Self Employed Australia

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“Everyone needs an Advocate”

Reforming the ATO

Good news: BIG review of Australian Taxation Office

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You’ll be aware of our ongoing heavy criticism of the Australian Taxation Office in their treatment of small business people.  In our view:

‘Mum and dad’ businesses are targeted by the ATO with unfair, even questionably legal, tactics.

And as just one example, we successfully defended Rod Douglass from baseless ATO accusations of fraud/evasion.

Further, with the recent resignation and investigation of a top Deputy-Commissioner over a massive tax fraud scandal, the administrative and investigative systems of the ATO are suspect.

We certainly have lost trust and faith in the fairness and impartial application of tax law by the ATO in relation to small business people.

Well, now the Inspector-General of Taxation (IGT) has announced a wide-ranging review into the practices of the ATO. We’re pleased to observe that, according to the IGT, the  “Review is being conducted at the request of the Commissioner of Taxation…” We congratulate the Commissioner, Chris Jordan, in taking this initiative. It’s necessary if the integrity of the tax administration system is to be assured.

We’ll be putting in a substantial submission drawing heavily on earlier submissions we have made as follows:

And adding our more recent learning experiences in undertaking the legal defence of self-employed people who found themselves under ATO attack.

To understand the scope of the Inquiry, here are some quotations from the IGT’s website:

  • …this review will focus on the future taking into account technological, social, policy and regulatory changes.
  • Products that transfer risk to third parties, such as taxpayer audit insurance and professional indemnity insurance, may be other areas for future development.
  • Work patterns are also changing as seen in the ‘gig’ economy where workers are engaged on a contractual or project-by-project basis rather than full-time employment, particularly impacting in-house corporate specialists.

Under the Terms of Reference the IGT will look at:

3. How the ATO and the TPB can seize the opportunities presented by technological, social, policy and regulatory developments to:

a.    work with the tax profession in providing contemporary, reliable, accessible and secure services that foster voluntary compliance by meeting the increasing expectations of taxpayers and tax professionals and improving their productivity;

Note that we’ve emphasized the words ‘voluntary compliance’. This is because the ATO’s systems are so dysfunctional and impossible for ordinary people to understand or work with, that ‘voluntary compliance’ by ordinary people is uncertain, presenting significant risk.

Tax scams and others. If it’s too good to be true, it usually is!

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If you’ve followed the revelations of the $165 million tax fraud, you’ll know that one of the ATO’s top enforcement officers allegedly sought to cut a deal for his son, one of the ringleaders of the fraud.

This case, of which we’ll hear lots more, highlights how self-employed people can get caught up in scams quite quickly. The ACCC is always warning us about scams and it pays to keep watch on the ACCC scam websites: here and here.

But there’s also a simple guide to stay alert about scams. If it looks too good to be true, it usually is! Take the following tax fraud.

The fraud involved the payroll-processing company Plutus Payroll not paying PAYG withholding tax to the ATO. Plutus apparently processed payrolls for some 2,000 self-employed contractors, mainly in the IT sector. In an online forum from 2014-15, contractors were querying the legitimacy of Plutus.

Look at these comments:

  • Hi … anyone using them? They sound too good to be true.
  • They have a meet and greet event in a couple of weeks…meet Miss World. This is looking a bit too flashy. We shall see.
  • …we provide all necessary insurance …at no additional charge … unbelievable
  • I’ve read all their website and it appears to be free. Do they guarantee payday?
  • I am currently paying 1% of my hourly rare to my agent. I’m not sure how they can do it for free.  So how do they make any money?

And on the forum discussion goes!

Plutus appeared to be providing services at no cost to contractors. This is not the industry norm. People were ringing alarm bells. Plutus looked too good to be true and it proved to be too good to be true!

It’s unknown at this stage if the ATO will try to recover unpaid tax from the 2,000-or-so IT contractors. And hindsight is cheap. But it does offer a reminder to us all. Nothing is for nothing. If alarm bells ring, be very cautious!

ATO’s humiliating admission exposes its baseless accusations of fraud

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On Monday, ICA’s Ken Phillips sat in the Federal Court in Sydney with our legal team witnessing an extraordinary event.

We were defending Rod Douglass against the ATO. You’ll remember we’ve been assisting Rod for nearly two years. We’ve explained this before.

