"Pay now, fight later" is a key tenet of tax disputes. Once the ATO raises tax assessments, the route to challenge them is often a lengthy, technical appeal with a heavy onus of proof on the taxpayer. This makes it very difficult to contest a tax assessment for errors in procedure or ATO conduct, and places the Commissioner in a powerful position to enforce taxation liabilities.
Hyder v Commissioner of Taxation [2022] FCA 264 is a reminder that there are other means to challenge regulator conduct.
Are there grounds to challenge ATO conduct that is oppressive, harsh, or unfair?
We often receive queries such as:
- Can I stop the ATO recovering tax and seeking security while we fight the assessments?
- Can I make claims for negligence / breach of statutory obligation against the ATO for freezing assets / demanding security / collecting tax debts, especially if we defeat the assessments or the ATO withdraws them?
Historically it has been notoriously difficult to challenge ATO conduct on the basis that it is oppressive, harsh or unfair. For example:
- In FCT v Futuris Corporation Ltd [2008] HCA 32, the High Court rejected the taxpayer’s claim that the ATO had committed misfeasance by knowingly “double counting” its assessable income. The Court reached this conclusion on the basis that the ATO’s actions did not involve a deliberate failure to act in excess of its powers.
- The ATO's position is that no superior Australian Court has ever been found to owe a common law duty of care to taxpayers in the performance of its functions - see Farah Custodians Pty Limited v Commissioner of Taxation (No 2) [2019] FCA 1076, [38]).
- In FCT v Donoghue [2015] FCAFC 183, the Full Federal Court rejected the taxpayer’s argument that the ATO had engaged in conscious maladministration by recklessly using documents in an audit that were later found to be subject to legal professional privilege.
- In Glencore International AG v Commissioner of Taxation [2019] HCA 26, the High Court left it open to the ATO to use hacked documents in assessing a taxpayer’s tax and issuing a notice of assessment.
The decision in Hyder therefore stands as an outlier among these examples.
The example in Hyder
In this case, a company called EMH IV Pty Ltd (the Trustee) held money on trust for a partnership consisting of Screaming Eagle Pty Ltd (SEPL) and Mr Hyder. In, 2015 the Trustee made an 18 million distribution to the partnership, following which Mr Hyder drew down $13.25 million from the partnership’s bank account. The Trustee and SEPL were solely owned by Mr Hyder.
The ATO's view of the transaction was a complex web of alternatives involving section 100A reimbursement agreements, division 7A dividends, Part IVA, and allegations that the partnership never existed at all. Broadly, ATO made two alternative assessments:
- a “primary assessment” to Mr Hyder on the basis that the $13.25 million which he drew down from the partnership’s bank account was a division 7A deemed dividend from his partner, SEPL; and
- an “alternative assessment” to the Trustee on its $18 million distribution to the partnership on the basis that the partnership had no present entitlement to it, and that it was therefore the Trustee’s assessable income.
The taxpayers appealed against the assessments. The ATO sought to tax (or retain tax) from all of the Trustee, SEPL and Mr Hyder which could result in double or triple taxation. Only after litigation commenced did the ATO admit that it could only ultimately succeed against one of the three taxpayers and promise not to press recovery action against any of them until after the substantive tax appeal finished.
By this application, the taxpayers relevantly sought an injunction to prevent the “oppressive” recovery of income tax.
Court finds oppressive conduct
In deciding whether to grant an injunction, the Court relied heavily on the High Court’s decision in Deputy Commissioner of Taxation v Moorebank Pty Ltd (1988) 165 CLR 55, in which the plurality observed that:
"There will inevitably be cases in which it would be oppressive for the Commissioner to seek to enforce payment of the full amount due under a notice of assessment or by way of additional tax before the final resolution of a genuine dispute about the correctness of the assessment. […] A case in which the Commissioner issues a number of assessments on an alternative basis to different taxpayers in respect of the same income provides an obvious example." [emphasis added]
The Court also observed that Practice Statement PS LA 2006/7 relevantly provides at [7] that:
"Despite the standing of alternative assessments once issued and the binding debt created, we are not permitted nor intend to undertake double recovery of the tax. Our intention is to ultimately collect the relevant amount of tax payable on the alternative assessments to the extent they prove correct to the exclusion of others."
Having regard to these and other matters, the Court held that until the time that the ATO undertook not to enforce the total debt, it had “obviously” acted oppressively. However, given the ATO undertaking, the Court held that it was unnecessary to grant the injunction sought.
The ATO may well appeal the judgment given it provides direction on how they exercise their powers.
Key takeaways in dealing with the ATO
- Engage proactively with the ATO on how it intends to collect your tax debts. We are seeing the ATO becoming more assertive in seeking freezing orders, garnishees and expensive securities (such as bank guarantees and real property mortgages), particularly where taxpayers have only liquid assets in Australia.
- It is difficult, but not impossible, to challenge the ATO's conduct in enforcing tax debts except in the clearest cases where the ATO is acting squarely in opposition to its own practice statements, and the clear common law position as articulated in Moorebank. Some allegations such as conscious maladministration are provocative allegations not to be made likely.
- Think strategically about how your ATO challenge will end. Some challenges will only ever remit the matter back to the ATO to decide again rather than fully resolve your tax dispute.