Income tax for the 2008, 2010, 2011 and 2012 income years

1. At the time of making the application for release, the Applicant's stated fortnightly income was $3,388.00 before tax and $2,548.00 after tax.
2. In updated information provided by the Applicant to the Respondent on 14 April 2014, and subsequently provided to the Tribunal by the Commissioner, the Applicant indicated that he was receiving a Disability Support Pension (DSP) from Centrelink of $589.43 after a payment of $45.87 for child support was deducted. Accordingly, the Applicant calculated the gross amount to be $635.30.
3. The following table reflects the Applicant's stated fortnightly income at the different stages outlined above:

1. The Applicant has stated that his fortnightly living expenses are as follows:

Per fortnight expenditure ($) Per original release application

Per fortnight expenditure ($) Per updated figures on 31 October 2013

Per fortnight expenditure ($) Per updated figures on 14 April 2014

1. The Applicant has provided the following information regarding his assets and liabilities:

Asset Value/Liability per updated information ($)

1. Shortly before the hearing the Respondent conceded that the Applicant will suffer serious financial hardship if the tax liabilities in question were to be satisfied. Having regard to the evidence and the submissions, I agree.
2. Accordingly, the only issue for determination by the Tribunal in these proceedings is the question of whether the Tribunal should exercise its discretion to release the Applicant from his taxation liability, either in whole or in part, pursuant to section 340-5(3) of Schedule 1 to the TAA 1953. This conclusion stems from the fact that the provision is discretionary in nature and only provides for the possibility that a release may be granted if satisfying the tax liabilities would cause serious hardship.
3. The fact that there is such a two step approach to be utilised has been recognised and discussed in a number of cases, the most significant of which was the decision of Hill J in Powell v Evreniades [1989] FCA 114; (1989) 21 FCR 252 where His Honour observed (at 264) of the former section 265 of the Income Tax Assessment Act 1936 (being the predecessor to the "serious hardship" provisions in Division 340 in the TAA 1953) that:

... the Board acting under s 265 must proceed in two steps. Where, as here, the case is one arising after the death of a taxpayer the Board must first decide whether owing to the death of the original taxpayer that person's dependents are in such circumstances that the extaction of the full amount of tax would entail serious hardship. If that question is answered favourably to the applicant for relief the Board must then address the next set of issues, namely whether there should be a release in the circumstances and if so whether that release will be of the whole or part of the liability, It is obvious that the factors that may be relevant to the second of these steps could be a great deal wider than the factors which are relevant to the first of the steps.

1. That is, according to Hill J, a two step approach is to be taken:
   • (a) Step one - would the extaction of the full amount of the tax entail serious hardship?; and
   • (b) Step two - if the answer to the question posed at step one is "yes", then should there be a release in the circumstances? If the answer to that question is "yes", then the issue to consider is whether the release should be of part or the whole of the liability.
2. Similarly, the Tribunal in Re Filsell and Commissioner of Taxation [2004] AATA 1012 identified a two step approach in determining whether the discretion in section 340-5(3) of Schedule 1 of the TAA should be exercised:

[14] In the Tribunal's opinion, the language of the legislation requires a two stage approach. First, the decision-maker must decide whether the settlement of the liability will result in serious hardship. If that decision is favourable to the applicant, the discretion offered by sub-section 340-5(3) then falls for consideration. In reaching the decision to release in whole or part, the question to be addressed is whether, in all circumstances, it is just and proper to provide the requested relief. Matters pertaining to the incidence and consequence of the tax and the effect of its exaction upon the affairs of the person will bear upon the issue of whether the relief is just and proper...

1. The Applicant contends that he will be in serious financial hardship and that "bankruptcy will be the conceivable outcome". He contends that the waiver of the debt should be allowed as there are no prospects of any financial improvement in his situation. He also contends that there is a moral obligation on the Respondent (rather than a legal obligation) to enable the Applicant to finalise his affairs and regain his dignity.

