Taxpayer rights: Calls to clean up ATO ‘disgrace’

A disgruntled taxpayer who lost his wealth, health and marriage after a five-year tax audit has lodged a statement of claim in the Federal Court seeking $5.1 million in damages, alleging the commissioner of taxation acted negligently and in breach of his statutory duties.

Another taxpayer who fought the Australian Taxation Office for a decade and won six times through the courts but is out of pocket nearly $1 million is considering personal action against the agency, amid calls by leading tax academics that compensation rights and the taxpayers’ charter should be enshrined in law.

Sydney architect Gary Kurzer battled the ATO for five years over an audit gone bad. The ATO originally demanded $407,000 in tax and penalties, which was later reduced to $8700 after former commissioner Michael D’Ascenzo stepped in and ordered a review of his case. However, as Crikey revealed in January, Kurzer’s lingering battle ruined his health, relationship and finances. After rejecting a $70,000 offer from the ATO to settle the matter, he told Crikey: “I will now be seeking a realistic monetary claim that reflects my losses in the Federal Court for negligence and breach of statutory duty against the Tax Office.”

Former senior ATO lawyer Serene Teffaha, who is representing Kurzer, says the case is precedential. “It urges the judiciary to establish the clear principle that the commissioner of taxation is not allowed to make incorrect and inconsistent decisions at the objection stage and to issue grossly incorrect assessments,” she said.

“Where the commissioner of taxation has taken a position that is not based on facts and the law, then he will be liable for tortious conduct?—?i.e. negligence and breach of statutory duty. The commissioner cannot hide behind the old excuse that he took a ‘reasonable position’ under the law. It is not reasonable to destroy someone’s life based on an incorrect application of law that is not supported by either tax legislation, or the facts of the case, let alone bad arithmetic. The bad arithmetic in Kurzer’s case was to the tune of $354,000.”

But history is against Kurzer, according to leading tax academic Dr John Bevacqua. “No negligence or breach of statutory duties case has succeeded to date. The very few claims which have arisen have been summarily dismissed,” the La Trobe senior lecturer said.

“The very few claims which have arisen have been summarily dismissed. Courts have been very consistent in finding that the commissioner owes no tortious duty to taxpayers?—?the duties of the commissioner are owed exclusively to the Crown. My argument is simply that there is a clear deficiency in a system which allows mistakes like those made in the Kurzer case to sometimes go un-remedied. I think it is unreasonable to expect judges to change the system?—?even if they could, any such changes would be slow and piecemeal. The task is properly one for our legislators.”

Not many people can claim they took on the taxman six times and won on each occasion, including a knockout victory at the High Court last month. Entrepreneur Ron Pattenden can. “I have been fighting the taxman for nearly a decade,” he told Crikey. “We all have burdens to bear in life. Some people lose an arm, others a leg. I had the ATO on my back for 10 years, and my health has suffered enormously. I became so disillusioned with Australia I now live in New Zealand.”

Crikey detailed the case of Pattenden’s insurance underwriting business Crown Insurance Services earlier this month. Soon after setting up business in Vanuatu in 2002 money was flowing between the Pacific haven and Australia by way of premiums and claims paid. At the same time Crown’s cash flows were being tracked by anti-money laundering agency AUSTRAC, which reports suspicious transactions to the Tax Office. “The ATO said I was putting the money in my pocket, so they gave me a tax bill that soon escalated to $15 million with penalties and interest,” Pattenden said. He then appealed to the Administrative Appeals Tribunal, producing a 1000-page affidavit as evidence. The AAT ruled against the ATO, and the assessment was reduced to zero.

Before the case got to the AAT the ATO deemed Pattenden a flight risk; it issued a departure prohibition order preventing him leaving Australia until he paid his bill?—?the same procedure that kept actor Paul Hogan detained in paradise for a period of time in 2010 during his dispute with the tax authorities. Pattenden then challenged the DPO in the federal court and won, with costs awarded against the ATO.

Shortly after, at the airport to return home to New Zealand, two federal police officers advised him that a tax officer was on the way to the airport with a new DPO. The matter returned to the Federal Court the following week, where the same judge who had lifted the original order warned the ATO: “That sort of scenario I would usually visit, if proved, with a term of imprisonment for the officer concerned and for those who counselled or procured that course.” The DPO was eventually lifted by the ATO before the matter got to court again.

Pattenden’s ordeal has left him out of pocket nearly $1 million, despite being awarded costs. “You only get 40-60% of your costs back. The ATO offered me a paltry $30,000 compensation, which I rejected,” he said.

