Wed 05 2018

Talking Tax – Issue 120

Case law

Caratti v FCT

In Caratti v FCT (No 2) [2018] FCA 568, Mr Caratti (Taxpayer) failed to receive orders from the Federal Court for interim injunctions restraining the ATO from taking recovery action against him for outstanding tax debts of approximately $11 million. The ATO agreed to refrain from undertaking recovery action in exchange for securities and guarantees given by the Taxpayer and his guarantors, under a Deed of Agreement (Deed), however, there was a dispute as to the value of the assets under the Deed which led to the matter being heard in the Federal Court.

Securities provided under the Deed were mortgages over lands (Property) owned by the Taxpayer. According to the Deed the Taxpayer was to provide the ATO with a valuation report of the Property and the ATO had the option to procure a property valuation at its own expense. The Taxpayer provided the ATO with valuations of the Property of $14.5 million, produced by a registered property valuer. The ATO then decided to engage its own valuation of the Property, which produced a valuation of $2.8 million – a significantly lower valuation than that provided by the Taxpayer. The ATO then requested that the Taxpayer provides with a mortgage over additional property, which the Taxpayer did, albeit again at inflated values to the values obtained from the ATO’s valuer.

On the valuation issue, the Court stated that whether the valuation is binding upon the parties depends on the terms of the contract, both express or implied. In this case, the parties did not agree that the valuation report provided by the Taxpayer was to be “final and binding upon the parties” and therefore, it came down to the terms of the Deed as to whether this should be implied. The Court held that in the absence of an indication in the contract to the contrary, it can be implied that parties have agreed to accept the valuer’s decision as final and binding, provided he or she acted honestly, impartially and in accordance with the terms of the contract. However, based on the evidence presented, it was held that the valuation was based on a series of contingencies and assumption occurring in the future.

ATO updates

Review into the Australian Taxation Office’s use of Garnishee Notices

Following the ABC Four Corners program which aired on 9 April 2018, the Inspector-General of Taxation (IGOT) has announced a review into the allegations made in the program, coupled with a broader intention to explore the themes arising from related complaints made to his office in recent years.

  • strategies to manage tax debts by way of garnishee notices
  • policies and procedures for issuing garnishee notices, including how the ATO considers circumstances of taxpayers such as vulnerable small businesses and individuals
  • mechanisms to ensure staff adherence to its garnishee notice policies and procedures
  • Key Performance Indicators (KPI) with respect to both tax debt collection and staff performance
  • specific communications to staff regarding the use of garnishee notices and associated KPIs at each location of its debt recovery units and
  • other relevant concerns or potential improvements identified during the course of the review.

The IGOT notes that following his review into the ATO’s debt collection approaches in 2015, 19 recommendations were made; some of which related specifically to garnishee notices.

Despite this, the IGOT (as the Taxation Ombudsman) has continued to receive complaints about the ATO’s debt recovery actions. It is noted that such complaints have consistently formed over 20 per cent of all complaints made to the IGOT, and that the use of garnishee notices is amongst the top three topics of such complaints.

We will be making a submission to the IGOT.

Phoenix Taskforce Outcomes

The Phoenix Taskforce (Taskforce) has provided its quarterly update to the Australian Government. The quarterly update highlights that:

  • the number of cross-agency disclosures jumped significantly compared to the previous quarter
  • the Taskforce is now working closely with Government in creating effective law reform measures to counter illegal phoenix activities
  • the Taskforce is actively referring matters to the Serious Financial Crime Taskforce (which is headed by the Australian Federal Police) for criminal investigation and
  • the Taskforce raised $116.5 million in liabilities, collected over $36.8 million in cash, and completed 64 audits and reviews.

With regard to criminal prosecutions:

  • A director of a company pleaded guilty to dishonestly using her position as a director of a company by disposing of assets to a related company. She was discharged without conviction upon entering into a good behaviour bond of $2,000 for 2 years.
  • A director pleaded guilty to dishonestly using his position as a director by transferring company assets to a related company of which he was also a director. He was convicted and sentenced, and was automatically disqualified from managing corporations for 5 years.
  • A director was found guilty of acting dishonestly in failing to accurately report PAYG withholding tax and causing loss to the Commonwealth. He was sentenced to 2 years imprisonment.
  • Another director was sentenced to Community Correction Order for 3 years for his role in stripping assets from a company after it was liquidated.

ATO – ‘interpretation Now!’

The ATO Tax Counsel Network has released episode 35 of ‘interpretation Now!’ to assist with some interpretation issues relating to tax laws. This episode discusses ambiguity of court orders, a recent case on penal provisions, Henry VIII clauses (provisions delegating legislative power) and statutory interpretation of deeming provisions.

In particular:

  • when a court order is plain and clear, it speaks for itself, and if it is ambiguous, the ordinary rules of construction apply and evidence of surrounding circumstances is then available to resolve the issue
  • the old rule about penal provisions being read strictly is one of last resort
  • the courts have less angst about Henry VIII clauses and
  • deeming provisions are to be read strictly in line with their purpose.

Legislation and government policy

New ASIC levy for companies

Under the ASIC Supervisory Cost Recovery Levy Act 2017 (Cth) which became law from 1 July 2017, all companies regulated under the Corporations Act 2001 (Cth) will be required to contribute toward ASIC’s regulatory costs for the previous financial year through the imposition of the annual ASIC Supervisory Cost Recovery Levy.

While the actual amount of the levy has not yet been determined, on 28 March 2018 ASIC published indicative levy amounts for the 2018 financial year. These indicative levies are based on ASIC’s budgeted regulatory costs as outlined in its draft Cost Recovery Implementation Statement, published in May 2018. Some companies will pay a flat levy and others will pay a graduated levy where the size or level of business will determine the entity’s share of the cost.

In June 2018, ASIC will contact all companies to request that they provide or validate information regarding their business activity. ASIC will use this information to calculate the final levy amount for each company for the 2018 financial year, with invoices to be issued in January 2019.

Importantly, at this stage, there is to be no exemption or reduction in the levy for charities. Many charities are established as companies limited by guarantee and are estimated to pay a levy amount of $321 for the 2018 financial year. This is a significant additional cost for smaller charities.

Contact

Frank advises his clients on direct taxes, international structuring and taxation, business transactions, corporate restructuring, taxation disputes and the not-for-profit sector...

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Peter is the section leader of the firm's Tax team. Peter has joined Hall & Wilcox in 2016 after nearly 30 years with KPMG where he was a Senior Tax Partner.

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Rachel is a tax lawyer specialising in direct taxes and tax disputes. Rachel’s areas of experience include advising on a variety of domestic and international tax laws...

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