1. The Respondent contends, as set out in his Statement of Facts, Issues and Contentions, that it is not appropriate for the Tribunal to exercise its discretion to release the Applicant, either in whole or in part, from his taxation debt, for the following reasons:

1. The Applicant has a poor compliance history and failed to lodge income tax returns for various periods by their respective due dates and also failed to pay the corresponding liabilities as and when they fell due. This resulted in the escalation of the debt through the imposition of general interest charges (GIC). Significantly, this was at a time when the Applicant earned substantial amounts of income from his employment. 2. The Applicant also failed to lodge the majority of his business activity statements by their due dates.

1. GIC accounts for approximately 20% of the Applicant's taxation debt, and he has not demonstrated a present capacity to pay the primary tax amounts even if the GIC component were to be remitted. Notwithstanding this, the Respondent contends that there is no basis to remit the GIC component in light of the Applicant's poor compliance history noted above. Further, any GIC remitted will form a part of the Applicant's taxable income for the next financial year, which may potentially create future tax debts for him. As such, the Respondent contends that granting release will not necessarily result in alleviating hardship.

1. Any hardship that the Applicant would experience is to a large extent of his own making, rather than being the result of a misfortune beyond his control. The Applicant derived a significant amount of income for a number of years. In our submission, it is not appropriate that the Applicant elected to employ Ms Megan Formosa and pay her a considerable sum of moneys that could otherwise be used towards satisfying his taxation debt. The fact that he was able to afford the expense, at a time when he was claiming serious hardship, is not reflective of a person who is in fact in serious hardship. 2. The Respondent further contends that the Applicant serviced his other creditors/debts in preference to his taxation debt, at a time when he was aware of his taxation debt and had a greater capacity to pay his debts. However, the Respondent acknowledged that the Applicant made payments towards his taxation debt until his final payment of $240.00 on 30 January 2014. 3. Any argument that the Applicant is likely to be made bankrupt if his application fails is not a proper reason to release him from his taxation liabilities: Re Alexander Lipthay and Commissioner of Taxation [2005] AATA 224; Re Milne and Commissioner of Taxation [2005] AATA 633. Bankruptcy will not affect the Applicant's entitlement to the Disability Support Pension, and the Applicant has indicated that he is not currently employed and believes he will never be gainfully employed again. 4. There are no extenuating circumstances that warrant the Applicant being treated preferentially to other taxpayers.
2. The Respondent further contended that:

[33] To grant the Applicant a release from his taxation debt would frustrate the purpose of the release provision and the taxation legislation generally.

[34] The Applicant will not be left without means to the basic necessities of life even in bankruptcy. It is also noted that the Respondent has offered to treat the Applicant's debt as uneconomical to pursue. However, the Applicant is hesitant to accept the offer.

1. The Tribunal concludes that the Commissioner's decision not to exercise his discretion to the release the taxation debt, either in whole or in part, was the preferable decision in all the circumstances.
2. It is well-accepted that the finding of serious hardship does not oblige the Respondent, or the Tribunal, to exercise his or her discretion in favour of the Applicant: R v Trebilco; ex parte F S Falkiner & Sons Ltd [1936] HCA 63; (1936) 56 CLR 20; Powell v Evreniades [1989] FCA 114; (1989) 21 FCR 252; Van Grieken v Veilands (1991) 22 ATR 630; Rollo v Morrow (1992) 23 ATR 477.
3. Where serious hardship is shown, the relevant question that must be asked in determining whether the discretion to grant relief should be exercised is "whether, in all circumstances, it is just and proper to provide the requested relief" (emphasis added): Re Filsell.
4. The factors relevant to the second question, whether if serious hardship be shown the discretion to grant relief should be exercised, could be a great deal wider than the factors relevant to the first question: R v Trebilco; ex parte F S Falkiner & Sons Ltd [1936] HCA 63; (1936) 56 CLR 20; Powell v Evreniades [1989] FCA 114; (1989) 21 FCR 252.
5. The Tribunal in Re Vagh and Commissioner of Taxation [2007] AATA 32 identified some relevant considerations:

