Restricting the ATO: The AAT’s potential new tool in small business taxation disputes

A taxpayer may disagree with the Australian Taxation Office (ATO)’s decision or assessment as to their tax liability. If this happens, there are avenues for the taxpayer to have the ATO’s decision or assessment reviewed. However, there are several aspects of the tax dispute process that can mean taxpayers are fighting with ‘one hand tied behind their back’.

New proposed legislation will allow the Administrative Appeals Tribunal (AAT) to make orders preventing the ATO from taking certain actions while the review process is underfoot.

These proposed changes go some way to redress the ‘David vs Goliath’ situation some taxpayers may find themselves in. The purpose of this article is to discuss the mechanics of the amendments it proposes.

Current landscape

Where a taxpayer is dissatisfied with an assessment, determination, notice or decision made by the ATO, they have the right to have the assessment reviewed – known as a taxation objection. Taxation objections can be heard by either the AAT or the Federal Court.

In most cases where a person seeks to have a decision reviewed by the AAT (outside of tax), section 41 of the Administrative Appeals Tribunal Act 1975 (Cth) (AAT Act) permits the AAT to make an order to stay or otherwise affect the operation the decision to which the review relates.

However, taxpayers requesting review of ATO taxation decisions do not have access to this mechanism. Section 14ZZM of the Taxation Administration Act 1953 (Cth) (TAA) disallows any interference with a decision under review. Given that an assessment issued by the ATO is effective immediately, it follows that the ATO may take enforcement action to recover any tax required to be paid even while a review is in progress.

Despite section 14ZZM, the ATO generally do not attempt to recover a disputed debt until any proceedings surrounding it are settled. For example, in PS LA 2011/4, the ATO states that recovery actions will be only be commenced before the determination of an objection ‘where circumstances of a particular case indicate an unacceptable level of risk’. Factors relevant to assessing risk depend on whether the taxpayer has entered into a 50/50 arrangement with the ATO, and include considerations such as the taxpayer’s level of indebtedness to the ATO, their capacity to pay the debt in full in case of an unsuccessful objection, etc.

Despite the ATO indicating a high threshold for exercising its power to commence enforcement actions during review hearings, it is easy to see that the power to commence enforcement actions during review hearings is extremely powerful. If utilised, it can have a devastating effect on a taxpayer. Further, without external oversight, the ATO are effectively judge, jury and executioner – as it is up to the ATO to assess what constitutes an ‘unacceptable level of risk’.

Proposed amendments

The ATO’s current role as judge, jury and executioner can lead to uncertainty and fear on the taxpayer’s part. There is no guarantee given to the taxpayer that an action for debt will not be commenced while the are in the process of determining the veracity of their assessed tax liability. Further, while the Courts have the inherent power to stay or interfere in the ATO’s recovery process, the judicial process is often time-consuming, expensive, and glacial in its pace.

The Treasury Laws Amendment (Measures for Consultation) Bill 2022: Increased Tribunal powers for small business taxation decisions (Amending Bill) somewhat alters this ‘David vs Goliath’ position. It aims to provide checks and balances by granting the AAT the power to make orders that the ATO cease enforcement action in relation to certain taxation decisions while a review proceeding is being conducted.

Who is covered? 

Broadly, the Amending Bill requires the AAT to make an order only if the proceeding is brought under the Small Business Taxation Division (SBT Division) of the AAT.

Any SBE in relation to whom a taxation decision has been made can apply for a review of that decision to the SBT division of the AAT. The AAT adopts the meaning of SBE given in the Income Tax Assessment Act 1997 (Cth). This means that an SBE is an entity carrying on a business in the current income year with an aggregated turnover of less than $10 million.

The Amending Bill modifies section 41 of the AAT Act in relation to ‘reviewable objection decisions’ that relate to ‘small business taxation assessment decisions’. Per the proposed amendment to section 14ZQ, a small business taxation assessment decision is a decision as to an assessment of tax-related liabilities relating to carrying on a business by an SBE.

Who isn’t covered?

The Amending Bill will not apply to any matters that do not fall within the parameters of the SBT Division of the AAT. That is, if a taxpayer is not an SBE that has been the subject of a taxation decision, it will be unable to seek the AAT to make the orders of the kind detailed in the Amending Bill. For example, a business owner individual or a passive discretionary trust are unlikely to be covered as they may not themselves be ‘carrying on a business’..

Further, disputes that are brought to the Federal Court rather than the AAT, or appeals of AAT decisions heard in the Federal Court, are also not covered by the Amending Bill. Disputes that are still within the internal objection phase are also not covered (however there is a process to force the ATO to make an objection determination). It is worth noting, however, that by virtue of the Court’s inherent power to stay or interfere in the ATO’s recovery process, a taxpayer requesting review in the Federal Court will nonetheless be able to seek that the Court make an order of a similar nature to that proposed by the Amending Bill.

Importantly, per the Explanatory Memorandum to the Amending Bill, the AAT’s powers are somewhat restricted. The Amending Bill only allows the AAT to make orders limiting the ATO’s discretionary actions in some circumstances. It cannot affect the operation of any judicial remedies obtained by the ATO (e.g. freezing orders, warrants, etc.)

When can the AAT make an order?

A taxpaying SBE can make an application requesting that the AAT make an order to stay or otherwise affect the implementation of a decision being reviewed.
The AAT can only make such an order (unless the order is sought by the Commissioner of Taxation rather than the taxpayer) if it is satisfied of the following matters:

1. the order is unlikely to prejudice or unduly restrict the Commissioner’s administration of tax law;
2. the order is unlikely to undermine the objective or purpose of a tax law or the integrity of the taxation system; and
3. the application, and request contained in it, are not frivolous, vexatious, misconceived, lacking in substance, or otherwise intended to impede the proper administration of a taxation law.

The objective of the above integrity measures aims to ensure that only genuine attempts to appeal the ATO’s decisions before being subject to debt recovery actions with potentially severe impacts can seek the AAT’s order-making power. Attempted use of the process to delay the repayment of any genuine debt is unlikely to be successful.

What type of orders can the AAT make?

The AAT will be able to make orders staying, or otherwise affecting, the operation or implementation of reviewable objections decisions that relate to small business taxation assessment decisions. These orders could include (but are not limited to):

1. alteration of timing of payments;
2. requiring the ATO to offer a payment instalment or a 50/50 arrangement; or
3. requiring the ATO to offer to accept security.

What types of orders is the AAT not allowed to make?

As mentioned above, the AAT’s orders cannot affect the operation of any judicial remedies obtained by the ATO.

The AAT is also expected to not make orders where taxation law already provides an alternative remedy in relation to the review of an ATO decision. For example, in relation to a departure prohibition order, the law already establishes mechanisms for review, and as such, the Parliamentary intention remains that any taxpayer seek review through those mechanisms, and not through those provided in the Amending Bill.

Conclusion

The Amending Bill effectively allows for a means by which a taxpayer can hold the ATO accountable to its regular practice of not commencing debt recovery actions during a review hearing. This is a positive development.

However, it is worth noting that challenging ATO decisions nevertheless remains an uphill battle given the design of the dispute system and the disparity in resources between some taxpayers and the ATO. An important feature of the Australian tax system is that taxpayers bear the ‘burden of proof’ in establishing that an assessment is excessive, which requires not only for the taxpayer to establish that the ATO is incorrect, but also what the correct position actually is.

When handling a taxation dispute, best practice remains to engage professional advisors as soon as possible – well before an assessment is issued!

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.