'How could they do this?': the tax office call that sent Kathryn broke

Kathryn Little won’t forget the insomnia, the desperation, the feeling of powerlessness. She chokes up talking about it. It was September last year when her ability to feed herself and pay her bills was taken away.

She had received a perfunctory call from the Australian Taxation Office saying her Australian Business Number had been cancelled. An ABN is the number all businesses must have so the tax office can track payments and the GST. It is impossible for a small business to operate without one.

Little, who worked for several small firms, asked how the ATO could make such a life-changing decision without giving her any notice. “I need my ABN to work for them,” she recalls telling the ATO officer. According to Little, the woman replied: “That’s not our problem.”

“They were literally taking away my capacity to live my life and they had no concern whatsoever for the repercussions,” Little says.

Four years ago, Little, who is single and in her late 40s, suffered depression and anxiety. It forced her to quit her job as an environmental scientist.

Instead of going on social security and becoming, what she saw, as a drain on society, she changed her lifestyle. She bought a 1988 pop-top caravan, travelled the country and picked up contract work.

Using her van as a mobile office, she did transcription work for an Adelaide-based business, OutScribe, along with a couple of other agencies, while travelling from one side of the country to the other, taking life down a notch to help restore her health.

It all changed with that call from the ATO.

“I was so stressed because I just thought, 'how am I going to do this? What am I going to do?' ” Numerous calls to the ATO seeking an explanation produced only “stonewalling and obfuscation”.

Little was one of more than a dozen OutScribe contractors called that day to be told their ABNs had been cancelled. Most were single mothers, carers or people with serious health conditions who wanted to work but needed flexible hours.

They were collateral damage in an ATO decision to audit OutScribe’s business model but not its finances. Using its extraordinary powers, the tax office was able to cancel the ABNs before the investigation had even been completed.

A joint Age/Sydney Morning Herald/Four Corners investigation into the ATO can reveal the heavy-handed treatment of OutScribe and the contractors is not an isolated case.

Evidence from businesses, current and former ATO staff, lobby groups, lawyers and academics, and an examination of court records and freedom of information documents, reveals disturbing behaviour and practices by one of the most powerful institutions in the country.

Kathryn Little had her ABN abruptly cancelled by the tax office.Credit: Eddie Jim

Costly mistakes

The ATO collected an estimated $360 billion in revenue last year and, like all tax-collection agencies, has been granted wide-ranging powers to do it. But the joint investigation reveals mistakes are being made on some tax assessments.

Despite the potential impact of its decisions, there are few external checks and balances on the tax office’s powers. The key oversight agency is the Inspector-General of Taxation, Ali Noroozi, but he has fewer than 30 staff to examine rulings and practices, and make recommendations. And the determinations are not binding.

Noroozi, who has held the position for 10 years, estimates the tax office gets about one in 20 cases wrong. “I think it’s perhaps 5 per cent of the cases or so, an organisation that size may not get it right,” he says.

Deputy ATO commissioner Deborah Jenkins concedes the ATO makes mistakes but believes Noroozi’s figure might be too high.

“We do make mistakes, but come and talk to us about those mistakes and we can work through a system of understanding how we can do it better next time,” she says.

Ken Phillips.Credit: Eddie Jim

Guilty until proven innocent

Ken Phillips, a small business advocate who runs non-profit group Self Employed Australia (SEA), says becoming embroiled in the ATO’s web is akin to being “cooked slowly, until you are roasted and you are dead”.

He has been working in the sector for more than 20 years and says there is a pattern of abuse. The ATO, he says, is effectively judge, jury and executioner.

He is not alone. Barrister Graeme Halperin, a tax specialist who has been representing small business for 30 years, describes some of the ATO's powers as draconian.

“People are brought up to believe they have the presumption of innocence, that they have the right to remain silent if they're questioned by the authorities, that the authorities are obliged to read them their rights, if they get into trouble, and that their assets can't be confiscated by the authorities,” he says.