[39] Considerations relevant to the proper exercise of the discretion whether or not to grant remission when undue hardship is established will vary from case to case, however, relevant considerations are likely to include:

(a) the circumstances under which the hardship arose;

(b) whether those circumstances were within the capacity of the applicant to have foreseen and controlled;

(c) whether the applicant has over-committed himself financially;

(d) whether the applicant or any of his dependants has suffered serious illness or accident involving irrevocable financial loss to the applicant;

(e) whether the applicant has been in regular employment;

(f) whether the circumstance of the hardship are likely to be of a temporary or recurring nature;

(g) whether a decision to remit the sum would as a matter of administrative justice and fairness be appropriate having regard to the fact that taxpayers are normally obliged to pay their taxes in full, including those who struggle with the payment of their taxes. (Ferguson (supra) at [34] applying Re Wilson v Minister for Territories (1985) 7 ALD 225 at 232-3; Filsell (supra) at [20]; Kirkman v Commissioner of Taxation (AAT oral decision, unreported, 14 April 2005, Ettinger, SM) at 4-5.

(a) the probable future financial position of the applicant; see Ferguson (supra) at [12];

(b) whether the applicant has demonstrated that he or she is serious about repaying the tax debt, including whether funds were received which could have been applied towards the tax debt but were not so applied: Kirkman (supra) at p. 5-6;

(c) the circumstances in which the taxpayer has arrived at the position wherein he or she would suffer severe hardship if required to satisfy the tax liability: Corlette v Mackenzie (1996) 62 FCR 597 at 598E per Wilcox J, Einfeld and Foster JJ agreeing at 600, 601.

1. In PSLA 2011/17, the Commissioner (at [38]) identifies factors that he considers should be taken into account in the exercise of the discretion not to grant release of a tax debt, even though the implications of serious hardship may be drawn. Those factors 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
   • where the person has used available funds to discharge debts due to other business creditors where those payments 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, without good reason, has failed to pursue debts due to them, or to seek 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 where the effects are likely to be only 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.
2. It is appropriate to have regard to the Commissioner's policy as stated in PSLA 2011/17: Re Drake and Minister for Immigration and Ethnic Affairs (No 2) [1979] AATA 179; (1979) 2 ALD 634 at 640.
3. The Tribunal considers that the following factors are particularly relevant in this case:
   • (a) The Applicant had used available funds to discharge debts due to other private creditors and did so in part in preference to debts due to the ATO (Factor 1);
   • (b) The Applicant had a poor compliance history (Factor 2);
   • (c) The circumstances in which the Applicant arrived at the position wherein he would suffer serious hardship is a set of circumstances largely of his own making (Factor 3); and
   • (d) The Applicant was offered and entered into some very generous repayment plans all of which he abandoned shortly after commencement largely without explanation (Factor 4).
4. Each of these factors is dealt with in turn below.

1. The evidence clearly suggests that the Applicant serviced his debts to other creditors in preference to his taxation debt, at a time when he was aware of his taxation debt and had a greater capacity to pay the debt.
2. Set out at Schedule A to this decision is a table showing the creditors to which the Applicant owed debts at the time of making the Application and the amounts paid to those creditors in satisfaction of the debt. These payments were made in preference to his taxation debts. The figures are based on information provided by the Applicant in his application and further information.
3. This consideration does not weigh in favour of the exercise of the discretion to release the debt.

1. The Applicant has a poor compliance history as evidenced by his failure to lodge his income tax returns and business activity statements by the required date for numerous periods. Specifically:
   • (a) The Applicant's income tax returns were lodged late for the income years ended 30 June 2001, 2002, 2003,2004, 2007, 2008, 2009, 2010 and 2011 - on a number of these occasions the lateness was in the order of two or even three years;
   • (b) The majority of his BAS statements were also lodged late.
2. The Applicant's poor compliance history does not weigh in favour of the granting of release.

