Australian Taxation Office move threatens small business bankruptcies

ROBERT GOTTLIEBSEN
January 9, 2017
The Australian
Over the holiday break when relatively few were watching, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison announced a plan that would bankrupt or put out of business tens of thousands of small enterprises around Australia.
Potentially it was one of the biggest Christmas presents any government in the nation’s history has handed the opposition.
The purpose of this commentary is to first detail what Turnbull and Morrison plan to do and then show how with a small, but significant amendment, Turnbull and Morrison can turn a looming total disaster into a long-term positive.
And, if they get it right, they can actually enhance the small business community and the nation.
In today’s environment any government that unfairly (and I emphasise the word “unfairly”) persecutes small business will be decimated in the polls.
The Turnbull and Morrison confirmed in the midyear economic statement that the tax office is owed some $19 billion in overdue tax including a staggering $13 billion by small businesses with turnover up to $2 million.
The government plans to allow the Australian Taxation Office (ATO) to disclose to credit reporting bureaus the names of those who owe the money unless they have “effectively engaged with the ATO to manage these debts”.
The reality is that the moment those names are published all bank and supplier credit will be withdrawn — that’s what happens in the small business community. And as soon as bank and supplier credit is withdrawn almost all the businesses will fold.
Accordingly, Turnbull and Morrison must know they are taking a step that will send broke tens of thousands of businesses. Taking such a draconian step requires a structure that is clear and fair to all.
To everyone’s credit the Australian Taxation Office says that anyone who enters into a payment arrangement will not be named. But much more that that is required to deliver fairness.
Before I detail how Turnbull and Morrison can deliver fairness I want to emphasise that, despite the draconian consequences, in principle, I support the action. I have met small business after small business that, when there is a snag, they stop paying the tax man (and superannuation). Before long they are in a deep mess. It seems that in 2015-16 some 28 per cent of small business tax liabilities were paid late. While this confirms the above pattern it also underlines the brittleness of large parts of the Australian entrepreneurial and small business community in the current economic environment.
If they knew they were going to be named to credit bureaus —and therefore be bankrupted — small enterprises would think twice about going down the non-payment of tax route and instead change their business model and/or raise capital.
The time to take such action is when the problem arises and not when some huge back tax bill has arisen. Accordingly going forward this “naming measure” will save thousands of businesses and make the small business sector much more healthy.
But unfortunately what is a good long-term measure in theory is set to be a total disaster for the nation because the validity of a significant chunk of that $19 billion in overdue tax is not understood by the people at the top of the ATO.
They are about to bankrupt or put out of business — via naming — a large number of businesses that owe nothing like what the ATO claims is owed.
I am now totally convinced that the ATO’s combination of being investigator, prosecutor, judge, appeal judge, and hangman has created a power (not bribery) corruption that means that a significant segment that $19 billion is not really owed.
In the case of large enterprises they have the money to go to court to have their claims independently adjudicated.
Small businesses simply can’t fund the legal expenses so they are in a hopeless position if they actually don’t owe the money that the ATO claims they owe.
It’s true they have the right to appeal to another arm of the ATO that may have independent people on a panel but, as we saw last year, that current internal appeal system can, and does, break down. In reality for most there is actually no meaningful right of appeal.
I emphasise that I expect that most of the $19 billion will be legitimately owed but last year we saw how Australian tax officials concocted a totally fictitious unsigned legal opinion aimed at bankrupting the man whose business showed Port Hedland how to be productive. That deliberately concocted fictitious and unsigned legal opinion went through the flawed tax appeal system and was only picked up because my commentaries and a court action caused the tax commissioner, Chris Jordan personally to look at it.
The case of Roy Douglass and his partnership business is merely the tip if the iceberg.
When I revealed to the nation Australia’s biggest tax fraud I also discovered that a tax official gave a highly controversial legal opinion about the practices of the world and Australian gold refining industry and then sat on the appeal panel that heard the appeal.
No world gold experts were called, as they should have been. He might have been right but justice must not only be done but also seen to be done.
Now we discover in at least two pending cases power-corrupted tax officials are using a definition of the personal services income act to claim tax liabilities that is highly controversial to say the least. Those claimed liabilities will doubtless be in the $19 billion in overdue tax and I expect similar cases will make up a significant chunk of the $19 billion. The current so-called “appeal system” is simply not fair and only when people have the money to go to court can unfair and wrong tax rulings be tested. In the case of the looming challenges to the tax interpretation if the personal services act, top tax lawyers say the ATO has less than 25 per cent chance of winning. The courts will make the decision.
Over the holidays I discovered another case where tax records were clearly tampered with and when this fact came out in court preliminaries the tax office dropped the case. Another iceberg tip.
Because the instances of power-corrupted bad decisions are so prevalent in parts of the ATO (not all parts) over the next 12 months we are going to see the tax commissioner hauled before the courts, Douglass style, to justify the actions of his people.
If the ATO loses those cases then thousands of people will have been wrongly “named” to credit bureaus and bankrupted. Inevitably that will cause the biggest set of “rectification” and damages claims against the ATO in Australia’s history.
Fortunately there is a very simple and non-court solution to the problem which will greatly enhance the credibility and fairness of our tax system although be opposed by the ATO because it ends their total power. Total power almost always corrupts.
All those who are in line to be named and therefore bankrupted and put out of business should be given the right to appeal to the Inspector-General of Taxation who must be given the power to make a ruling binding on both sides.
The Inspector-General of Taxation is a government body, which has won high respect from both the ATO itself and from those outside the ATO. Currently it can look at cases but can’t make a binding decision. For example it looked at the Douglass case and saw it was fictitious nonsense but the ATO people ignored the inspector-general because what they were doing to Douglass is merely what they have been doing to countess thousands of unfortunate people over the years. That’s how the system works. They never dreamt Douglass would take them to court, there would be extensive commentary and that the commissioner himself would discover the fiction.
The Inspector-General of Taxation should take over the role of being the main appeal process not just for those who have over due tax but all future tax cases. Running down the current internal appeal system in the ATO would fund the extra resources required.
If Turnbull and Morrison strengthen the integrity of the tax system by taking that step then when the bankruptcy complaints hit the fan they will be able to say that they made sure that moneys were owed by inserting an independent and reputable appeal system.
And even more important going forward, all smaller enterprises would have the protection of a proper independent appeal system. Under this system if the ATO claim is true (as defined by an independent appeal process) then the tax officials can go for a staggered payment system and if that can’t be reached they can go their hardest. But if the ATO claim is a trumped-up case like Douglass then small enterprise will be protected. It adds enormous assurance to small enterprises and credibility to the governments claims that it wants to foster innovation.
Even more important: It’s the right thing to do.