When to pay your tax debt

Taxpayers who are in dispute with the taxman over a tax debt are often in two minds – pay the debt now to avoid interest penalties if you lose the dispute, or refuse to pay and show you are confident you can win. ROBERT RICHARDS reports.

By Robert Richards

Taxpayers who are in dispute with the taxman over a tax debt are often in two minds – pay the debt now to avoid interest penalties if you lose the dispute, or refuse to pay and show you are confident you can win.

The theory is that if the tax office assesses you, it can collect the tax unless you can show that the assessment was improper.

This is because section 204 of the Income Tax Assessment Act 1936 says (broadly speaking) that tax becomes due and payable 21 days after the due date for lodgement of a return or, if a return has been lodged earlier than that date, 21 days after notice of the assessment is given to the taxpayer.

The Taxation Administration Act 1953 gives the tax office power to sue for recovery of that debt. Paragraph 255-5 of Schedule 1 to that act states that “the Commissioner or a Deputy Commissioner may sue in his or her official name to recover an amount of a tax-related liability that remains unpaid after it has become due and payable”.

In practice, the tax office is not so strict. It has a “receivables policy” and will not normally seek to enforce recovery of an assessed debt where there is an objection against the assessment until it determines the objection.

Then if the taxpayer appeals against the tax office’s disallowance of an objection, it will not normally seek to collect the debt until that appeal is determined – if the taxpayer makes a payment of 50% of the disputed debt.

Sometimes taxpayers want to pay all of a disputed debt out of caution. They are concerned that if they are unsuccessful in their appeal they will be liable for interest (the current interest rate on debts due to the tax office is 10.15%).

On the other hand, some people are concerned that if they pay the debt the tax office might think they are not confident, and this would place them at a technical disadvantage.

But this should not be of concern to taxpayers. Someone deciding an appeal normally would not know if tax had been paid or not.

The mere suing of a taxpayer and the obtaining of a judgement order, or the making of a statutory demand against a taxpayer (the first stage in the recovery of a debt), is not enough. The tax office then has to enforce that judgement order or statutory demand.

This is done, if the taxpayer is an individual, by seeking to cause the bankruptcy of the taxpayer. If the taxpayer is a corporation this is achieved by causing the liquidation of that corporation.

However, as the recent decision in Zolsan v Deputy Commissioner of Taxation (Supreme Court of New South Wales, 21 November 2007) shows, the tax office should not always be confident that it can always do this without difficulty.

It is almost impossible to fathom from the decision the facts of that case. It was said that the tax office was dissatisfied “with the valuation taken by the plaintiff of its trading stock land”, and that the tax office “concluded that the plaintiff had been in breach of the relevant legislation and imposed penalty tax in addition to billing additional GST”.

Assessments and a “penalty notice” were issued by the tax office, but an objection was only lodged against the penalty notice. That objection was disallowed “and nothing further happened following the disallowance”, although a statutory demand appears to have been issued against the taxpayer.

The plaintiff admitted that it did not challenge the notices of assessment, but said that this was because the controller of the company was very ill (the controller has since died).

Statutory demands are made under the Corporations Act 2001 and not under tax law. Sections 459H and 459J of the Corporations Act allow the setting aside of a statutory demand where there is a genuine dispute as to the existence of a debt, there is a defect in the demand that would cause injustice, or “there is some other reason why the demand should be set aside”.

Here the court concluded: “However, as we are dealing with GST and with a liability that dehors [not within the scope of] an assessment; the chances of the debt being successfully challenged at law is not in the class of being feeble or non-existent.”

And later: “It follows that either under s459H or s459J of the Corporations Act, the statutory demand must be set aside.”

I find this conclusion – given that it appears that assessments were involved – hard to understand.

The Zolsan decision does illustrate an important point; just because a judgement order has been made against a taxpayer or a statutory demand has been issued against a taxpayer, it does not necessarily mean all is over. The taxpayer might still have another day.

Certainly this should be the case where there remains a genuine dispute.

This article first appeared in CPA Australia’s magazine, In the Black