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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.


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.

  11. Mark from Melbourne

    Tax avoidance is one of the hardest things to prove in a court of law so let’s not get to sympathetic.

    These two might be innocent – I have no knowledge of the details – but there are an awful lot of players who aren’t and make the same noises.

    I agree there must be some right to appeal without it going too far but am I happy for the ATO to go after the tax dodgers – absolutely.

  12. Chris Seage

    Wow. I can’t believe Minter Ellison is representing the ATO in this matter. Do they have no responsibility to us – the taxpayers? See http://www.crikey.com.au/2013/01/08/the-tax-office-and-the-expensive-muzzle-on-complainants/?wpmp_switcher=mobile

    “The ATO advised Kurzer of its decision after receiving advice from Minter Ellison, that no defective administration arose and no compensation was payable. Kurzer continued to owe $120,000. Minter Ellison charged the ATO $128,000 for this advice, as documents obtained by Crikey under freedom of information laws show.”

  13. mattsui

    My point is that the system itself should be intractable. That is that for every dollar that changes hands Xcents go to the government. No exceptions, no deductions, no legal rorting.
    Both sides have something to lose from genuine reform, not to mention the lawyers in the middle. So the flaws in the system are meeted out on these poor victims.

  14. Kevin_T

    Post #2 “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.”

    Post #4 “Vanuatu? End of story. You only do business from there to avoid taxes.”

    Post #5 “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.”

    You would think after 6 court hearings, that at least once they would see the depth of such legal arguments, but instead it appears that the courts had the audacity to let the facts of the case get in the way of a rush to judgement.

  15. Burt Steen

    > Wow. I can’t believe Minter Ellison is representing the ATO in this matter. Do they have no responsibility to us – the taxpayers?

    The government outsources legal services to all the big law firms including the AGS who are now run as an enterprise complete with billable hours. They are paid millions. It is in the law firms economic interest to protract litigation.

    This is all on the public record and there are court decisions reporting this and The Australian has covered it fairly well. The Attorney general OLSC is supposed to intervene to stop this but doesn’t. So why the silence from the major parties?

    At least some of these law firms are donating to Labor and Liberals who don’t criticize the practice.

    Draw your own conclusions.

  16. Serenatopia

    Thank you Harry Rogers, Chris Seage, Kevin T and Burt Steen for your comments and insights.

    As I said earlier, I believe that the role of the judiciary has never been as important as it is now. Taxpayers and other victims of the bureaucracy including victims of abuse by institutions like Defence, AFP, CSIRO, ASIC and the Catholic Church have to start taking their battles collectively to the Courts. The Court processes, in the least, allow for public scrutiny and when enough collective pressure is placed by abused citizens, then there may be a chance that the by-standers will start calling for change.

    0425 754 299

  17. Brian Williams

    Leaving aside the emotional arguments here, I honestly believe that Justice Rares is the best Judge we could have got to look closely at this. He will absolutely call it as he sees it, and if he sees that the ATO are at fault, he won’t hesitate to punish them

  18. Elliot Blue

    The $128000 is a disgrace. That money could have paid for a nurse and had some left over. This is why we have 4 hour queues in emergency departments and people dying on waiting lists. What a disgraceful waste of our taxpayer money.

  19. lespauljunior

    Folks: “loophole” is a tainted word. For the record, Ron Pattenden’s case is not about loopholes, he was providing a useful service for the Aboriginal community, and the way he was treated was unconscionable (in other matters as well). As stated, there should be no such word: make the laws clear and unambiguous. I can assure you (collectively) that the cases that we have been made aware of against the ATO have nothing to do with avoidance: they are indefensible attacks on innocent people by an all powerful government agency that has no compunction in acting illegally, and who are not under any form of responsible corporate governance from treasury or the prime minister.
    Read the information on the “Rule of Law Institute of Australia” site outlining their total disregard for Law.

    Believe me, when you know they are wrong, and they know they are wrong, they stop at nothing from trying to prove why you should gain no justice: and they use these bottomless public funds to cover their tracks via huge payments to private legal firms and the issuance of secrecy deeds to ensure that their mistakes are never made public.

  20. Andbega

    “I can assure you (collectively) that the cases that we have been made aware of against the ATO have nothing to do with avoidance: they are indefensible attacks on innocent people by an all powerful government agency that has no compunction in acting illegally, and who are not under any form of responsible corporate governance from treasury or the prime minister.”

    @Mattsui, Merve & Shaniq’ua Shardonn’ay

    Hmmm, looks like you all jumped in with judgment before understanding all the facts. Having an offshore trading account does n’t automatically mean you are avoiding tax. Besides that, they are legal entities.

