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KEY POINTS
- Australian system of ‘default assessments’.
- Application to lodge a late objection.
- Unfettered discretion to decide whether to accept application.
- Write off of debt due to government.
England’s first innings has ended at 102 all out. Pathetic. It’s enough to make you stop watching the desktop scoreboard and actually do some work instead.
Given that the Australians seem (today) to be rather good at cricket, I wonder if they have anything to teach us about tax?
After all, they do get mentioned quite often when new tax proposals are being considered – their charter has ended up being the model for ours, for example, and has improved it considerably.
So I wonder what they do about tax debts which it would be unfair to collect; does their system give the taxpayer a fighting chance of getting the liability overturned? (Australia’s lost an early wicket; maybe there is a glimmer of hope here?)
On the back foot
Australia does, of course, have a self assessment system for personal tax. While the terminology is slightly different, the principles are really quite similar. If a taxpayer does not send in a tax return, the Australian Taxation Office (ATO) can issue a ‘default assessment’, which is the equivalent of an HMRC determination under TMA 1970 s 28C.
Rather than only being able to displace this by filing the return, the Australian system is more like the old UK pre-self assessment days, and you have to lodge an ‘objection’ – the equivalent of the old UK appeal.
The time limit for doing so is a maximum of four years from the date of the assessment. The time elapsed since the filing date for the year concerned is not relevant at all.
The main reason for invoking equitable liability is when the time limit for overturning the determination by submitting a return has passed. Similarly, in correspondence with the ATO, I established that the same issue could arise:
‘For example, if the Commissioner issues a default assessment for the 1999/2000 income year in 2002 with a taxable income of $50,000 and the taxpayer lodges a return with a taxable income of $20,000 in 2009, the original default assessment of $50,000 will still be valid.’
However, while the only resort of the UK taxpayer with no objectively reasonable excuse is to beg for the extra-statutory application of equitable liability, the Australian taxpayer has a statutory option open to him which makes it more of a fair fight:
‘The only option for the taxpayer would be to seek approval to lodge an objection out of time against the default assessment. If it is allowed then they can lodge an objection to the original assessment.’
(69 - 1 at tea, this is NOT looking good.)
Late appeal
The key sections of the Australian legislation is Taxation Administration Act 1953, s 14ZW(2) and s 14ZX. These allow the taxpayer to lodge the objection late accompanied by a written request asking the Commissioner of Taxation to deal with it as if it had been lodged on time. This discretion will in practice normally be delegated to a tax officer.
The legislation simply requires the Commissioner to consider the request and decide whether to agree it or refuse it – as the Australian courts have commented, it is a very wide discretion.
From the various cases on the subject, the ATO has drawn some principles that it encapsulated in a practice statement, PS LA 2003/7.
The statement makes it clear that each case must be decided on its own merits. Subject to that, the officer is to weigh these factors in the balance in deciding whether to agree to a request:
- ‘the taxpayer’s explanation for the failure to lodge the objection within the allowable time limits;
- the circumstances of the delay;
- whether the taxpayer has an arguable case for the objection to be allowed in whole or in part; and
- other relevant matters that arise in the circumstances of a particular case.’
While the onus is on the taxpayer to show that the request to lodge a late objection should be granted, there is no requirement that the taxpayer has acted ‘reasonably’.
Round the wicket
Some of the guidance regarding the taxpayer’s explanation seems at first sight to be contradictory; for example it says that ‘there is therefore a requirement that the applicant provide a satisfactory explanation for the delay’, but at the same time that ‘it is not essential that the taxpayer provide an adequate explanation for the delay in order for other factors to be taken into account’.
It seems that this contradiction is resolved by saying that, although the taxpayer will have to provide some sort of explanation, and it would normally need to be a satisfactory one, this is subject to an overriding requirement to consider the case in the round.
In Brown v Commissioner of Taxation 1999 FCA 563, Mr Justice Hill said:
‘While, therefore, the explanation for delay in lodging the objection will be an important factor, it is necessary to bear in mind that the decision-maker should take into account all the circumstances of the particular case against the background that Parliament has enacted a procedure to permit extensions of time being granted. An extension should be granted where the justice of the case requires.’
It is this reference to the justice of the case which highlights the distinction between the UK statutory defence of reasonable excuse and the discretion given to the ATO. In the UK, the focus is entirely on the taxpayer and whether he can justify his actions.
In Australia, the focus is on justice and equity. Another case, quoted in Brown although it was to do with a similar discretion in a different part of the legislation on objections, is Lighthouse Philatelics Pty Ltd v Commissioner of Taxation 91 ATC 4942:
‘It was in the past a reproach to the law that the real issues in taxation appeals could be refused a hearing for a defective objection, and Parliament has legislated to remove that reproach; an amendment under s 190 should not be considered with reluctance, but on its merits.’
Mr Justice Hill finished his judgment by saying that decision makers ‘should not lose sight of the fact that s 14ZW is an ameliorating provision designed to avoid injustice’.
That, of course, was (and for the time being still is) the basis of equitable liability in the UK tax system, albeit that it is non-statutory: it applies when it would be ‘unconscionable’ to collect the tax due.
It is worth noting, however, that the Australian system puts the taxpayer in a much better position so far as the technical arguments about liability are concerned.
To lodge a late objection, it is necessary to show that there is an arguable case, but Brown specifically establishes that the facts are not at that point to be established – broadly, it is enough if the taxpayer shows that on the facts he is asserting there is a case to argue. The objection itself is then heard in the usual way.
A UK taxpayer has to satisfy HMRC what the true tax liability would be. Moreover, the very fact that there is a relevant body of Australian case law emphasises the non-statutory and therefore non-appealable nature of equitable liability.
The UK taxpayer is more or less at the mercy of HMRC’s goodwill, the Australian taxpayer has the full legal process open to him.
(Australia are already well past England’s first innings total, with nine wickets left. Just close the desktop scoreboard down ...)
Long stop
My correspondence with the ATO indicated that an application for a late objection would be the most likely way that they would deal with these issues. However, if that failed, there is also an Australian version of equitable liability, although it is not limited to tax.
Financial Management and Accountability Act 1997, s 34 gives the Minister for Finance and Deregulation an (again) unfettered power to waive a debt due to the Commonwealth of Australia.
As well as write-offs for reasons which we would probably describe as official error and taxpayer hardship, there is also a category described as:
‘…based on the operation of the tax laws themselves, in that the relevant Act has caused the taxpayer to incur an unintended debt to the Commonwealth, the recovery of which would produce an anomalous or inequitable result.’
That would seem to cover much the same ground as the UK’s equitable liability provision. (Wicket! Unfortunately not Ponting’s.)
Close of play
Given that the UK has a tried and trusted solution in equitable liability, I still think that it is still best to simply retain it.
But if the Treasury is still convinced that such a concession cannot be permitted, then perhaps we should look at the Australian system of giving an unfettered discretion to allow returns to displace determinations even if they are outside the time limit.
It is arguably a more rigorous solution, and presumably the UK courts would look with interest at the Australian authorities as persuasive guidance on how to interpret it. (Three wickets in four overs! Maybe there’s hope for us yet?)
(Postscript – Monday morning: oh, dear...)