Pattenden’s lawyer David Hughes from SMH tax lawyers told Crikey: “The government must show genuine steps towards rebuilding trust with taxpayers and it can do so by promising to pay meaningful compensation to those taxpayers who have lost so much at the hands of overzealous ATO officers. We will pursue the tax office through the courts to obtain a more realistic compensation figure.”

Crikey understands some of the officers involved in the Kurzer and Pattenden cases have been promoted within the agency recently.

Shadow treasurer Joe Hockey has barked loudly about the need to “break the Tax Office up”, but his office refused to comment on greater compensation for taxpayers. So did Assistant Treasurer David Bradbury. Crikey is aware of at least four cases where aggrieved taxpayers have contacted Bradbury only to be told he can’t help them. Due to privacy and secrecy laws the ATO doesn’t comment on individual cases.

But according to leading tax academics, tax lawyers and professional associations, Australia is falling behind many developed countries when it comes to taxpayer rights. They call for action to address an imbalance between the ever-growing powers of the ATO and the rights of taxpayers.

“Taxpayer rights are a disgrace in this country,” said David Russell QC, an international tax barrister and former vice president of the Liberal Party. “They don’t deserve to be called rights, because there are none.”Russell co-authored a report?—?Towards Greater Fairness in Taxation?—?a Model Taxpayer Charter —?derived from a survey of taxpayer rights and responsibilities in 37 countries, representing over 73% of world GDP, to provide a blueprint for embedding in law the basis on which taxpayers’ obligations to the state are balanced against the rights of taxpayers. The preliminary report found taxpayer rights, whether included in a taxpayer charter in place in a particular country, or recognised by legislation, had one or more of the following shortcomings:

• Taxpayer rights are not comprehensive in scope;
• Taxpayer rights outlined in a taxpayer charter are not legally binding and, as a result, are largely ignored by taxpayers, advisors and the tax administration;
• Where taxpayer rights are recognised, they don’t go far enough, are listed in very general terms and are not generally capable of enforcement;
• The taxpayer charter is largely a policy statement issued by the tax administration, focused mainly on enforcement, and is self-serving and not useful; and
• There is no attempt to hold the tax administration accountable to taxpayers.

Bevacqua echos Russell’s call for rights to be enshrined in law. “Arguments against a charter with legislative force do not stand up to scrutiny,” he said. “The charter has been a success for lifting ATO service standards but a failure as a defender of taxpayer rights. The Kurzer case indicates that informal mechanisms like the charter and the CDDA scheme [a Commonwealth scheme for defective administration] do little to assist many taxpayers who intuitively appear to have been poorly treated by the ATO.”

Professor Duncan Bentley?—?a deputy vice-chancellor of Victoria University who has been published widely on taxpayers’ rights and best practice in international tax administration?—?highlights the difficulties in legislating for genuine defective administration leading to serious damage. “But I see room for a remedy within clear parameters,” he said. “This would be constrained to prevent its misuse by anyone who doesn’t like an audit outcome, but would provide for clear breach of administrative rights.”

And it seems not liking audit outcomes is why politicians and governments are not keen to discuss the issue, Bevacqua said: “There is a real fear of in some way inhibiting the ability of the ATO to carry out its important statutory functions. The concern is that taxpayer rights to compensation might fetter the discretion of the commissioner or open the floodgates to large or indeterminate liability. My argument is that it is possible to frame taxpayer rights in a limited manner which respects these concerns and at the same time provides a remedy for taxpayers who are aggrieved by patently negligent or wrongful tax officer behaviour.”

Tony Greco, a senior tax advisor with the Institute of Public Accountants, believes not having proper compensation mechanisms in place is “a real concern for our members”. Small business benchmarking is an ATO compliance tool to select cases for audit, using financial ratios to help compare the performance of similar businesses in an industry. “But at times the benchmarks are used inappropriately because there are valid reasons why a particular business may be reporting below the average, and I think some cases border on maladministration,” Greco said. “Many taxpayers have taken out tax audit insurance because it costs so much when the ATO go on fishing expeditions.”

The ATO’s chief watchdog is Ali Noroozi, the Inspector-General of Taxation. He told Crikey that some taxpayers and their representatives had complained to him about compensation matters. “If people are concerned about compensation they should talk to me,” he said.

The Kurzer matter is set for a directions hearing in the Federal Court today before Justice Steven Rares, who oversaw the recent James Ashby case.

This article first appeared on Crikey.