1. The evidence suggests that any hardship that the Applicant would experience is to a great extent of his own making, and not the result of a misfortune beyond his control.
2. At the time that the application was lodged, the Applicant was self-employed as a sole trader in a site preparation services business. Through this employment, the Applicant derived a significant amount of income over a number of years.
3. The taxation debt relevant to this proceeding relates to the Applicant's self-assessed income tax liabilities for the income years ended 30 June 2008, 2010, 2011 and 2012. As noted above, the Applicant not only failed to lodge his income tax returns for those tax years by their respective due dates, but also failed to pay the corresponding liabilities as and when they fell due. This resulted in an escalation of the debt through the imposition of GIC.
4. Significantly, the tax liability arose at a time when the Applicant earned substantial amounts of income from his employment. Set out at Schedule B to this decision is a table showing the amounts of gross business income that the Applicant reported as being received in the relevant periods, and the corresponding amounts of taxable income as per the notices of assessment issued to the Applicant for those periods.
5. At the time of making the application, the Applicant stated that his fortnightly income (after tax) was an amount of $2,548. However, the Applicant's bank statements covering the period from 3 December 2012 to 2 December 2013 suggest that the Applicant was earning a substantially greater amount on a fortnightly basis.
6. Set out at Schedule C to this decision is a table showing the amounts that were paid into the Applicant's personal bank account by a company to which the Applicant provided plant and labour services since 16 September 2008.
7. While the Tribunal accepts that the amount received by the Applicant often varied, and sometimes significantly, based on the amounts shown in Schedule C, at times the Applicant earned in excess of $4,000 a week. This lends support to a finding that the Applicant was in a position to pay his taxation debts as and when they fell due, but elected not to do so.
8. The Tribunal is of the view that, having regard to the above, the circumstances in which the Applicant finds himself are to a great extent a result of his own actions, and this weighs strongly against the granting of release.

1. The Respondent provided evidence at the hearing that the Applicant entered into three formal payment arrangements in June 2012, February and July 2013. The first required monthly payments of $700 for 10 months and then a lump sum at the end of $674 - the Applicant made only one payment and then defaulted. The second required payments of $150 per month - the Applicant made three payments and then defaulted. The third required monthly payments of $480 per month - five payments were made by the Applicant and he then defaulted. The Applicant agreed with this summary of the previous payment arrangements which had been entered into.
2. The Applicant has chosen to abandon such repayment plans without any real explanation being provided either in writing or at the hearing. The fact that all three plans were generous in favouring the Applicant, providing as they did for what could only be described as modest repayment schedules over extended periods of time, suggests a more than reasonable approach on the part of the Respondent which now reflects poorly on the Applicant and his somewhat seemingly disdainful abandonment of those repayment plans.
3. The Tribunal considers that this factor, while weaker than the other factors, weighs against the granting of release.

1. While bankruptcy is a possible outcome in light of the fact that the Applicant will not be in a position to pay his taxation debts based on his figures of fortnightly income and expenses the Tribunal has decided in several cases that bankruptcy does not necessarily provide grounds for release: Re Lipthay and Commissioner of Taxation [2005] AATA 224, Re Milne and Commissioner of Taxation [2005] AATA 633.

1. The Respondent placed great emphasis in his oral and written submissions to the Tribunal on the employment by the Applicant of Ms Formosa.
2. The Respondent written submissions stated (footnotes omitted):

[34] ... the Applicant had placed his own private interests over the interests of his taxation obligations and disposed of his available funds, without making a proper provision for meeting his tax liabilities.

