Bob
Baldwin MP
Chair
Joint
Committee of Public Accounts and Audit
We
thank you for the opportunity to make a submission to your committee and would
appreciate the opportunity to add to this in face to face hearings. We have been
in existence as a group since May 2002 and we are the successor to a group
formed in November 2000 to represent the 41000 Australian taxpayers who invested
in MMTEIs in the period 1992 - 1999. We are non-profit and rely on
donations. We knew virtually nothing of tax law when we started this
journey in 2000.
We
are not against being taxed. We are against being taxed on the basis of vague
law and rulings which are uncertain in application, and which involve “wise
after the event” reinterpretation by the ATO, especially if this is
revenue rather than law driven (the Committee is referred to a long memo (March
1999?) from Asst Cmr Michael O’Neill to Michael Carmody on EBAs). We are opposed
to the use of expressions like ”vanilla” and “sniff test” by the Commissioner
because only he knows what he means. (Appendix I of the Word Attachment shows
that even well-trained ATO staff could not accurately apply the sniff test or
distinguish vanilla from fruit salad). We are against effective tax rates of 87%
for people on lower incomes.
We
welcome the decision to wipe 3000 pages from the tax
legislation.
Part
A
This
compounded for the tax payer by the existence of complex deeds contained within
prospectuses.
eg.
a loan may become non-recourse to the taxpayer after two years, but still remain
recourse in the sense that if earnings from a project do not cover expenses over
the life span, the taxpayer is still liable for the residue of
debt.
In
cases on the matter decisions on recourse have gone both ways – some in favour
of the investors some in favour of the lender, but all this at a point remote in
time from the original decision on recourse made by the ATO (five years, 1999 vs
2004) in the case of Central Highlands Wine
Grape).
There
are issues such as degree of control over a project – in one case the existence
of provisions in the deed to allow the taxpayer to weed their own section of a
group project and sell the oil themselves seems to have been enough to allow
those taxpayers to escape allegations of tax avoidance ( although since the ATO
didn’t challenge on this project (in fact it apparently gave an approving
advance opinion) this was never tested in court or the AAT).
There
are issues such as the marking of individual holdings in a project, again
essentially something largely within the control of the manager not the investor
taxpayer.
There
must be an end to the vicarious liability attaching to the taxpayers for the
actions of others of which they were unaware or attaching to their inferred
purpose, as found in S177A(3) of the ITAA and in the concluding part of S177D (
after the eight point test).
To
give a current example, Westpoint investors who invested in a unit trust on the
understanding of a certain tax treatment for property trusts may now find that
that investment was switched without their knowledge to a promissory note with
fixed interest and no favourable tax treatment. Certain documents comprising
part of MMTEI projects and relating to loans were not known to most if not all
investors, and the ATO cannot by law disclose them unless the matter goes to
court or the AAT. The vicarious liability concept is fundamentally unjust,
especially as the ATO reassesses with penalties and interest, and demands
payment, which has had devastating effects on families and lives including my
own, before the taxpayer’s day in court or the AAT, where they are up against a
virtually limitless legal purse.
One
judge recently has managed to render S177A(5) meaningless by saying that
“purpose” in S177D (b) is the same as “dominant purpose” in S 177A(5). Yet the
judge in the Vincent case went out of his way to that Mrs Vincent’s subjective
purpose was quite different from the inferred purpose of the promoter
–nevertheless his hands were tied and she was
liable.
It
is an interesting sidelight that Graham Hill apparently advised John Howard when
he put forward PtIVA as Treasurer in the early 1980s, and then more recently as
Justice Hill he sat on some of these cases, and was reportedly unhappy at how
judges on the High Court with less tax experience had overruled some of his
decisions.
Negative
gearing has not been attacked although reducing tax may in some cases be the
primary subjective motivator. And in the case of share buybacks like
Westpac, the tax saving from franking credits may be the primary motivator to
sell back the shares, but because what is not a dividend in ASIC’s eyes is a
dividend in the ATO’s eyes, and even though non-acceptors don’t get the dividend
and the buyout money might otherwise have funded genuine across-the-board
dividends, all is sweet.
There
have been six at least court or AAT cases in relation to MMTEIs - Howland-Rose,
Vincent, Puzey, Cooke, Iddles, Calder, and Sleight. One, Cooke, went wholly in
favour of the two taxpayers but it had taken sixteen years from initial
investment to determine the application of the law! These covered matters such
as the two limbs of S 51(1), S 82KL, S 82KM and then S 177D(b). Yet the taxpayer
is required by law to self-assess even though these required the advanced
analytical skills of federal court judges. And only one appellant was ever
funded by the ATO contrary to promises made in 2001 by the ATO Commissioner.
This is important because it is usually financially impossible to challenge the
ATO decisions in either the AAT or the federal court, unless a group of
investors can find each other and band together assisted perhaps by a legal
practitioner as a focal point. In the Calder case which involved the Main Camp
series of projects, as far as we can ascertain, counsel for the ATO failed to
advise the Member ( perhaps the ATO had failed to advise her) that on at least
five occasions the ATO had given forms of written approval for deductions in
these projects, seemingly making the role of the AAT that of proving ATO
officers wrong.
