Josh Frydenberg’s small business tax stumble

Josh Frydenberg has barely put a foot wrong in the last 18 months. Picture: AAP

Treasurer Josh Frydenberg has hardly put a foot wrong over the last 18 months. This week’s budget will be a tribute to his astute management of the pandemic economy. And the budget also reflects the fact that, more than any other treasurer in our recent history, Frydenberg understood that the powerhouse of the economy is small and medium-sized businesses and they were central to his strategies.

Therefore it is sad that on the eve of his triumphant budget he should stumble in the very area where he is strong — small and medium business. And also putting their name on the stumble are three other ministers, Michaelia Cash, Stuart Robert and Michael Sukkar. They will be embarrassed.

The Frydenberg base decision that led to the stumble was correct — that the tax collection system for small and medium businesses has deep problems. Longer term that realisation is potentially fantastic news for the nation.

Frydenberg decided to tackle one of the major tax problems — the current ruthless actions by the Australian Taxation Office to issue a garnishee on the bank accounts of businesses and business owners on the basis of an alleged tax bill which has not been tested by a working appeal process.

The garnishee is arguably the most brutal of the ATO’s weapons.

Most enterprises that receive the ATO “garnishee treatment” are immediately badly damaged or even destroyed because as soon as banks see an ATO garnishee notice they panic and the word quickly spreads among creditors.

Sometimes enterprises are lucky and are warned that there is a garnishee notice coming but, as the Inspector-General of Taxation found to his horror, that is not always the case.

Under the new Frydenberg policy the ATO can still fire a garnishee at a small enterprise before any working appeal process. But now if the business can survive that potential ATO initial killer blow they can “apply to the Administrative Appeals Tribunal (AAT) to pause or modify ATO debt recovery actions where the debt is being disputed in the AAT”.

Using my words the ATO is allowed to machinegun a business and their owners and after the initial rounds have been fired if the small business survives they earn the right to ask for a “pause”. While that’s better than having no rights to stop the machinegunning, it simply does not meet any fairness test.

Sadly, and inaccurately, the Frydenberg, Cash, Robert and Sukkar statement then goes one step further and says: “The change will bring Australia more into line with the tax systems of the United Kingdom and United States.”

The facts are very different.

In the US and the UK business taxpayers are given time to appeal or lodge objections before drastic actions like garnishee are taken. In the US any penalty and interest does not start until all appeals have been exhausted. There is no ATO-style “machinegunning” allowed until the appeals process is concluded. It’s the English justice system.

What the government needs do is follow its own press release and follow the US and UK and introduce a ban on the garnishee weapon until the appeal process is concluded. They can then legitimately say that Australia is moving into line with the USA and the UK. And it also happens to be English justice.

But let’s assume the government makes the required small business amendments to follow the US and UK, then what about medium sized enterprises? Surely they are entitled to the same protection against a ruthless ATO? Currently they have no working appeal process except the Federal Court. It becomes very important for enterprises to keep their turnover below the small business $10 million cut-off.

But there is some good news.

I am very pleased to see that Frydenberg is using the small business tax tribunal offshoot of the Administrative Affairs Tribunal that the government agreed to set up in November 2018.

The 2018 decision followed many comments from me and the wonderful work of Michaelia Cash and Stuart Robert who battled the ATO all the way.

But a lot has happened since 2018.

With the benefit of hindsight I should have campaigned for a different controlling body.

We recently saw the Federal Court give the Administrative Affairs Tribunal a thrashing over almost all aspects of one of the AAT landmark tax judgments on which it spent 15 months deliberating.

One of AAT conclusions was that electronic gossip could be used to convict without interviewing taxpayers. The Federal Court, quite rightly, said this was unfair but the ATO thought this is how tax should be collected so went off to the High Court to appeal the Federal Court decision.

The High Court thought the ATO case was so bad it refused a hearing. So an AAT landmark judgment was lambasted by both the Federal and High Courts.

Something is seriously wrong with the AAT in tax matters.

Thanks to the work of the High and Federal courts, the Inspector-General of Taxation plus the Small and Family Business Ombudsman we know the business tax collection system is riddled with bad practices.

What makes it now so important that these issues are tackled is that the government has initiated magnificent reforms which will speed up the flow of money in the business community and make possible much better lending by banks and non-banks. The current tax collection system threatens the value of the wonderful work the government has undertaken in small business.

The Frydenberg stumble could give the ALP a window of opportunity in non-social issues, but they also stumble regularly in these areas so the government is probably safe.

* Footnote: A lesson for Canberra. The government did not address its Australia Post stumble and now, as expected, former CEO Christine Holgate will take Australia Post head on as CEO of rival Toll. Australia Post now urgently needs a functioning board and chairman.