly con and a breach of the Coalition’s election promise.

For several weeks we’ve been approaching Senators putting our case. In a detailed submission, we explained why there should be no contract value limit.

Everything came to a climax on September 14 with the Senate debating the Bill. Family First Senator Bob Day moved to increase the contract limit to $500,000. The Senate, however, voted for the Green’s amendment, moving the limit to $300,000. This was supported by Labor and all the independents, including Bob Day.

Staggeringly, Senator Cormann for the government warned the senators that if the limit were increased, the government would reject the Bill in the House of Representatives. The outcome would be no unfair contract protections for small business people.

The vote amending the Bill happened around midday. By 2.30pm, Gottliebsen had written this up (How the ALP put small business in the election spotlight, September 14), saying the government had turned its “back on a million people in the small business community”. Around 4pm the spill was announced. By 9.30pm, Tony Abbott was rejected by his Party.

It’s reasonable to surmise that the Senate’s morning events were a big additional straw that broke Abbott’s prime ministerial camel’s back.

The lesson for me, however, was the performance of the Senators. We spoke to everyone: Greens, Labor and the independents. We were listened to with attention and interest.

Senator Leyonhjelm was conceptually against the Bill. He’s a strong free-market person. But he understood that the Bill codifies the structure of commercial contracts. Senator Day saw both sides: he owns a large business using subbies, but built his business from being a plumbing subbie.

We had constructive discussions with all the independents and/or their advisers including senators Lambie, Lazarus, Madigan, Wang, Muir and Xenophon.

Long discussions with several Labor senators occurred. There was an understanding that these protections available to self-employed people were basic.

Unlike employee protections, these protections for small businesspeople only apply to standard form contracts and don’t go to issues such as price. Nothing will stop anyone entering a ‘bad deal’. That’s the risk of being in business. But the protections do mean that, for example, the price of a contract cannot be changed without both parties agreeing. It’s about ensuring that contracts have structural integrity.

The Greens were equally focused. In fact, its amendment to move the contract protection limit to $300,000 was based on a pragmatic assessment of what the government might accept. We wanted no limit, so we didn’t get what we wanted, but the Senate outcome is a big improvement.

Amazingly, the government rejected this outright. Big business interests must have exerted considerable massive influence over the Abbott Government. The amended Bill has now returned to the House of Representatives. The Turnbull Government has an immediate test before it. Will it side with big business over the Coalition’s small business constituency?
Senators are dealing with a swirling crash of detailed, complex, diverse legislation. What I observed was a government trying to bludgeon the Senate into compliance. I observed Senators acting professionally, prepared to consider clear arguments. Yes, there won’t always be agreement. But thank goodness for a Senate independent of the government. Democracy does work and it can let the ‘little person’ be heard.

 [First published in Business Spectator, September 2015]

Hard to believe: ICA is opposing the Unfair Contracts Bill

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Wednesday, August 26, 2015

Since 2010 ICA has campaigned hard for the unfair contract protections available to consumers to be extended to small business people. The Abbott Coalition promised to do this when in opposition and again repeated the promise on winning government.

The Bill is now in Parliament. Yet we’re opposing it! It’s been sent to a Senate Committee for review. Here’s our detailed submission to the Committee.

Our grounds for opposition? There’s been a simple ‘trick’ inserted into the Bill: the protections against unfair contracts are limited to contracts under $100,000.

That means that the people who will miss out on the protections are:

  • most IT contractors and all consultants.
  • massive numbers of owner-drivers
  • small retailers trying to bulk buy goods
  • family farmers try to sell bulk products.
  • and many more.

The Coalition didn’t promise to protect some small business people some of the time! It’s a sell-out to big business and government bureaucracy who oppose small business protections. The government’s stated excuse for doing this is irrational.
We are hugely disappointed. The restriction is so bad that the Bill needs to be rejected. We’re hoping the Senate Committee will recommend the removal of the $100,000 limit. There should be no limit.

