1. Mr Balens was previously married but has been separated since 14 February 1997. He has previously been subject to outstanding child support debts under the Child Support (Assessment) Act 1989 (Cth) or the Family Law Act 1975 (Cth). All of his children are now adults and he is no longer subject to any requirements to make child support payments. He now lives alone in a modest home in suburban Brisbane and conducts his own business as an owner-driver of a hire car.
2. The current outstanding tax debts arise from liabilities from three financial years: 2009-10, 2010-11 and 2011-12. With the exception of the first quarter of the 2009-10 and 2010-11 years, Mr Balens has outstanding tax debts in respect of all other quarters for the three financial years mentioned above. As a result of lodging his income tax return for the first two of the above mentioned financial years, he was assessed as having a tax credit in each of those years and the amount of credit was offset against his outstanding tax debts.
3. Mr Balens gave oral evidence at the hearing before this Tribunal and it was noted that despite having an arrangement with the Australian Taxation Office ("ATO") to make payments against his tax debts, little progress has been made over the past three years towards settlement of the outstanding debt. Notwithstanding that, he has nevertheless made $4,000 in contribution to his superannuation and has obtained a loan to purchase the house in which he presently lives. Mr Balens said, in response to a question asked in cross-examination, that while he has a spare room in his house that could possibly be rented out to give him additional income, he was not comfortable in having someone live in his house whom he did not know. In response to whether he should have paid his tax debt before purchasing his residential property, he said that he had an arrangement to pay off his tax debts at the time he made that investment.
4. It was noted that Mr Balens has a Ford Fairlane which he uses as a hire car to earn his income, and that he also has an older Fairlane which he uses to undertake shopping and other domestic activities so that his work vehicle is always kept in good condition. He said his second vehicle is of very little capital value. He also acknowledged that he made payments to private health insurance. Much of his financial difficulties seem to point to increasing credit card debts and poor management of his financial affairs. Mr Balens also acknowledged that he had had difficulty in complying with his legal responsibilities in relation to tax.

1. I have considered all the evidence presented by the applicant and the respondent. In relation to this application I make the following findings of fact:
   1. Mr Balens is separated and lives alone and has no requirement to make payments in support of his former wife or children.
   2. He is a hire car owner-driver. He has a licence to conduct that business and has purchased a Ford Fairlane on credit for the conduct of that business. His present vehicle is a 2007 Ford Fairlane.
   3. Mr Balens has provided the Commissioner with a Statement of Income and Expenses and a Statement of Assets and Liabilities. He did not make any provision for outstanding tax debts in either of those financial statements.
2. The applicant's financial position as submitted to the respondent on approximately 20 May 2012 shows a statement of income and expenses which, in aggregated form, is:

Fortnightly income: $2,560 Fortnightly expenses: $2,854

It is to be noted that the applicant has made no provision for income tax expenses in the above statement.

1. In relation to Mr Balen's statement of assets and liabilities, these are, in summary form, set out below:

Debts for Motor Vehicle Hire Purchase Agreement: $22,000

1. Mr Balen's outstanding tax liabilities as at 4 February 2013, just prior to the hearing date, are as follows:

General Interest charges on tax instalments: $1,836.44

1. The applicant's request to be released from his tax liabilities is governed by s 340-5(1) of sch 1 of the Act. This section provides that an applicant may be released in whole or in part from taxation liabilities if s 340-10 of sch 1 applies. Section 340-10 prescribes the categories of tax liabilities that can be considered for release under s 340-5. The income tax instalments above are included in the list of taxes for which relief may be given, however the goods and services tax is not contained within that section and therefore cannot be released.
2. The ground upon which the applicant may be considered for release from tax liabilities is that the commissioner must be satisfied that he would suffer serious hardship if he was not so released (s 340-5(3)).
3. The term serious hardship is not statutorily defined but guidance is set out in the policy document Practice Statement Law Administration (PS LA 2011/17: Debt relief) ("PSLA 2011/17"). In order to determine whether serious hardship is present in any particular case, PSLA 2011/17 provides, as follows, in Section B of the Statement:

Release decision - determining serious hardship

...

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 or 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.

41. Subject to the general considerations above, the steps by which the ATO evaluates the merits of individual cases can be addressed in three segments:

• Income/Outgoing Tests
• Assets/Liabilities Tests
• Other Factors.

Income/outgoing tests

42. These tests are concerned with quantifying the person's capacity to meet the tax liability from their current income. The tests in sequence are:

(i) What is the person's capacity to pay, as measured by the income and outgoings stated in the application or supporting documents, that is, what net income remains after deducting total outgoings from total income?