[35] At a time when the Applicant was claiming serious hardship, and when the Applicant was earning significantly greater income than at present, the Applicant elected to employ Ms Megan Formosa ("Ms Formosa") from 6 January 2013 for the stated purpose of assisting him in meeting his business obligations and business regulation requirements so as to continue to remain operationally viable as a business.

[36] The Applicant provided a copy of the "PAYG payment summary - individual nonbusiness" issued to Ms Formosa, which shows that she was paid a gross amount of $18,576.00 for the income year ended 30 June 2013. The total amount constitutes payments of wages across only a 6 month period.

[37] Accordingly, the Respondent submits that the amount of the Applicant's expenditure on employing Ms Formosa is an extravagant expenditure when considered in light of his taxation debt.

[38] Further, a reduction or elimination of this expenditure in favour of the discharge of the Applicant's taxation debts would have allowed the Applicant to discharge his releasable debt of $52,109.15, without causing the Applicant to be unable to afford reasonable acquisitions of food, clothing, medical supplies, accommodation, education for children and other basic requirements (and therefore without causing the Applicant "serious hardship").

[39] In circumstances where the Applicant was claiming serious hardship, it was not appropriate that the Applicant elected to employ Ms Formosa and pay her a considerable sum of moneys that could otherwise have been used towards satisfying his taxation debt.

[40] Notwithstanding the reasons provided by the Applicant as to why he employed Ms Formosa, the fact that he was able to afford the expense, at a time when he was claiming serious hardship, is not reflective of a person who is in fact in serious hardship.

1. However, I find this logic less than compelling. It is true that the Applicant did employ Ms Formosa at a time when he had significant tax debts, but according to his evidence, which was largely uncontested, this was for the purpose of straightening out his financial affairs which were, by all accounts, in a complete mess.
2. I think it is not unreasonable for a taxpayer, even one already in serious financial hardship, to employ someone for the purpose of assisting him in his business in such a way as to ensure that he is better placed to carry on and possibly pay back some of his outstanding debts including his tax obligations. I don't think one can, or should automatically and without further explanation, read into this that the taxpayer by doing so is taking money that could otherwise have been used to pay down his tax debts and using it for an inappropriate purpose or in an inappropriate manner. Often this will be done so as to put the taxpayer in a better position in the longer term to enable him to fund a larger portion of his outstanding debts.
3. Whether that was the case here is unclear but the evidence presented did not, in and of itself, support a finding that the funds paid to Ms Formosa were being used inappropriately having regard to the outstanding tax debts which the Applicant owed to the Respondent. In this context it is not appropriate to assess the position with the benefit of hindsight. The fact that Ms Formosa's assistance did not in the end result assist the Applicant in avoiding the precarious financial position he now finds himself in, does not mean that her engagement should be viewed as inappropriate. The question is whether it was appropriate at the time she was so engaged having regard to the skill set which she would bring to the table. Based on the evidence presented I am of the view that the Applicant genuinely believed that Ms Formosa's engagement would greatly assist him and was not an inappropriate "extravagant expenditure".
4. Having regard to the above I conclude that Ms Formosa's engagement is not a factor that is relevant to the exercise of the discretion.

Household Income and Relationship with Ms Formosa

1. The income and assets of all members of the household with whom the Applicant has financial relations (including the spouse of the Applicant) is to be taken into account. The Tribunal in Re Filsell had the following to say on this issue:

In addressing the applicant's suggestion that his wife's income should be ignored in the assessment of serious hardship, the Tribunal notes that the expenditure estimated by him relates to himself, his wife and his adult son. This situation when considered in conjunction with serious financial hardship would create, in the Tribunal's opinion, an expectation that all family members living under the same roof would contribute whatever they had available. However that may be, the decision of Gummow J, Van Grieken v Veilands & Ors_[1991] FCA 167; , (1991) 21 ATR 1639 clarifies that a determination of whether the exaction of the tax would entail serious hardship properly involves a consideration of the financial affairs of the taxpayer, including his financial relations with other members of his household._

