The Applicant seeks release of income tax and Pay As You Go (PAYG) instalment liabilities of $130,961 which forms part of a total tax liability of $235,288 as at July 2012.
The Applicant is 69 years of age and has been in practice as a solicitor since 1978 in the Sydney suburb of St Marys, and continued in practice until December 2010. He no longer holds a practicing certificate as a solicitor.
Both the Applicant and his wife receive the aged pension.
From 1999 the Applicant's business as a sole practitioner solicitor had been gradually deteriorating and he gave evidence that his brother was ill and died in 1999 which he asserts affected him personally and his practice.
In February 1973 the Applicant and his wife acquired a matrimonial home at Kenthurst and resided there from 1973 to September 1999. The purchase of this property was assisted by funds being advanced from the mother of the Applicant's wife. They used the Kenthurst property as security for the purpose of obtaining funds which were applied to his business activities.
In 1993 his wife received an inheritance, and because of the financial difficulties which the Applicant experienced at various times, she said she was determined to retain her inheritance for her personal use, benefit and security and to isolate those funds from the Applicant, his practice, and commitments. As a consequence of this separation, the position is that all the assets of the "household" are owned by his wife. On the evidence before me, the Applicant has no assets of any significance.
In 1999 the Kenthurst property was sold. A large part of the proceeds from the sale were used to meet the Applicant's obligations and expenses.
After the sale of the Kenthurst property in 1999, his wife purchased and sold a number of properties and accumulated funds in her own right, including a property at Forster. This property, together with two other properties, were initially investment properties bought by her. The evidence was that the Applicant made no contribution with respect to other assets held by his wife since 1999.
Having retired from practice and surrendered his practicing certificate, the Applicant does not intend to resume practice as a solicitor.
The Applicant suffers from a number of health issues, including indications of cancer and problems with his shoulder which may involve substantial expenses in the order of $3,000 for medical and dental expenses. He also has had problems with his eyesight and with arthritis, as well as injuries to his foot which has necessitated him having surgery and recuperating for six months.
The assets held by the Applicant's wife, are held solely in her own name. The present place of residence at Forster is estimated to have a value of $320,000 with no mortgage. There is also an investment property at Greenpoint with an estimated value of $280,000 with a mortgage of $140,000. Another investment property at Bathurst was sold in May 2012 with a net equity of $100,000 after discharge of mortgage, which money has been placed in a bank term deposit.
Neither the Applicant nor his wife has furnished any independent financial information such as valuations of properties.
[2]
The Applicant's releasable taxation liability at 4 July 2012 amounted to $130,961 with an additional liability in respect of GST of $104,326.37. This latter amount is non-releasable.
Information provided by the Applicant indicates the household expenditure of the Applicant and his wife at $2,427 per fortnight, which substantially exceeds their income derived from the aged pension which amounts to $1,443. It is not contended that the Applicant is unable to afford the basic necessities of life such as food, accommodation, clothing, transportation, and medical treatment.
[3]
There are two issues:
(a) Whether the taxpayer would suffer serious hardship if he were required to pay the debt of $131,961; and
(b) Whether the Respondent should exercise its discretion to release the debt if such hardship is found to exist.
Section 340-5 of the TAA gives a discretion to the Commissioner to release a person from some tax liabilities if satisfied that the liabilities would cause serious hardship.
Under section 14ZZK of the TAA, the onus is on the taxpayer to establish that the taxation decision should not have been made: see Vagh and Commissioner for Taxation[2007] AATA 32 at [27].
The Commissioner has adopted a policy on the application of s345 entitled "Practice Statement Law Administration 2011/17: Debt Relief, which relevantly reads as follows:
[4]
"37. The term 'serious hardship' is not defined at law and must be given its ordinary meaning. The ATO determines whether serious hardship exists by applying several tests which are designed to ascertain whether payment of the tax would produce unduly burdensome consequences for the person such that they would be deprived of necessities according to normal community standards.
38. Thus, serious hardship would be seen to exist where payment of a tax liability would result in the person being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements. On the other hand, elements of hardship may be regarded as marginal or minor - rather than serious - if the consequences of payment of tax are seen, for example, as limitation of social activities or entertainment, or loss of access to goods or services of a more luxurious nature of standard.
39. As a first step in considering an application for release, the ATO must determine the person or persons to be included in his assessment of hardship factors. The assessment of hardship is not limited only to the person's present circumstances; it may also consider the future prospect of an inability to provide food and clothing, for family members or others for whom the person has responsibility.
