The Ostrich Principle Part Two or, So the Tax Office has prosecuted you
After you have lodged all of your outstanding returns, one of two things will happen. First, any money that the Commissioner of Taxation owes you will be sent to you. Hooray, you’re compliant with your reporting obligations and you’ve received a windfall from the Tax Office. End of matter. Unfortunately, that fairy tale isn’t how things usually go.
In reality, you’ve lodged all outstanding returns, and a debt has been realised. Whatever you do, DO NOT PANIC. Having a tax debt isn’t the end of the world – provided you actively engage with the Commissioners attempts to get you to pay. Burying your head in the sand is not an option. The Tax Office has vast powers that allow it to compel taxpayers to comply with its request and demands. Burying your head in the sand always does more damage than good.
Today we will look at what you ought to do if you find yourself in the position of having a tax debt.
First, be proactive. What does your accountant say? Do you owe the amount that the Tax Office says you owe? Has the Commissioner imposed administrative or failure to lodge penalties and or General Interest Charge? If you were prosecuted, has the Tax Office remitted any penalties that it has imposed (given the Court has likely already penalised you)? Did you have a Private Binding Ruling? If so, did you strictly comply with the terms of the arrangement to which it relates? These questions (and their answers) are all very important. The purpose of asking these and other questions is to properly understand the facts and circumstances that may (likely) be relevant to the determination of and calculation of a tax liability.
Second, once you have determined the amount of the tax debt, how much of it is made up of penalties and interest? In many cases the total liability when properly analysed, reveals that the debt is made up of tax shortfall and penalties and interest. The penalties and interest may be significant, and in many instances more than the actual tax shortfall. If you find yourself in that situation, you should contact a lawyer that has experience dealing with the Tax Office and ask that he or she explore your circumstances with a view to making an application for remission of penalties and interest. The Commissioners discretion to remit interest is enlivened by a number of circumstances, including:
- Circumstances that have contributed to your inability to pay (or delayed payment) that are outside of your control and you have taken reasonable action to mitigate (reduce) the effects of those circumstances.
- When the delay in payment was caused by you, but a taxpayer that pays his, her or its tax on time, considers it fair and reasonable to remit the interest.
- The existence of special circumstances, because of which it would be fair and reasonable to remit the interest.
- The Commissioner considers it otherwise appropriate to remit the interest.
You should also make an application for remission of penalties at the same time as making the application for remission of interest. Despite what you may hear ‘on the grapevine’ or what you may be told by Tax Office call centre staff, you do not have to pay off your tax debt before the Commissioner will consider an application for remission of penalties and interest.
Third, assuming your request for remission of penalties and interest is successful; enter into a payment arrangement with the Tax Office. It is usually the case that the Commissioner will require all lodgements to be up to date before he will entertain a payment arrangement proposal. He will also require ‘proof’ that future tax liabilities will be able to be paid as and when they fall due and that you have exhausted all other avenues to obtain finance to extinguish the current debt before making the proposal. In short, the Commissioner takes the view that his role is not that of banker or financier.
Now, all of the above seems rather straight forward. It isn’t. Tax law is very complex. If you get it wrong the consequences can be disastrous. For example, if you make an application for remission of interest and the Commissioner refuse the request, you do not have an automatic right of review of that decision. If you wish to take the Commissioner on, you’ll need to trot off to the Federal Court. The cost of doing so, will, in all but the most exceptional of circumstances, be high.
Having problems with the Tax Office? Contact Adrian Bambrick on 8362 5269 or 0439 981 969. Adrian is an experienced solicitor specialising in tax controversy matters. Adrian’s tax practice covers criminal prosecutions; applications for remission of general interest charge and failure to lodge penalties; responding to Tax Office Position Papers; defending attempts by the Tax Office to windup or bankrupt taxpayers; Part IV C disputes; and defending claims made by the Tax Office in State and Federal Court jurisdictions.
Liability limited by a scheme approved under Professional Standards Legislation (SA)