    Chris Seage and Serene Teffaha…you are both awesome people.

  21. mattsui

    Yeah, I really should take your lead and wait for three days before I comment on a “news” item.
    My comments at the time were based on all the facts in the story (which the author has since admitted were poorly presented).
    The bigger picture here is tax reform. Broken systems creating (aparently innocent) victims.

  22. Shaniq'ua Shardonn'ay

    @Chris Seage – yep I’m sure Vanuatu is more ‘competitive’. Ron can go and live there if he wants – send his kids to school there, use their healthcare system and drive about on their roads if he wants to. Electricity and Water is probably cheaper and I’m sure they have great broadband infrastructure. He can support the indigenous community there – I’m sure they need it. Funny he chooses not to.
    @Andbega and others – as I said just because it’s legal doesn’t mean it’s morally right.

  23. ArcherCCH

    @mattsui – you showed your naivety in your original post about how the tax system works and how the commercial world works. Even the Commissioner of Taxation acknowledges there are very good and sound reasons why Australians invest overseas. I did not see any admission by the author that he presented the case poorly because he wrote the taxpayer won 6 times in court including over 2 overzealous DPO’s where the judge warned the ATO.

    @Shaniq’ua Shardonn’ay – I can see the commie coming out in you. Don’t like free enterprise?

  24. ArcherCCH

    The important point of this whole story is that Australia has fallen behind the rest of the developed world with taxpayer rights and accordingly our tax system is not functioning at full throttle.

    In the US there is Taxpayer Bill of Rights legislation which includes taxpayer rights to compensation and a strong Office of the Taxpayer Advocate. Claims by taxpayer for compensation for breaches by the IRS of Constitutional rights are also common. There is presently a push for further legislative change to further strengthen taxpayer rights. In countries like the UK there is a judicial recognition of substantive rights to fair treatment by tax officials and an incorporation into UK law a number of principles of European Law which stand to further enhance British taxpayer rights. In Canada there has recently been a spate of taxpayer negligence claims against the CRA with judges being much more receptive of taxpayer claims.

  25. Elliot Blue

    Elsewhere: “The Treasury has admitted it is virtually powerless to stop multinational companies such as Apple and Google dodging tax, saying Australia must focus its efforts on an international crackdown led by the G20 and the OECD.”

    Australia needs a Bill of Rights. Bob Carr tells us we don’t need one because parliament protects our rights for us, but we consistently see politicians only look after themselves and their party. Politicians might pretend not to like the ATO, but it pays for their over the top perks and election war chests.

  26. Brian Donaldson

    As someone in the process losing my house and all I own to the ATO because of one auditor’s reckless audit I can assure readers that honest taxpayers have no rights at all, for the dishonest its simply put your house and possessions in some one else’s name end of story. But if like me and against solicitors instructions you take the moral high ground and put it all on the line because you no you are right, there is no justice at all no day in court and no satisfaction from the commonwealth or taxation ombudsman and to tidy it all up when they bankrupt you they then say they cant talk to you have no rights. Though homeless and in poverty the dedication I have shown to my business these last 23 years will turned to over throwing this dictatorship

  27. lespauljunior

    Shaniqu’a: Ron Pattenden lives in New Zealand, not Vanuatu. His scheme was to give burial dignity to the Aboriginal population; but the restrictive laws made it impossible to base the business in Australia. I have had frank talks with the Deputy Inspector of Taxation: he states that he “would not” set up a company in Australia because of the restrictive bureaucracy and the practices of the ATO. The ATO do not obey “The Rule of Law” (although they are meant to be “Model Litigants”) and can falsify your case to demand money from you. Until you have been through it, and have had money, or your house stolen, it is impossible to reduce in words the degree of corruption and suffering it causes.

  28. lespauljunior

    The matter of private legal firms being hired by the ATO is another facet that must be exposed. For example, Minter Ellison have a two year standing order to supply the ATO with $3.8m of “legal services.” If you were a private company looking towards Minter Ellison, (or other private law firms on government retainers), you would need to think hard about using their services. If they falsify facts, or act with gross negligence in your case, would it be because they want to please the ATO?

    In my case, they were paid $127,000 from public funds (from the $100m+ per annum that the ATO spends on “legal services”) on the entire basis of an eleven word contract:
    “To assist and advise in the resolution of the claim generally.” I got thiscontract info under FOI.

    Nice work if you can get it! Compensation paid to the innocent: $0.


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