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Jul 19, 2013

What are your rights with the taxman? Call to clean up ATO ‘disgrace’

Another disgruntled taxpayer is suing the ATO for $5.1 million in damages, as taxation experts call for stronger compensation rights and a taxpayers' charter to be enshrined in law.

Chris Seage — Tax consultant and former ATO audit manager

Chris Seage

Tax consultant and former ATO audit manager

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.”

“Taxpayer rights are a disgrace in this country. They don’t deserve to be called rights because there are none.”

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.

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28 thoughts on “What are your rights with the taxman? Call to clean up ATO ‘disgrace’

  1. Serenatopia

    A very-well researched and academic piece of reporting Chris. Congratulations to you and Crikey for providing a critical platform for these issues.

    I also appreciate the key insights into the failures of the current system articulated so well by Dr Bevacqua, David Hughes, David Russell QC, Professor Bentley and Tony Greco.

    However, I am far more optimistic about the role of the judiciary in clearly establishing the principle that the Commissioner of Taxation owes taxpayers a duty of care to perform objection decisions in accordance to law and fact and to follow AAT orders under the Taxation Administration Act.

    The First Directions Hearing went very well today and Justice Steven Rares did NOT summarily dismiss the proceedings. In fact, he concurred that, subject to substantiating the claims through evidence, that Gary Kurzer’s case raises legitimate grievances. I think Justice Rares is the best man for this job.

    The matter will go to Mediation on 27 August 2013. The ATO is represented by Minter Ellison.

    Serene Teffaha
    Human Rights Advocate

  2. mattsui

    I find it hard to feel sorry for Pattenden. There’s only one reason for basing a financial service in Vanuatu and that’s to avoid paying taxes. Boo-hoo.
    Not so sure about the other case but let’s be honest. The system is so full of loopholes begging to be rorted, it’s a lawyers banquet. The whole system should be rebuilt from the ground up – if it were less socially acceptable to dodge tax, there would be no need to discuss the “rights” of obscenely wealthy tax cheats.

  3. lespauljunior

    Either the tax laws, or the facts of the matter, applies or they don’t. Ambiguity, loopholes, mistakes, et al, have no place in a tax system. Simplify it, or allow the taxpayer the same courtesy to “interpret” as the ATO takes … (and they take it to supremely untenuous ends). The difference is that the ATO uses a bottomless pit of time and public money (including paying private legal firms) to pursue (including innocent) people until they are destitute and exhausted (some just commit suicide). This is unbalanced, and is a case of having to prove yourself innocent using your time and money whilst the people who have broken laws (the ATO staff) continue life using the public purse as an unending source of succour… promotion, and superannuation. The ATO, last year, spent over $100m on “legal services” and recovered $3.5m (sums from their own publication).

    Being the person subject to the ATO negligence, I can tell you that trying to face the day (foreclosure, debt recovery actions, unpaid bills, loss of support systems, mental injury, and a raft of challenges …including the ludicrous assumption that you are a “tax cheat”) is impossible to convey to those who have not been subject to this heinous process. Not a single politician will even bother to reply, let alone assist. (My) information sent to Joe Hockey appears to have been appropriated as Liberal “policy”, but no support given back to the Australians who have the need for remedy.

    My local member, Malcolm Turnbull, has not had the courtesy to see me, despite three years of requests. Believe me, when the ATO attacks, you are on your own as far as “your government” is concerned.

  4. Merve

    Vanuatu? End of story. You only do business from there to avoid taxes.

  5. Shaniq'ua Shardonn'ay

    Yep, sorry but the ‘Vanuatu’ did it for me. Just because there are legal loopholes doesn’t mean it is the right thing to do. And if you want to dispute the claim don’t claim it’s equivalent to losing an arm and a leg.
    Lost a million? Luxury Problem.

  6. Harry Rogers

    Entirely predictable responses from most readers.

    A reflection of the society we live in full of pre-judgements and the death of fairness.

    Where to from here??

  7. mattsui

    @ Harry Rogers #5
    Where to from here??
    Why don’t we hand a few thousand more dollars over to the lawyers so they can decide for us. I’m sure any advice given will be in the purest interests of the clients.

  8. Serenatopia

    Mr Ron Pattenden was exonerated by the Court six times from being a labelled a tax cheat. The ATO spent your taxpayer money pursuing a losing case. Gary Kurzer is not a millionaire, but like most of us, is a mum and dad investor…the ATO also spent your taxpayer money hurting him…this is about all of our rights to ensure that we are treated fairly by our bureaucrats and taxpayer funds are not spent on ruthless pursuit of the innocent. In relation to lawyers, well the ATO spent over 100 million of our taxpayer money last year on the likes of Minter Ellison to pursue losing cases and recovered only 3.5 million! It’s not Pattenden who is making the decision to embezzle our taxpayer funds, it is unelected fat cat bureaucrats.

    It is time we all stood up and said enough is enough. Instead of cutting sole parent pensions and scholarship funding in our universities, I can show the Government how to cut a billion easy from their budget—axe all contracts with the major law firms! There’s a start!

  9. Harry Rogers

    Hear, hear Serenatopia!

    Sadly the tax department and others take advantage of the innate jealousy of the wage earner when someone who does well is considered a cheat when he looks for fairness.

    I suspect you won’t change this attitude as it assists the ATO and others to demonise citizens freely without recourse.

    Its endemic in people who seek to blame others for their position in society. We can only hope with education that this dumbing down ceases however until the problem “is in their backyard” they will continue to carry the noose.

  10. Chris Seage

    I appreciate everyone’s comments but I feel I must clarify the Pattenden story. As a writer I try and tell a story in so many words but obviously I am confined to write in certain parameters – meaning words – which sometimes means I can’t tell readers everything I would like them to know. Ron arrived in Australia from England in 1978 with 80 pound in his pocket. He ran pubs in London before arriving in Australia. He launched a fund to pay for funerals for members of the Aboriginal community, who would make payments to the fund and whose next-of-kin would receive a benefit when the member died.

    If the benefit exceeded the cost of the funeral Pattenden would donate the excess to the Fred Hollows Foundation.

    The only reason he set up in Vanuatu was because in Australia it would have cost him $5M to set up whereas in Vanuatu it was $300K.

    Does that mean in Australia we are uncompetitive? I think so.

    I hope what I have said gives some light to Ron who has been very brave to come forward with his story. Not many taxpayers do.