How would you like to be forced to pay tax when you have received no income? That’s what’s happening to a taxpayer following a High Court ruling this week. And it’s happened because the Australian Taxation Office has the legal power to act like a ‘Mongrel Bunch of Bastards’—something it’s rather good at.
The case involves a legal interpretation of an obscure 1936 tax law affecting trusts. You might think that trusts are only used by wealthy people. But no! There are 900,000 trusts in Australia, used mostly by small/medium-sized family businesses.
In this particular case, the ATO ‘formed an opinion’ that a medium-sized family business made a (theoretical) profit in 2014. It’s a ‘theoretical’ profit because the ATO decided to ignore the business’s expenses in its assessment. That’s exhibit number 1 of ATO bastardry.
Because the business didn’t make any profit, the father who ran the business didn’t distribute any money to his daughter who was a ‘beneficiary’ of the business’s trust. Sounds sensible! And the ATO accepts that no money went to the daughter. But the ATO decided that it would test the 1936 law in the High Court. (Bastardry exhibit number 2.)
On the strict wording of this obscure tax clause the High Court has ruled that, with trusts, tax must be paid even if no ‘profit’ is distributed. It’s a blatantly unfair situation.
But there’s a further stinger not covered in this High Court decision. That is, that under the general powers of the ATO, the ATO only has to ‘form an opinion’ of a profit having been made for it to become a legal ‘profit’ and hence creating a tax debt. And the debt must be paid immediately. Unfair! Unfair! Unfair!
The High Court’s job, however, is not to decide public (tax) policy but to rule on the meaning of the law. But in this case the Court nonetheless recognized the unfairness, saying that:
“That unfairness arises because Div6, and s97(1) in particular, is drafted to tax a beneficiary by reference to present entitlement, not receipt.”
Here’s the High Court’s ruling—see paragraph 26 (we’ve highlighted it.)
The ramifications of this ATO behaviour are massive. 900,000 people/businesses with trusts will now never know if the ATO will ‘form an opinion’ that they have made a profit and create from thin air a tax debt that it can enforce.
But how many other obscure tax clauses exist that the ATO might use to impose a tax debt where no income has been received? We are all at risk from this ‘bastard’ ATO.
So who’s to blame for this mess? Doyen business commentator Robert Gottliebsen has said of this case in The Australian that, “Many tell me that the tax commissioner is ‘out of control’. I think the truth is different—the commissioner is ‘not in control’”.
Frankly, this is a terrible way to run a country. For more than a decade we (Self-Employed Australia) have been exposing ATO bastardry and calling for a fix. In early 2020 we offered a specific and detailed fix based on the rules the United States uses to control its tax authority (the IRS). What has the Morrison government done in response? Nothing that has made any difference. They have merely fiddled, while seemingly pretending to do something.
This recent act of ATO bastardry takes the unfairness of this fouled-up tax administration system to a new low. It could have been stopped with a decent government having rules to control the ATO (like the USA) instead of the ATO ruling over the government.
We’ll have more to say on this!