40. Conversely, although a person's immediate situation may suggest inability to meet the combined total of the tax debt and family expenditures, that factor will not indicate hardship if the income or asset positions of other members of the family are such as to suggest that the person cannot reasonably be regarded as responsible for all relevant outgoings. For example, the separate earnings, allowances or benefits received by other family members will be relevant to an assessment of the person's overall financial circumstances."
[5]
In relation to the exercise of discretion, the Practice Statement also sets out considerations to be taken into account as follows:
[6]
"51. If the ATO decides that payment of a releasable liability will cause serious hardship, it will then move to a second decision making process to decide whether or not to grant a release. If serious hardship is established, the ATO is not bound to grant release (Corlette v Mackenzie 96 ATC 4502; (1995) 32 ATR 667). Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously. Examples of situtations in which the ATO may decide against granting release, even though implications of serious hardship may be drawn, are:
[7]
- Where it appears that the person has, questionably or otherwise, disposed of funds or assets without making proper provision to meet tax liabilities;
- Where the granting of release would not result in reduction of hardship, such as where the person has other liabilities or creditors to such an extent that release from the tax debt will not relieve hardship;
- Where the person has used available funds to discharge debts due to other private creditors in preference to debts due to the ATO;
- Where the person has used available funds to discharge debts due to other business creditors where those payements are not considered reasonably necessary to maintain the viability of the business and could be considered as unfair preference payments to the detriment of the ATO;
- Where the person, for less than adequate reasons, has failed to pursue debts due to them, or to see possible contributions from insurers, or persons with joint responsibilities for debts;
- Where serious hardship is associated with a single event or short term outcome, such as might be encountered in the more speculative or seasonal business undertakings, the effects of which can be expected to abate within a short term;
- Where the person has a poor compliance history; and
- Where the person is unable to demonstrate that they have made provision for future debts.
[8]
These factors are appropriate for this Tribunal to take into account and weigh in deciding whether hardship has been established and the exercise of the discretion.
The authorities indicate that in considering serious hardship the primary emphasis is on financial difficulties which will be suffered by the Applicant if the Applicant were required to pay the debt. In Powell v Evreniades(1989) 21 FCR 252 at 258, Hill J observed that the task is to:
[9]
"...consider whether the exaction of the full amount of tax would involve the dependants of a deceased taxpayer in financial difficulty which in all the circumstances can be said to be serious. The financial difficulty will be such that the dependants will be in significant need warranting action by the Relief Board to relieve the condition."
[10]
At 259, His Honour said in relation to financial hardship:
[11]
"Clearly there would be severe financial hardship if the dependants of a deceased person were left destitute without any means of support. That is not to say that in any particular case something less than that will not constitute serious hardship."
[12]
In Ferguson and Commissioner of Taxation[2004] AATA 779, Deputy President Handley of this Tribunal observed that "serious" hardship is something less than "extreme" and involves more than straightened circumstances or inability to pay tax liabilities immediately. He considered that a taxpayer would suffer serious hardship where, for example, he did not have the means to support himself.
In Van Grieken v Veilands & Ors(1991) 21 ATR 1639 at 1644-6, Gummow J examined the history of the expression 'serious hardship' in the context of tax relief provisions and said:
[13]
"...No doubt, the presence of resources from which payment may be made by the applicant is something to be taken into account in determining whether the exaction of the full amount of the tax would entail serious hardship.
...But the determination of whether the exaction of the full amount of the tax would entail serious hardship properly involves a consideration of the financial affairs of the taxpayer, including his financial relations with the other members of his household, and with any family company. I accept the submissions to that effect by counsel for the respondents."
[14]
An appeal was taken from that decision by the Full Court of the Federal Court and the appeal was dismissed.
Other considerations, such as presence or absence of moral wrongdoing, or the fact that the financial difficulties were caused by circumstances beyond the taxpayers control, may be relevant in particular cases. The Federal Commissioner of Taxation v Milne [2006] ATC 4503 at [19]; cf Rollason v Commissioner of Taxation[2006] AATA 962 at [34].
In Milne's case a series of business catastrophes had left the tax payers with debts he could not repay and his position was adversely affected by the fraud of a former business partner. In that context, Conti J considered those circumstances were relevant in demonstrating the absence of any moral wrongdoing. That case involved a family law practitioner who was relieved from a substantial part of the tax debt by way of release.
However, it is important to keep in mind, as Stone J pointed out in Commissioner of Taxation v A Taxpayer[2006] FCA 888 at [23]- [24] that, in considering the question of a release from debt, it is necessary to assess the cumulative effect of considerations and to evaluate the relative weight to be given to each factor. It would be wrong to consider each factor in isolation however, without examining the cumulative impact.
