On 23 June the AAT decided that it should reverse the Commissioner’s decision not to grant ‘hardship relief’ and decided that a retired couple, with tax debts totalling almost $106,580 have been granted relief from paying most of those debts – despite pay paying out certain debts, from their collapsed business, ahead of the ATO.
See below, for further details.
The Facts were these.
- The taxpayers were a retired, married couple, although Mr S continued to do casual work as a truck driver.
- They previously operated a small interstate transport and freight business in partnership, which they sold in May 2017 for net proceeds of approximately $70,385 after suffering serious cash flow issues (a contractor went into voluntary liquidation owing the business $80,000 and there were unusually large truck repair bills).
- The taxpayers were assessed to pay tax totalling almost $110,280 for the 2014-15 to 2016-17 income years. At the date of the hearing, their total tax debt, including the GIC, was almost $106,580.
The AAT has decided to exercise the discretion in s 340-5 in Sch 1 to the TAA to relieve the taxpayers from most of their tax debts. The Commissioner has issued a Practice Statement PS LA 2011/17 on how he will exercise his discretion to release taxpayers, from income tax related liabilities, if the individual ‘would suffer serious hardship’ if required to pay all the tax.
- The AAT was satisfied that the taxpayers would suffer serious hardship if required to pay the debts because their fortnightly expenditure exceeded their joint income, they had no realistic capacity to borrow against their assets and it would be unreasonable to require them to sell their home or other assets (principally 2 cars).
- Although the taxpayers had paid out business contractors, suppliers and an employee ahead of meeting their tax obligations, the AAT accepted that they were under considerable financial strain as a consequence of the serious cash flow issues that were outside the taxpayers’ control.
- They also had personal pressures as a result of various health issues.
- The AAT also took into account:
- the significant contribution the taxpayers had made to the community through the operation of their business for approximately 50 years and
- the fact they had not engaged in reckless or extravagant spending,
- nor previously failed to pay their tax liabilities.
In view of the hardship finding and all the above factors, the AAT decided on balance that it was appropriate to release the taxpayers from their tax debts except for $21,000 (equal to half the taxpayers’ savings).
It is really encouraging to find an AAT, who was prepared to take a different view, to the Commissioner, and grant relief, on the merits of the case. Note the ‘finesse’ of the decision, which made the taxpayers use half of their savings, to discharge the tax debt, but allowed them to keep half. To me, this shows a keen sense of what the discretion is about, and how it should be exercised.
I’ve given a summary, below, of how the the Commissioner uses his Practise Statement, to administer this power to grant hardship relief (with some comments about the ‘pros’ and ‘cons’ of this).
(Smith v CofT  AATA 1851, AAT, Groom SM, 14 May 2021.)
[LTN 120, 25/6/21]
PS LA 20011/17
A key advantage of ‘hardship’ release of tax debts, is that you can keep your house (compared with ‘bankruptcy’ where your house would fall into the ‘estate’ that ‘vests’ in the trustee for bankruptcy and is ‘divisible’ amongst your creditors).
There are two tests for establishing hardship:
- An ‘income test’ which is an assessment of whether you can repay the tax debt within a reasonable time – viz: an excess of income, over outgoings (for necessaries) that allows the debt to cleared within about 3 years. In my experience, taxpayers typically can establish hardship, under this test.
- An ‘assets test’ which assesses whether the taxpayer would be left without the basics of life, if forced to pay the tax debt, which mercifully, includes a roof over your head. Any surplus investments or holiday houses, etc. have to be sold (or proved not reasonably capable of being liquidated). Most ordinary taxpayers, who can’t pay their tax debt, pass this test also (or have to sell those assets, but still have a tax debt).
But there is an ‘other factors’ test, on basis of which, the Commissioner can refuse to release the taxpayer, from their tax debt, despite it causing the taxpayer hardship. It’s sensible to have such discretion, but you’d hope that these were rare and extreme circumstances that warranted inflicting hardship, on taxpayers. But NO! The Commissioner has drafted a list that is regularly used by his officers in Northbridge, Western Australia, to deny relief.
The two most mischievous are:
- a taxpayer has paid other debts (either business or private), in preference to their tax debt.
- the taxpayer has a poor compliance history.
There will be hardly anyone, who’s got behind in their tax, that hasn’t paid others before the ATO. In my opinion, to use such a factor, to exclude practically everyone who can’t pay their tax, is failing to use the power (to release taxpayers) for the purpose for which it was given. You’ll note, this was one of the objections the Commissioner raised, in this case (paying others ahead of the Commissioner). Fortunately, the AAT saw it differently and granted relief.
Most taxpayers, who get behind in their tax, have got behind in their lodgements, too.
In my experience, these ‘Northbridge bods’ have applied a too trivial or ‘stickler’ approach to this. A taxpayer who has mended their ways, got on top of their tax affairs, and demonstrated they have, ought not be denied tax relief (in my opinion). About 15 years ago, my clients were granted relief, in these circumstances (arrears of lodgements of a couple of years), but about 10 years ago (I think when the ATO declared, unilaterally, they were going to ‘get tough on debt’) relief almost entirely dried up. And this was an often cited reason.