(ii) Does the ATO accept that the income and outgoings stated are accurate and that the outgoings are necessary, or is there scope to increase the net income available or to reduce outgoings to meet the tax debt without serious detriment to living standards?

(iii) If there is a margin by which available income exceeds reasonable outgoings, is it sufficient to allow the liability to be met within an acceptable time frame?

...

Assets/liabilities tests

...

46. There are several types of assets which the ATO would generally regard as normal and reasonable possessions, and which would not be expected to be surrendered or sold to meet revenue debts. Subject to the proviso that values are modest rather than extravagant, those assets include:

• ownership of, or equity in, a residential property which is the person's home
• a motor vehicle
• furniture and household goods
• tools of trade, and
• cash on hand or bank balance sufficient to meet outgoings for necessities or other reasonable expenditures, for example, funds put aside by aged persons to cover funeral expenses.

...

Other factors

50. Apart from the financial factors discussed in preceding paragraphs, various additional factors may require consideration during the ATO's evaluation of cases. Some could have a bearing on the ATO's decision while others, though offered as grounds warranting release, are not relevant.

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; (1996) 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 situations in which the ATO may decide against granting release, even though implications of serious hardship may be drawn, are:

• 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

1. The applicant has the onus of proof to establish that the Commissioner's decision was wrong (s 14ZZK(b) of the Act). Specifically, an assessment under s 340-5 of sch 1 of the Act is concerned with two questions:[1]
   1. would the applicant suffer serious hardship if he was required to pay the outstanding tax debt; and
   2. if so, should the Commissioner exercise his discretion to release the applicant from his debt, in whole or in part?
2. In assessing the tax debt and justification for waiving or releasing the taxpayer's debt, the principles governing justification are contained in Finance Circular 2009/09, made under the authority of the Financial Management and Accountability Act 1997 (Cth). That Circular provides for three broad categories which may justify release from a tax debt:[2]
   • (i) where the taxpayer's debt is being aggravated by the ATO's actions or omissions;
   • (ii) where a statutory provision has caused the taxpayer to incur an unintended debt and this would result in an unfair burden being placed on the taxpayer; and
   • (iii) "repaying the debt would cause genuine and significant financial hardship"

In the present case, only category (iii) above could be likely to have any application.

1. It is clear from s 340-10 of sch 1 of the Act that GST is not a category of debt which can be forgiven. Therefore, only the balance of Mr Balens' debt (excluding GST and its corresponding general interest charge) can be considered for release; that is, the tax instalment debt and its general interest charge.
2. In determining whether there is serious hardship, it must be shown that the requirement to pay the tax liability would result in the person, according to normal community standards, "being left without the means to achieve reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements".[3]
3. Any such assessment must be particularised by three tests:[4]

1. This test is to be answered by considering three subtests:

2. Are the income expenses regarded as being accurate?

3. If there is an excess of income over expenses, does that excess allow the liability to be met within an acceptable timeframe?

1. The applicant's statement of income and expenses submitted in May 2012 discloses a negative balance of $294 per fortnight. A general perusal of the amounts claimed does not show them to be unreasonable or excessive. The accuracy depends on whether there are some items which may be regarded as discretionary or which could be given lower priority in relation to tax debts. The quantum of superannuation contributions, $200 per fortnight ($5,200 per annum), is clearly an example where it is difficult to justify subordinating the tax debt to such payments, particularly considering the magnitude of tax debts and the period of time over which they have existed. In addition, apart from two tax credits which have been applied after assessment of his annual income tax return, no other amounts have been paid by the applicant to offset those debts.
2. Looking at the case as a whole, redirecting superannuation contributions of $5,200 per annum might repay the total existing tax debt and general interest charges in about 4.5 years. This might be a little longer than what might be regarded as acceptable as a general principle referred to in PSLA 2011/17. However, the applicant's tax debt has not been reduced by any tax credit by the applicant for some years. Even if the amount spent on superannuation was to be regarded as a way to reduce the tax debt, it does not take into account the discipline required of also changing the applicant's practise and commencing to remit the tax instalments and GST collections on a regular basis.
3. Two other issues may provide some opportunity to improve his financial management or to consider the accuracy of the statement of income and outgoings:
   • (a) Credit card payments and hire purchase payments

Mr Nam, for the Commissioner, submitted that there is evidence of credit card repayments which involve a mixing of private expenses with the business credit card and, therefore, this does not give a true picture of the applicant's financial position.

(b) The possibility of re-structuring Mr Balen's loans to obtain lower interest rates might be expected to be achieved. For example, hire purchase loans might be able to be amalgamated with personal loans which might be expected to attract a lower interest rate.

