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]