ATO attacks mum and dad partnerships

There are few more important tax cases on the horizon than the action being brought against the ATO by Rod Douglass.

The new Australian Taxation Office in Melbourne’s Box Hill.

There are few more important tax cases on the horizon than the action being brought against the Australian Taxation Office by Rod Douglass. The result of that case will determine the fate of tens of thousands of husband and wife partnerships in Australia and is likely to lay bare the anti-small business culture that I believe pervades sections of the Australian Taxation Office below the top people.

I have already referred to this case (Landmark case will reveal the extent of the ATO’s cultural problem, September 29) but now much more detailed statements of claim have been submitted to the Federal Court which show exactly what Douglass and his lawyers believe happened. If the statement of claim facts are right — and it’s up to the Federal Court to determine this — then Australia’s husband and wife partnerships are deeply threatened by the ATO and its culture.

Rod Douglass formed two partnerships, one with his first and another with his second wife. The partnerships conducted work for large contractors in WA. Each partnership shared income equally.

In the statement of claim, Douglass says that at all times all the partnerships’ revenue was fully accounted for — nothing was hidden. Given he is being helped fee wise by his legal team clearly they believe his claim is accurate but again that is a court matter.

Douglas set up the partnerships after viewing the clear 2005 ruling from former Tax Commissioner Michael Carmody who stated that “tax avoidance schemes did not apply to a typical husband and wife partnership where there are no unusual features”.

Carmody ruled that husband and wife partnerships in which both parties were responsible for half the debts were a legitimate way to organise your business. As a result they spread around the land.

Of course, it is always open to the commissioner to challenge a contracting business to determine whether or not there is an employee relationship.

Douglass believed that his partnerships satisfied the requirements as did most of the other partnerships that dominated subcontracting in the WA mining investment boom.

Section 170 of the tax act sets out clearly that the tax commissioner may only amend assessments within two years. This is a really important protection for small enterprises because if the tax commissioner goes back multiple years and charges penalties and interest the bill is enormous and normally bankrupts the small enterprise. And that is exactly what the tax officers decided to do with Rod Douglass.

I fear thousands have been treated this way and did not have the money to fight. Unlike large companies, small enterprises can’t afford expensive legal battles unless they are helped by lawyers. There is therefore no protection.

According to the statement of claim, to overturn the clear protection of section 170 in the Douglass case, the tax office relied on another section of the act which says that the commissioner may amend an assessment beyond the two year limit if he or she is of the opinion that there has been fraud or evasion.

According to the statement of claim (which must be verified by the Federal Court), the tax office called for an opinion and that opinion stated that there had been evasion. Again according to the statement of claim this opinion was not signed.

Armed with an unsigned opinion the tax office clearly believes it can issue a horrendous bill which bankrupts a small enterprise.

Again, subject to the view of Federal Court, the normal essence of evasion is where some material facts have been omitted or misconstrued. In this case, according to Douglass statement of claim, there were no facts omitted or misconstrued. It was a matter whether operating as a partnership complied with the act as ruled by Michael Carmody — in other words a legal dispute with a two-year time limit rather than evasion matter that enables the commissioner to go back many years.

If Douglas loses the case it would become a chilling precedent for tens of thousands of small enterprises. It would put into jeopardy Malcolm Turnbull’s desire to make Australia into an entrepreneurial nation.

The constitution allows for a citizen to apply directly to the High (or Federal) court to seek a review of an administrative officer, including the commissioner of taxation, where he may have exceeded his power.

There are very limited exceptions to this right and one of the issues that will be debated at the Federal Court is whether the tax commissioner is entitled to obtain an opinion and then bankrupt a small enterprise.

The contrary view is that where the commissioner wants to use the evasion power he must go to the court to justify that opinion. This will be an important matter to be tested in the Douglass case because the tax commissioner has not regularly been going to the Federal or High Courts to gain approval for actions outside the two-year limit.

The commissioner relies on a precedent in the Futuris case which purports to substantially limit the need for officers to go to the courts. In the Douglass statement of claim, his lawyers state that the Futuris precedent does not apply in this case. If the Federal Court was to uphold this claim, it would significantly protect the small business community from attack by the tax office.

As readers will know, I believe that, unfortunately, in the tax office there is a culture which is anti-small business which exists despite the best efforts and intentions of the current commissioner Chris Jordan. He has a different view.

My belief is that the only way the anti-small business culture will be changed is if small- and medium-sized enterprises can appeal to an outside independent tribunal but that is a subject for further commentary and is not a matter for the Federal Court.

The Federal Court will determine whether the facts that Douglass sets out in his statement of claim are correct and whether the commissioner has applied the tax act correctly. Whichever way the judgement goes, the precedent will be very far reaching.

Footnote: Thanks to Ben Butler for accessing the Federal Court documents on which this commentary is based.