Rod had been accused by the ATO of fraud/evasion on the basis that he should have sought ‘professional’ advice before submitting his tax returns even though he followed ATO website information in completing his returns. He had declared all income. Yet the ATO sent Rod a $550,000 tax bill backdated 10 years which meant he would be bankrupt.

This ATO attack against Rod can happen to any self-employed person. In fact the ATO do this constantly in our experience.

On Monday the ATO caved in. They totally withdrew their accusation of fraud/evasion against Rod saying they had made an ‘error’. Note the ATO only admitted this once we were in court and a massive legal bill had been run up to defend Rod. The ATO’s behaviour is an outrage! How would you defend yourself against such an ATO attack?

Here’s the thing. The ATO can accuse you of a criminal act (fraud), issue a bankrupting tax bill, maintain the accusation for two years then say ‘ah sorry, we were wrong!’ You will have a huge legal bill and the ATO does not offer any compensation for turning your life and work upside down.

Senior business journalist Robert Gottliebsen from The Australian joined us in court on Monday and witnessed the entire episode. His comments are important.

Robert said yesterday in his article:

  • “…before the Federal Court, I have witnessed the Australia’s Commissioner of Taxation, Chris Jordan, make an unprecedented and humiliating admission of error.
  • tax officials tried to falsely bankrupt a small businessperson,
  • The commissioner’s barrister confessed that the facts in the Douglass case as presented were “incorrectly formed” and so the allegations of tax fraud and tax evasion “are withdrawn”.
  • Douglass worked as a contractor in partnership (with his wife)…. But the tax office … drummed up an unsigned opinion that fictitiously claimed that Douglass was guilty of tax evasion and fraud…(and) issued Douglass with a mammoth $500,000 assessment by going back 10 years
  • …I fear the ATO may have bankrupted hundreds and possibly thousands of small businesses by issuing Douglass-style fictitious opinions.”

Robert said in his article today:

  • “In the case of Douglas it is very easy. Clearly you can’t have the current anti-small business groups deep in the tax office preparing fictitious opinions so that upstanding Australians are falsely accused of evasion and fraud and are threatened with bankruptcy.
  • No person should be accused of evasion and fraud (which enables the ATO to go back much further than the two years that applied in Douglass) without the case being approved by the Federal Court as was envisaged by the constitution and the 1903 act.
  • In order for small enterprises to prosper in Australia this nonsense must stop.”

There’s a lot more to happen on this.

We’ll be back in court next year again defending Rod over ATO allegations on the Personal Services Income tax laws where we say the ATO (again) is wrong!

 

ATO attacks mum and dad partnerships. We’re all at risk!

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If you are one of the 2 million self-employed people in Australia we suggest you read the following very carefully. This is a story of (frankly) how concerned you should be about your potential treatment by the Australian Taxation Office. It’s the story of Rod Douglass, a 55-year-old IT contractor, but it could just as easily be you.

We first explained the tax issues in March this year. Then three weeks ago we announced the legal action we have organised to defend Rod, who’s been accused of tax evasion and sent a bill for $550,000 backdated 10 years. (It will bankrupt him!) What he did was comply with tax information published on the ATO website. However, the ATO says that by acting on this ATO information Rod committed tax evasion. ICA and our legal team are organizing Rod’s defence at no cost to him. This an important issue of justice.

The court documents have been lodged in the Federal Court and the Administrative Appeals Tribunal and pre-court discussions are occurring with the ATO. Because of confidentiality issues we are constrained in what we can say at this stage.

However, yesterday Robert Gottliebsen from The Australian had an outstanding commentary based on the public domain court documents. Robert’s article is here. Robert made the following points:

Partnerships

  • “The result of (Rod’s) case will determine the fate of tens of thousand of husband and wife partnerships …”
  • In 2005 Tax Commissioner “Carmody ruled that husband and wife partnerships in which both parties were responsible for half the debts were a legitimate way to organize business…” and that “tax avoidance schemes did not apply (to such partnerships)…”

Fraud/evasion trigger

  • Normally the ATO can only go back 2 years on tax assessments. “This is a really important protection for small enterprises…”
  • However the Commissioner can go back over any period if he/she forms an “opinion that there has been fraud or evasion.” “…the normal essence of evasion is where some material facts have been omitted or misconstrued. In this case, according to Douglass’ statement of claim, there were no facts omitted or misconstrued.”
  • “If Douglass loses the case it would become a chilling precedent for tens of thousands of enterprises.”