“In the world of tax, none of these things are true.”

Graeme Halperin.Credit: Eddie Jim

Taxpayers are guilty until proven innocent. Once an assessment is issued, the taxpayer typically has 30 days to pay. If they disagree with the assessment, a portion of it (about 50 per cent) must be paid upfront.

The tax office has the power to raid a business or home without a warrant. Police must, in most cases, obtain a search warrant. The tax office can compel you to answer questions; it can stop you leaving the country. It can send a garnishee notice to a third party (bank, other financial institution, customer, family company or employer) compelling them to pay up to 100 per cent of the money the ATO says you owe it. It can charge penalties and interest on the debt. Penalties can be up to 90 per cent.

Phillips says the ATO is abusing some its powers to boost its revenue-raising activities.

Prominent tax lawyer Mark Leibler told our investigation “criminals have many more rights before the law because you have to prove your case against a criminal beyond reasonable doubt. Here [in tax] it’s the exact opposite.”

Mark Leibler.

Leibler outlined his concerns in a speech to the Tax Institute’s annual conference last month, saying while he doesn’t know any “reported cases” of maladministration, the reality is “under the self-assessment regime, the full scope of this power lurks beneath the surface like a saltwater crocodile”.

“The [tax] commissioner has almost unlimited power to assess any person to any amount at any time,” Leibler says. “The commissioner can raise an assessment on almost any basis he pleases, and then require the taxpayer to prove before the Administrative Appeals Tribunal or the Federal Court what their liability should have been.”

Annette Pike: "I had women on the phone crying.”Credit: James Elsby

Lives thrown upside down

Annette Pike, a single mother with three children, runs the OutScribe transcription business on the northern edges of the Adelaide Hills. The ATO had been looking at the business for four months when, in late June, it decided it should have been classifying contractors as employees.

In July, Pike told the ATO she would appeal the decision. In August, the ATO rang to confirm the case would be reviewed. It said it would initiate reviews of the contractors. On September 11, the contractors had their ABNs cancelled.

OutScribe and its reputation were shattered. “Revenues plunged and some people accused us of being sham contractors, which is shocking,” Pike says.

While her business was upended, she also felt the effect it had on the contractors.

“I had women on the phone crying,” Pike says. “They were no longer able to work for themselves, couldn’t pick up work from us, or anybody else. Their lives were thrown upside down, our life was thrown upside down.”

Jenkins declined to talk about OutScribe or the reason behind the cancellation of the ABNs of its contractors but said late last year the ATO undertook a review of the process of all ABNs for the millions of individuals, self-managed super funds and businesses that hold an ABN.

Michael Shord has spent a small fortune fighting the tax office in court.Credit: Tony McDonough.

One $300k bill, two heart attacks

In the case of 67-year-old oil-field diver Michael Shord, questions have been raised about whether the ATO acted like a model litigant.

Shord’s battle with the tax office has run for six years and he has come out second best. He has suffered two heart attacks due to a collapsing of blood vessels and he is at risk of losing his house and savings.

Shord had been working overseas for years. Under Australian tax law before 2009, if someone worked overseas as an “employee” they were not taxed in Australia. That is so people weren’t taxed twice.

On May 15, 2013, the ATO slapped him with a tax bill of about $300,000 including 50 per cent in penalties.

It was a savage blow he decided to fight in the Administrative Appeals Tribunal. He lost. He then took the matter through two more costly appeals in the Federal Court.

Finally, there was an outcome: justices Antony Siopis and Richard White said the AAT’s decision, which was based on an ATO pre-hearing submission that Shord was not an employee, was a “jurisdictional error”.

Justice John Logan reminded the ATO of how it should behave as a model litigant, stating that: “the commissioner should not just have not opposed the amendment but readily consented to it and actively promoted the upholding of that ground. That is how a model litigant ought to behave.”

Despite these points, Shord failed in a bid to have the ATO pay all his costs. He is seeking special leave in the High Court as his case continues.