How the ATO is oppressing small business

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The scariest thing about being a small businessperson in Australia is not the ‘normal’ commercial risks of business but rather that you’ll be targeted by the Australian Taxation Office. This is the conclusion that can be drawn from two official reviews of how the ATO deals with small businesspeople.

The first report is the Board of Taxation’s Review of Tax Impediments Facing Small Business released in February. (You can read my summary and comments here.) The second comes from the Inspector-General of Taxation into The Management of Tax Disputes released this month. (Again, you can read my summary and comments on this report here.)

Both are high-level tax authorities and these are no lightweight reports. They are both scathing of the ATO, although expressed with varying degrees of bureaucratic ‘niceness’.

On the general administration of tax processes the Board of Taxation finds significant problems with the ATO’s behaviour. For example, when allocating Australian business numbers the ATO uses a ‘prescriptive interpretation’ of what constitutes an ‘enterprise’, which bears limited connection with the reality of being in business.

Look at start-ups: it’s almost impossible to prove that you’re in business when you haven’t started trading. The refusal to grant an ABN means you can’t register a business name, obtain a post office box, access wholesale prices or claim input tax credits. The Board of Taxation refers to the ATO’s processes as ‘an unreasonable impediment to small businesses’.

In applying the Personal Services Income tax rules the BOT recognises that ‘the profile of Australian workers is also evolving … with more white-collar workers adopting forms of contracting and self-employment…’ However, the ATO applies an interpretation of the rules affecting these people that involves ambiguity creating ‘uncertainty for individuals’.

The ATO has a habit of issuing its Director Penalty Notices without warning. These are ATO orders to pay up on a debt or face legal action. But this can often happen, it seems, when directors of small businesses may not even be aware of a debt allegation or haven’t had time to understand the allegation. It’s pretty scary, suddenly being told ‘you have a debt, pay up or be sued’ when you don’t understand the debt allegation against you.

So, how is it possible to have a tax debt and not be aware? Turn to the Inspector-General’s report!

Debt allegations routinely occur because the ATO has done a retrospective reinterpretation of a rule. What were previously accepted legitimate tax deductions, say superannuation contributions, are suddenly no longer accepted. The ATO will have decided that they no longer consider you a contractor, for example, thus denying you your superannuation contributions.

There are lots of ‘interpretative’ situations in which a self-employed, small business-person can be caught. It happens constantly.

But it’s the process of dispute management that the Inspector-General criticises strongly. The ATO review/appeals process is entirely internal. There is no independent external review process as has been in place in the US since the 1920s.

Depending on the circumstance the ATO will force people to pay an alleged debt or a big part of it before they are allowed to appeal. This denies them money to pay for an appeal. The ATO officers often won’t discuss the issues and/or don’t know the rules that are supposed to apply.

The Inspector-General 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.

Do all this and ultimately you’re in court. Once there, even a small dispute, say $5,000, will cost the taxpayer around $4,500 to defend.

But don’t worry if you’re a big business. The ATO has a new dispute management system in place that the big end of town reports as wonderful. The ATO cuts deals with big business to settle issues. Last year this alone involved over $1 billion of alleged debt settlement.

Of course, this isn’t available for the ‘little people’ in business, yet some 97 per cent of tax disputes involve small businesspeople and ordinary taxpayers. That’s some 21,756 individuals considered in the Inspector-General’s report.

The Inspector-General says: ‘As a matter of fairness and equity, effective dispute resolution should be available to all taxpayers regardless of resources.’ But both reports paint a heavily negative picture.

In both the general management of small business tax and handling disputes, the ATO runs what can probably be described as an oppressive regime.

[First published in Business Spectator,  March 2015]

ATO discriminates against small business people

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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.

For more information and a link to the Inspector-General’s report, click here. For more on taxation, visit our Tax Issues page. For Ken Phillips’ associated Business Spectator article, click here.