We have an excellent legal team and researchers preparing Rod’s defence. The case tests:

  • ATO fraud and evasion ‘opinion’ procedures.
  • Personal Services Income tax assessment processes.
  • Partnership income-sharing legitimacy.
  • Reliability of information/advice published by the ATO.

On the last point (ATO reliability) the issue puts at stake the faith Australians can have in the very integrity of the tax administration system.

There’s a lot hanging on this case.

 

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.

 

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]

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.

Paralysed in a tax office trap

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The Australian union movement has been quite open about its campaign to stamp out independent contractors wherever it can. Running parallel to this, it’s instructive to see that the Australian Taxation Office has shifted to a decidedly anti-independent contractor stance over the last few years.  The outcome (intentional or not) is to aid the unions’ objectives.

Last week Robert Gottliebsen described the behaviour of one tax official as demonstrating a “blood lust in the tax office” toward small business people (Call off the small business attack dogs, April 19). This attitude goes deep because it’s entrenched in ATO’s administrative systems. Take this example.

Over about the last two years the ATO has started rejecting more applications by individuals to receive an Australian Business Number (ABN). The implications are significant because effectively, if you have no ABN, you can’t be in business for yourself!

First, under new national business name registration rules, if you don’t have an ABN, you can’t register a business name. And it’s an offence to use a business name that isn’t registered.

Further, if you operate a business without an ABN, anyone paying you is required to withhold 46.5 per cent of your payment and send this to the ATO. No-one can operate a small business under this cash-denying arrangement.

In addition, without an ABN you’ll find it impossible to register under state workers’ compensation schemes and to receive other regulatory registrations and approvals. Also, submitting tenders for government or private-sector work become impossible without an ABN.

By controlling to whom the ATO allocates ABNs, the government has massive big brother/sister type, master control of the make-up and structure of the Australian workforce and business. This works against the original intent of the ABN system, which was to give the ATO significant auditing capacity to detect non-declaration of incomes.

When the Australian Business Number system was established around 2000, the process intentionally gave an ABN to everyone who applied, including individuals. The reasoning was that this supported tax compliance and auditing. The ATO can and does cross-reference ABNs to bank account details and so on. This huge trawling of data enables, or should enable, the ATO to check claimed business income against actual bank deposits and other transactions.

Over about the last few years this started to change. The ATO began to stop allocating ABNs to individuals. If someone’s a labourer, for example, they now automatically have their ABN application rejected.

ABN applications can be done online through an ATO ‘decision-making’  tool. The tool takes applicants through a series of questions to determine if the individual is an employee or contractor. As an applicant steps through questions, different answers trigger alternative additional questions. Eventually the tool will declare the applicant to be either an employee or contractor. If the declaration is ’employee’, an ABN application is rejected.

More recently the ATO tool appears to have undergone fine ‘tweaking’. It’s not noticeable to the casual observer but to others familiar with the tool, the differences are noticeable. Meanwhile, people applying as individuals are having difficulty obtaining an ABN. At Independent Contractors Australia we’ve been receiving a steady stream of information and complaints for around 9 months. People who want an ABN are being told ‘no’ on the basis of allegedly being an employee, according to the ATO.

In my view the legal basis for the ATO setting itself up as a God-like, online determiner of an individual’s employment status is highly questionable. The  ABN legislation is clear that the main objective of the ABN is to enable businesses to interact with the ATO for taxation purposes. The Act’s objectives do not include that an ABN is a determiner of employment or contractor status. It’s perhaps arguable that the way the ATO currently behaves is beyond its legislative authority.

On a practical level the ATO is likely contributing to a growth of the black/cash economy and tax compliance headaches. The ATO automatically gives an ABN to individuals applying under a company, partnership or trust structure. Yet the ATO has tax compliance problems stopping illegal income-splitting and tax avoidance with small companies and trusts.

And imagine the reaction of people who have their ABN application rejected? They either set up a sham company structure or operate in the cash economy, thus more easily avoid declaring their incomes.

On every measure the denial of ABNs works against the social and economic responsibilities of the ATO. Yet why is this happening? Look back to the objectives of the Australian union movement. Denying ABNs is a most effective way of using the power of government to suppress independent contracting.