All wound up

As the economy slows, disputes with the taxman are only going to increase. And as ROBERT RICHARDS explains, the tax office will not hesitate to put a company into liquidation over a tax dispute.

By Robert Richards

As the economy slows, disputes with the taxman are only going to increase. And the tax office will not hesitate to put a company into liquidation over a tax dispute.

Of all of the features of the tax system, the one that I find most blatantly unfair is the rule that requires a person to pay tax even though there may be genuine doubt as to whether that tax is properly payable or not.

This is because the tax legislation says that tax is payable as a consequence of the raising of an assessment – it does not matter if that assessment is objected to or not.

It is true that the tax office might allow payment of disputed tax to remain in abeyance pending the determination of an objection against income tax, but it is much more robotic when it comes to goods and services tax and PAYG liabilities.

The tax office will not hesitate, and the daily court lists are proof of this, to seek the bankruptcy of a person or cause a company to go into liquidation if it feels it needs to do so. And a constant complaint of practitioners is that it often, to its own detriment, forces a company into bankruptcy or seeks the liquidation of a company instead of making a proper decision as to whether or not the debt can be worked out.

If the tax office wants to wind up a company, it will first serve a statutory demand on that company. Then, unless the company manages to have the statutory demand set aside, the tax office will be able to, without having to prove the debt, cause the company to be wound up.

Unless the company manages to have the statutory demand set aside then it will, after the statutory demand is served, be at the mercy of the taxman.

A creditor has 21 days from receipt of a demand (unless a court allows an extension of time) in which to file an application seeking to have the statutory demand set aside. A statutory demand will be set aside if the court is satisfied that there is a genuine dispute between the company and the creditor about the existence of the debt to which the demand relates, or that the company has an offsetting claim against the creditor.

A genuine dispute does extend to an objection to an assessment, since the legislation makes the tax payable simply as a consequence of the serving of an assessment.

However, a taxpayer might be able to dispute the amount shown by the tax office on one of its “running account balance” statements, provided that dispute is not a dispute as to an underlying assessment, while an offsetting claim would include a claim for a goods and services tax credit, or a tax refund.

Alternatively, a court can set aside a demand if it is satisfied that because of a defect in the demand, substantial injustice will be caused unless the demand is set aside, or if there is some other reason why the demand should be set aside.

Last year, the Queensland Court of Appeal in Neutral Bay v Deputy Commissioner of Taxation (Queensland Court of Appeal, 28 September 2007) held that a statutory demand could be set aside where the demand related to disputed tax (in this case the demand related to goods and services tax). The tax office (as part of its test case program) appealed that decision to the High Court. The High Court allowed that appeal (the High Court case is known as Deputy Commissioner of Taxation v Broadbeach Properties, High Court, 3 September 2008).

The High Court approached the matter in what might be categorised as a legalistic and matter-of-fact manner. Issues such as equity and commercial sense seemed to be of no concern.

Rather, the court observed: “[The Queensland Supreme Court] emphasised the importance of the disruption to the taxpayers, their other creditors and contributories that would suffer from winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the commissioner upon the statutory demand system.”

A pattern is emerging: The High Court will not allow taxpayers in dealings with the tax office to go outside the tax law. The Broadbeach Properties decision should be seen as an extension by the court of its decision in Federal Commissioner of Taxation v Futurius Corporation (High Court, 1 July 2008, see here for more ) where it would not allow a taxpayer to dispute an assessment other than under Part IVC of the Taxation Administration Act 1995.

Robert Richards CPA is a solicitor specialising in tax matters. This article first appeared in CPA Australia’s magazine, INTHEBLACK.