He has spent thousands on legal costs and will have to spend thousands more.

“I am just Joe Blog,” he says. “I am not anybody special.

I am a small cog in a big wheel. But I do not like being fobbed off, lied to and deceived.

“And I certainly don’t like being bullied.”

Each year, more than 24,000 taxpayers challenge the ATO’s assessments through an objection process that can be costly, lengthy and stressful. Most don’t challenge. Last year, the ATO amended tax assessments of 253,000 taxpayers, including individuals and businesses.

“If you haven’t got $30,000 to $40,000 to cover it, you are dead,” Phillips says. “The tax office runs the line you are guilty, so most cave in and pay up, even if they did nothing wrong.”

“It's been devastating”: small business owner Annette Pike

Cultural reinvention?

Over the years, to get a fairer approach for taxpayers; parliamentary inquiries, watchdog reports and a cross-section of politicians from both sides have called for more scrutiny and accountability.

A 2010 root and branch tax review by Ken Henry recommended an advisory board to provide high-level advice to tax office senior management on issues such as information technology, strategy and culture.

The idea was raised again in 2011 by the Inspector-General of Taxation. It was also backed by the Business Council of Australia, which said in a paper that such a board would “influence shaping ATO culture” and noted countries including the US, Britain and Canada had oversight boards.

In May 2013 at a National Press Club speech, then shadow treasurer Joe Hockey signalled a Coalition government might break up the ATO to ensure a more “independent” resolution of tax disputes. This would involve a separation of regulatory and policing functions into separate entities.

Hockey said the ATO had developed an “insular and inward-looking culture that has put it at odds with taxpayers”. He also said the tax office had an “overly aggressive” interpretation of tax laws.

Such proposals were quashed when Chris Jordan took over as tax commissioner in early 2013 and promised “cultural reinvention” at the ATO and a fairer approach towards tax disputes.

In 2014, a parliamentary inquiry was launched into tax disputes. The following year, the inquiry published a report calling on the government to impose limits on the ATO’s powers, including reversing the onus of proof, in cases of fraud and evasion, onto the ATO. The inquiry also recommended an independent second commissioner be appointed inside the ATO to hear taxpayer appeals.

The government rejected the recommendations, saying there was “no need for legislative separation” or a separate commissioner.

The ATO has long resisted calls for greater oversight. In fact, Jordan has often argued at parliamentary hearings that the ATO is subject to a great deal of external review.

In 2016, an inquiry into tax office scrutiny was held. The inquiry rejected any move to have less monitoring and noted “there are remaining genuine concerns amongst stakeholders” about whether the ATO had achieved cultural change across the organisation.

Allan Fels, who ran the powerful Australian Competition and Consumer Commission for decades, says there is no question the ATO needs more oversight. “The ATO has virtually untrammelled power that must be balanced by a strong, well-resourced independent oversight mechanism, or there will be abuse," he says.

“Regulators rarely feel the need for any oversight. They are the worst judges of whether they need oversight or not. It is the normal human bias to see your decisions not needing to be challenged.”

He says because the ATO makes determinations on single bits of money it is very different from other regulators, which makes the challenges greater.

The fact the functions of policing, decision making and processing are combined in the same entity creates dangers and is a case for separation of powers, he says. At the very least, there need to be more safeguards.

Jenkins, who agreed to an interview after Jordan pulled out without explanation, says the ATO is going through “a continuous process of learning how we can make sure the processes are currently working” but dismisses the need for greater oversight.

“We have so much scrutiny in the ATO. We’ve got various committees, Senate estimates, other revenue committees, we’ve got the Inspector-General, and there’s a whole other range of people who are doing various reviews. We have got enough scrutiny of the work that we’re currently doing,” she says.

Jenkins says the ATO’s reinvention journey includes her staff doing mental health training. “So they actually talk about how to be empathetic, how to put yourself in the shoes of the businesses we’re actually dealing with every day. But it’s a journey.”

