Australia’s tax commissioner, having been soundly beaten in the first round before the courts, has come again to have his revenge.
The Australian Taxation Office can now bankrupt Douglass because Douglass does not have the vast sums required to continue to fight via the courts.
But in the Douglass process the Australian tax office is graphically showing it can pick out any professional in Australia who is operating in partnership and bankrupt them because they can’t afford to defend themselves.
The only defence is to be very rich so you can fight the ATO in the courts.
The most vulnerable group in the community are mum and dad partnerships who operate in areas like plumbing, computer programming, engineering, electrical work and so on.
Douglass operated two mum and dad partnerships and relied in the clear assurance given by a previous tax commissioner and the very plain language both sides of parliament have agreed upon in this area of small business tax.
Although the ATO will disagree, I believe the tax commissioner has now started to write the tax law and is in grave risk of taking on the role occupied by politicians.
The politicians offer tax reductions and other benefits to small business but these are being totally neutralised by what is the greatest threat to Australia’s small business movement — a tax office that is starting to replace the politicians as the law maker.
And once you understand what is happening the Cranston affair takes on new meaning.
These are strong words, but I think they can be justified.
The personal services income test was designed by the then treasurer Peter Costello with the strong backing of prime minister John Howard. It was not changed when the ALP came to office so it’s been endorsed by both parties.
Costello carefully crafted the legislation so that there was a set of tests to see if a person/partnership was an employee or contractor.
To make it very clear the parliament inserted an overriding clause that reads: “For the purposes of paragraph (1)(a), (b) or (c) or (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee.”
In the case of Douglass nothing could be clearer because the partnership structure was widely used on the Port Hedland contracting projects, so Douglass passed the custom or practice test as set out by the parliament. Most mum and dad partnerships would do the same — that’s why parliament crafted the law that way.
But in the pages of allegations against Douglass the key factor of whether partnership contracting was a common practice was not discussed.
As a result tens of thousands of small partnerships are in jeopardy, even though they meet the parliament’s test of custom or practice
For those who are interested, I attach below a link to the ATO letter sent to Douglass after he won first round in the courts--- where the commissioner attempted to impose heavy fines. When you see the allegations against a simple contractor on the surface obeying parliamentary law you realise how impossible it is for a normal mum and dad contractor like Douglass to fight the ATO. They need vast sums.
There is a second issue where the tax commissioner is setting new law. Overriding the Costello-Howard personal services legislation is the Part IVA, which covers avoidance schemes.
The greatest tax commissioner Australia has had in recent decades was Michael Carmody.
Carmody knew that to have an effective tax system you had to have the trust of the Australian small business community and they need clarity.
Below I have a link to his full statement but here are a few words that are clearly designed to cover the Douglass situation and encourage small business trust and compliance.
Carmody: “Suppose a husband and wife conduct a personal services business in partnership and, as the relevant Partnership Act provides, share equally in profits and losses, notwithstanding that only one of them performs the main bulk of the work………. in the ordinary case, the arrangement also has the very real financial consequence of exposing each partner to full liability for the debts of the partnership. The equal division of profits and losses is not solely explicable on its face by the purpose of obtaining a tax benefit …. Therefore, absent unusual features, it would be difficult to conclude that having regard to the section 177D factors that the dominant purpose of such a partnership arrangement was the obtaining of a tax benefit through the equal division of profits and losses”
Carmody also relied on the Ryan test case. That case has been removed from the ATO upfront web pages and was not mentioned in the Douglass case.
Costello and Howard, backed by the ALP, set the law. Carmody made sure the ATO obeyed it.
Once the small business community loses trust in the law and the ATO then societies are in grave danger of becoming like Greece and Italy, which are dominated by the cash economy.
The ATO has sent out a huge bulletin trying to explain its attitudes towards arrangements involving partnerships and small business.
It is an incredibly complex statement that I defy anyone to understand. Even my QC friends will be bushed. But it looks like the ATO is trying block the distribution of funds from partnerships/ companies, even though those partnerships comply with the law as established by parliament.
The law makers never had this in mind. I am sure Bill Shorten and Chris Bowen would be just as horrified as Malcolm Turnbull and Scott Morrison if they knew what was going on.
I am reluctant to make a connection to the Cranston affair but I think any public servant faced with the situation that Michael Cranston encountered would know the proper thing to do. The same would apply to senior executives.
But when you live in a world where you are a kingmaker and setting the law and where you are way above politicians, you might be tempted to extend that way of operating to your personal affairs.
It’s the job of politicians to set the law. In the case of small business they performed their task and performed it clearly and well.
The ATO needs to follow that law, not set its own rules.
And if you think I am wrong have a try at reading the latest small business ruling, which is the first link below.
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One of the world’s greatest mining/port productivity experts Roy Douglass, the man who spearheaded the dramatic increase in the productivity of Port Hedland, will now live overseas for the rest of his life.