1. In this regard, the letter of 20 May 2012 refers to Westpac being prepared to consider a consolidation of loans if there was a period of 12 months of mortgage payments "in good order". This is also referred to in the objection decision and a period of six to nine months is mentioned there (see applicant's letter of 5 November 2011). The objection decision also refers to the applicant having made some default on mortgage payments which had not been declared by him.
2. Looking at the circumstances as a whole, there appears to be a possibility for improved cash flow by restructuring of debt and redirecting deductions for superannuation into paying off some of his tax debts. The applicant could probably obtain advice from his accountant to have a more optimal structure, with a likelihood of interest savings.
3. The issue which is concealed in all of this analysis is the management of his tax debt and general interest charges. As previously stated, only the tax instalments are eligible to be considered for relief under s 340-10 of sch 1 of the Act (i.e. GST cannot be forgiven). In addition, these debts are continually increasing.
4. The ATO objection decision of 6 June 2012 and subsequently at the date of the hearing on 4 February 2013 reveals that the eligible debts were:

1. It can be noted from the above table that the actual increase in general interest charge for that period was almost 50% of the increase in the tax instalment debt, despite the percentage of general interest charge being only between 15-22% of the total debt amounts shown in para 27 above. The rate of increase in general interest charge is therefore increasing disproportionately to the tax instalment debt. The same might be said of the remainder of the total debt of over $23,000 shown in para 11 above.
2. It is relevant that the applicant's compliance history has been poor over a long period of time and he clearly did not give it any consideration in statements provided to the Commissioner as it was not included in the statement of income and expenses which he submitted. The poor compliance history is also reflected in the pattern mentioned in paras 11 and 28 above, which has been growing every quarter since the 2009/10 tax year.

1. The applicant's statement of assets and liabilities, shown in the respondent's statement of facts and contentions, reveals the position as at May 2012; the credit card debt was $63,200. In the respondent's outline of submissions received by the Tribunal on 21 January 2013, the credit card debts as at 23 October 2012 (some five months later) has risen to $74,200. However, the net asset position has moved from $78,028 to between $95,000 and $100,000 by 23 October 2012. This net result includes an increase in cash at bank from $9,228 to $30-35,000, much of which was deposited in September 2012 to an account held by the applicant.

1. As is evident from para 51 of PSLA 2011/17, even if the applicant's financial position could be regarded as classifying him as being in serious hardship, there may be good reason why the discretion should not be exercised in his favour.[5] This would be particularly so where there is evidence of an applicant giving preferential treatment to other creditors or to himself personally in lieu of attempting to make some payment against his tax debts.
2. I was referred to a number of principles and authorities by the Commissioner's advocate, in particular that:
   • "hardship" ... is treated ... as being an inability to provide for the necessities of life if relief is not granted (see Corlette v MacKenzie);
   • "serious hardship" is to be guided by the Commissioner's rulings and guidance notes (now PSLA 2011/17) (see Re Ferguson and Commissioner of Taxation [2004] AATA 779); and
   • where a person has necessities of life and is not at risk of bankruptcy, this is an indication of a person not suffering "serious hardship" as that term is used in s 340-5(3) of the Act (see Lipthay and Commissioner of Taxation [2005] AATA 224).
3. In any event, the other factors referred to in paras 50 and 51 of PSLA 2011/17 tend not to be of any real benefit to Mr Balens as he has no other person for whom he provides and he no longer has a child support debt. His financial position has improved and would appear to have prospects for significant additional improvement in cash flow if his debt interest was better managed. Mr Balens' financial position could also improve considerably the sooner he eliminates his debts.
4. While I do not regard as necessary the respondent's suggestion of Mr Balens' gaining extra income by renting out a room of his house, he has sufficient equity in his home to pay his tax debts if the Commissioner demanded payment. However, it would be a most undesirable path to foreclose on his house.
5. In considering Mr Balens' position overall, I am not satisfied that he is suffering serious hardship. In some respects, there are indications that his liquidity position has improved. However, there is evidence he has treated his tax obligations to the Commissioner with scant regard. Perhaps the most generous assessment is that the organisation of his financial affairs over the past few years has not been optimally structured and granting relief from his tax liabilities would not necessarily result in improving his overall financial position, particularly in relation to his ability to enjoy the necessities of life.
6. In the circumstances, I am not satisfied that he qualifies for relief under s 340-5 of sch 1 of the Act.

1. The decision under review is therefore affirmed.

I certify that the preceding 37 (thirty-seven) paragraphs are a true copy of the reasons for the decision herein of Senior Member Dr K S Levy, RFD

....................[Sgd]....................................................

[1] See Commissioner of Taxation v Milne [2006] FCA 1005; (2006) 153 FCR 52.

[3] See paras 37 and 38 of PSLA 2011/17.

[5] Corlette v MacKenzie (1996) 32 ATR 667.