1. As noted above, the Applicant and Ms Formosa are currently in a relationship. According to the Respondent, Ms Formosa was noted as the Applicant's spouse in his income tax returns that were lodged for the income years ended 30 June 2013 and 2014.
2. The Respondent submitted that the financial affairs of the Applicant and Ms Formosa "are closely intertwined". In those circumstances, relying on the authorities of Re Filsell and Van Grieken, the Respondent contended that the financial circumstances of Ms Formosa were a relevant consideration for the Tribunal. In the 2013 and 2014 returns, the Respondent noted that the Applicant had disclosed that Ms Formosa had a taxable income of $28,651.00 and $21,672.00, respectively. However, no evidence has been adduced by the Applicant as to Ms Formosa's financial affairs.
3. The Respondent's submissions noted that Ms Formosa has indicated that "no decision has been made by [her] regarding the longevity" of her relationship with the Applicant, and that she was "not in any financial position to take up his debt with the tax department". The Respondent submitted that there is a reasonable expectation that Ms Formosa, as the Applicant's partner, will provide for him and contribute whatever she has available.
4. From the available evidence, it is not clear to the Tribunal as to exactly how the financial affairs of the Applicant and Ms Formosa are intertwined. Before reliance can be placed on decisions such as Van Grieken the details of the extent to which their financial affairs are intertwined needs to be put in evidence before the Tribunal. That has not occurred and in the absence of such evidence the Tribunal places no weight on this factor. In any future application this issue may become relevant.

1. This matter was raised by the Applicant and it is clear it is of relevance to the question of the discretionary exercise of the Respondent's powers.
2. However, the Applicant led no evidence at the hearing to support his submissions that he will never be able to work again due to his deteriorating health. The available medical evidence of the Applicant's health at the hearing did not support a conclusion that the Applicant would never work again.
3. In response, it was indicated at the hearing that the Respondent would not pursue the outstanding debt while the Applicant remained on a DSP from Centrelink, remained unemployed and did not gain or produce any further income. This undertaking was provided in writing the day after the hearing.
4. In circumstances where there is insufficient evidence to demonstrate that the Applicant's future financial position cannot improve, I do not believe the Tribunal can properly conclude that the financial position is such that a debt release should be granted. If in the future, the Applicant believes that he has sufficient evidence to support that conclusion, he can make a further application for a debt release at that time. In the meantime he has the Respondent's written undertaking of non-pursuit of the claim while he remains unemployed, on a DSP and with no additional income.

1. In his written submissions, the Applicant contended that the Respondent had a moral obligation to enable the Applicant to finalise his affairs and regain his dignity. Whether or not the Respondent has such a moral obligation is an interesting philosophical issue which may be the subject of considerable discourse elsewhere, but the Tribunal is bound to consider only the application of the law and the recognised factors that must be considered to determine whether to exercise the discretion to release taxation debts.
2. The factors that are recognised as relevant to the exercise of that discretion make no reference to a moral obligation to enable a taxpayer to finalise their affairs especially where the issue is to allow the taxpayer to so settle on the basis that the tax debt will be released. Indeed the accepted factors suggest the exact opposite - of relevance is the fact that taxpayers are normally obliged to pay their taxes in full and the question is whether it is fair to allow this taxpayer to do otherwise.

1. In conclusion, notwithstanding that the Respondent accepts that the Applicant is currently not in a position to satisfy the taxation debt, the Tribunal concludes that the relevant factors weigh against the exercise of the discretion to release the tax debt.
2. The Respondent's objection decision dated 13 June 2013 is affirmed.

I certify that the preceding 69 (sixty -nine) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President

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Business Income Reported in Income Tax Return ($)

Taxable Income per Notice of Assessment Issued to Applicant ($)

BUSINESS RECEIPTS PAID INTO THE APPLICANT'S BANK ACCOUNT BY ONE CORPORATE CUSTOMER