[15]
The Applicant submits that having regard to his 'financial relations' with his wife, the position is that all her assets and income are segregated from him and he has no right or claim to any part of them. Accordingly, her assets and income must not be taken into account when deciding whether there would be serious hardship to him if the eligible debt was not released.
I do not accept this submission because I consider that the expression 'serious hardship' which is the criteria to be applied, extends beyond the question whether assets are segregated. It is sufficiently broad to cover dealings at the present and foreseeably likely to continue in the future between the Applicant and his wife, all aspects of their relationship in respect of finance. It is artificial to confine the examination to the question of whether assets are legally segregated or quarantined.
The expression 'financial relations' fits into a broader concept and would include, for example, financial arrangements and support between parties and their conduct in sharing and meeting financial commitments. It would also involve an assessment as to whether a wife would be likely, having regard to past conduct and dealings between the parties, to come to the support of the spouse and so far as can be estimated their future relationship financially.
On the evidence in this case it is likely that in view of past actions and conduct the Applicant's wife would be most likely to assist him were he in danger of suffering deprivation or hardship. There are strong indicators that such support would be ongoing into the foreseeable future. For example, he lives rent-free in the property owned by his wife. There is no evidence that she would not come to his assistance if necessary to provide him with necessities of life, or any sign of disagreement or strained relations between them.
The expression 'serious hardship' is sufficiently broad to involve examination of the assets and income of a spouse as a relevant consideration in an appropriate case. In the present case, this approach is apposite. Independently of the above consideration there is no evidence in the present case that the Applicant does not have, or will not continue to have access to, adequate transportation, medical treatment, food, clothing or other basic requirements of life if the debt is not released. The present intention of the Applicant as stated to the Tribunal is that he does not propose to resume legal practice. Even if enforcement proceedings by way of bankruptcy were to ensue, the consideration that bankruptcy may prevent him from practicing as a solicitor and thereby cause hardship is of no significant weight. Indeed, there is no evidence before the Tribunal to indicate how, when or whether any enforcement action is likely to be taken if the debt is not released.
In addition, if the debt is released the serious hardship to the Applicant will not be removed because there remains the outstanding liability in the order of $104,000 which is not eligible for release in respect of Goods and Services Tax (GST). The question of serious hardship is one of fact that has and as has been pointed out the authorities, the expression is not in any sense a technical or legalistic use of language but rather a clear and ordinary use of the English language. The expression 'serious' can be taken to mean more than "significant" hardship but less than "extreme" on a spectrum measuring degrees of hardship.
Another factor to take into account is that in the course of cross-examination it was indicated that substantial sums were being spent by the Applicant himself in purchases at a well-known handyman store and in liquor purchases. These appear to be large discretionary expenditures of monies that could have been applied to the satisfaction of part of the taxation debt. They also point to an ability to make some discretionary expenditure, which in turn provides some evidence of the absence of serious hardship and an ability to call on financial resources.
Having regard to the above considerations, particularly the evidence as to the absence of any likely clear hardship, and his ability to obtain the necessities of life, the Tribunal is not persuaded that there would be any "serious" hardship if the eligible amount of debt was not released. For these reasons I consider the correct and preferable decision is that the eligible debt in this case not be released. I affirm the decision under review.
[16]
After having found that there would be no serious hardship, strictly the question of the exercise of discretion does not arise. However, in brief, my conclusion is that I would not be prepared to exercise my discretion in favour of the Applicant in this case for the following reasons:
(i) The Applicant at all relevant times was an experienced, self-employed solicitor, aware of his obligations to meet taxation liabilities. There is no satisfactory explanation given as to why the debts were not paid, and although the Applicant has suffered ill health and there have been misfortunes in his family, these considerations do not outweigh the need for fairness to other tax payers in remitting debt;
(ii) The payments appear to have been in his control. He has failed to keep his financial affairs in order and properly manage his practice according to sound business principles;
(iii) In any event, the Applicant will still owe a substantial debt in respect of GST as noted earlier;
(iv) On the evidence before the Tribunal, the Applicant appears to have made no substantive effort to pay part of the tax debt or to make any effort to come to a satisfactory arrangement with the Commissioner of Taxation.
(v) The Applicant has access to the necessities of life such as food, lodging and some discretionary expenditure.
Accordingly, if, contrary to the view of the Tribunal, the Applicant's circumstances qualified for exercise of discretion to release the debt, it should not be exercised in his favour.
[17]
I certify that the preceding 41 (forty-one) paragraphs are a true copy of the reasons for the decision herein of Hon. B Tamberlin, QC, Deputy President.