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.