“It is likely that in 5 per cent of cases things do go wrong”: tax watchdog Ali Noroozi

Equal treatment

Noroozi has called for all taxpayers to be treated equally.

Currently, large business taxpayers with over $250 million can request an “independent review” before the tax office has finalised the audit position. The review is conducted by a senior officer who has not been involved in the audit.

The company can bring lawyers to assist. The review comes up with a recommendation. The audit team completes the audit in line with the recommendations. The process brings a fresh set of eyes to the audit before an assessment is made – that is, before the debt is due and payable to the ATO. This is important because the creation of debt allows the ATO to take recovery action to collect it. It is then up to the taxpayer to pay now, then challenge.

But small-business taxpayers, of which there are 3.8 million in Australia, don’t get that opportunity. They are offered in-house mediation. The discussion and disagreement remains between the taxpayer and the auditor. If the auditor does not change its mind, an assessment will be issued and the taxpayer has to pay at least half the debt then fight the case.

The ATO says in a statement there are no plans to extend the independent review service to small business. “Due to the nature of these disputes, it is resource intensive and, as a result, has only been offered to the large market.”

Halperin says the independent review gives big business “a much better deal than small business”.

Jenkins concedes “small businesses are obviously time poor and they’re resource poor” and refers to a pilot program called Dispute Assist, which started in December 2016, to support vulnerable unrepresented taxpayers, such as those dealing with family illness, domestic violence or mental health issues.

As of June 30, 64 taxpayers received this service, but Noroozi questions how independent it is when the ATO, which made the adverse finding against the taxpayer, decides. He suggests an external watchdog may be better placed to carry out that function.

John Bevacqua.Credit: Joe Armao

Ten deadly sins

John Bevacqua, a law academic at La Trobe University, has compared taxpayer rights in other countries with Australia. His analysis of OECD countries - including the US, Britain and Canada - concludes Australian taxpayers have fewer protections and less oversight.

“In the US, oversight extends to statutory obligations for reviews of IRS [Internal Revenue Service] staff to take into account fair treatment of taxpayers,” he says.

“There are annual audits of compliance with this obligation. There is also a list commonly known as ‘10 deadly sins’ which is a statutory list of grievous breaches of taxpayer rights which trigger summary dismissal of tax officials. There is no equivalent oversight here.”

There is a US Taxpayer Advocate, who can issue binding directives to the IRS on behalf of taxpayers, known as taxpayer assistance orders. These are orders to the IRS to take certain actions, cease certain actions or refrain from taking certain actions. It can also order the IRS to reconsider, raise to a higher level or speed up an action.

In addition, taxpayer rights in the US are statutorily entrenched in the Taxpayer Bill of Rights. In contrast, Australia’s taxpayer charter is non-binding.

“There are statutory rights to compensation for negligent or reckless tax-collection activities,” Bevacqua says. “We definitely have nothing equivalent here. Compensation usually rides on the ATO itself determining whether a taxpayer is entitled to compensation.”

Bevacqua says US taxpayers also have the ability to bring a constitutional damages claim, known as a Bivens action, alleging breaches of fundamental rights by tax officials.

“Taken all together, there is a much greater incentive backed by legal rights and performance-standard requirements, for the IRS to respect taxpayer rights,” he says.

The ABNs of Kathryn Little, and the other contractors, have been reinstated pending the outcome of the ATO’s final audit process on OutScribe.

All involved are hanging by a thread.

If the ATO decides OutScribe can’t use independent contractors, it will force the company to send the work offshore.

Almost 12 months since the audit began, Pike is still waiting.

“It’s an affront to who we are,” she says.

“We feel it’s a real David and Goliath because we are just minnows in the ocean in the transcription world. If we don’t speak up, who is going to?”

Know more? Email the authors on [e-mail] or [e-mail]  

Look out for part two of this investigation at SMH and The Age on Monday. Watch ABC TV Four Corners “Bunch of Mongrel Bastards”, Monday at 8.30pm.