In
one of these cases the judge clearly dismissed the application of the Spotless
case, involving complex transactions in an overseas tax haven, to an MMTEI
involving investment in Australian agriculture, yet the Spotless case was the
key case cited in the ATO Position Papers on the projects.
The
fact that it can take up to sixteen years to determine the law raises the issue
of “what are taxpayers expected to do in the meantime?”, assuming they even know
that a certain case going forward has relevance to their investments. The ATO in
the instance of the MMTEIs adopted a stance of case by case, which leads to a
situation of what we call “microprecedent”. And which ordinary taxpayer is aware
of cases going forward which may affect their situation.
At
the same time it needs to be said that the ATO has to work with the tax
legislation handed to them by successive parliamentary sessions, so the
responsibility for sorting out the ludicrous expectations of the skills of the
ordinary taxpayer imposed by self-assessment can only be sorted out by
Parliament. This wasn’t helped by the Tax Law Improvement Project being called
off leaving us with two ITAAs. Even if the taxpayer seeks the advice of a
government-licensed tax agent, he or she has no redress if the agent is wrong
about PtIVA, because its application is now so uncertain that insurers will
apparently not provide professional indemnity to agents in respect of PtIVA. The
safe harbour provisions, under which the agent is held responsible if the tax
return is challenged, announced by the Treasurer eight years ago as government
policy, flouted by the ATO in the interim, and sidelined in terms of legislative
action in the 2004 ROSA report, still need to be legislated. If the
government has no confidence in its agents’ ability, which are the linchpin of
the tax system, why should the public? In fairness to the agents though, they
cannot be expected to wait up to four and half years for a public ruling on an
issue (as with TR 2000/8 on some MMTEIs), or be told sixteen months after being
told that a public ruling would be available that it will not now be available
(super recontributions). Interestingly when this last matter was being
considered initially re a private ruling, the ATO said it would look at the
legislative intent. Unfortunately when the second reading speech by the
introducing MP, Mr Baldwin, was consulted it gave no indication of the
legislative intent.
We
still have concerns at the unevenness and uncertainty of the application of TR
92/20 in respect of retrospective application of ATO decisions. For example the
public was told when PCD 9/95 on MMTEIs was put out for comment over the
Christmas holidays in December 1995 (which led to the MMTEI rulings TR 97/D17
and then 2000/8), that any ruling would be prospective only. The subsequent ATO
actions resiled from this commitment.
This
has been illustrated by the apparently favourable treatment accorded a corporate
taxpayer facing tax evasion charges based in part on transaction in a Caribbean
tax haven compared to that of ordinary mum and dad taxpayers facing allegations
of tax avoidance in which no overseas tax havens were involved (which is not
subject to criminal prosecution). It has also been illustrated by the lack of
application of tax avoidance provisions to those who invested in infrastructure
bonds even though the nature of those investments appear to clearly infringe the
conditions set by the relevant tax determination, TD 94/80.
Despite
the recommendations of the Administrative Review Council seventeen years ago, it
has been made impossible by the wording of the ADJR Act to use the Act to
challenge the way the ATO goes about making administrative decisions. Similarly
the AAT cannot be used to challenge this either, so natural justice cannot be
enforced. (The Ombudsman’s office and the Public Service Act and Commissioner
have also proved to be toothless tigers in this respect). The recent granting of
the right of a taxpayer to appear at the PtIVA Panel (after an ANU CTSI report)
is a step forward and implicitly accepts the High Court Kioa vs West decision on
natural justice (the ATO argued for five years that it didn’t apply to them),
but we still have concerns at the conditions imposed by the Guidelines on the
taxpayer about questioning ATO officers at the Panel, and about the taxpayer’s
access to third party documents unseen by the taxpayer but affecting the
taxpayer’s liability.
There
still MMTEI taxpayers who have settled on one project, offered to settle on
another and never heard from the ATO again two years later, and never been
challenged by the ATO on a third.
Penalties:
There
is still too much uncertainty about the use of TR 94/4 and 94/7 (reasonably
arguable case and about as likely as not correct). The ATO’s application of
these clearly confuses subjective and objective purpose, in that while whether
the dominant purpose ( and not necessarily that of the taxpayer concerned) was
tax avoidance is inferred from an “objective” test, the whole legal concept of a
imposing a penalty is related to subjective intent. The Commissioner has been
shown in the MMTEI issue to apply them in a way which preempts any subsequent
findings for or against a reassessment.
Also
one or both of these two rulings have qualifiers where tax avoidance is
involved, but in the MMTEI issue penalties were applied on the basis of the
general provisions (eg S51(1)) and PtIVA simultaneously even though there
cannot legally be a finding of PtIVA if deductions are disallowable under the
general provisions. So once again penalties were applied pre-emptively and so as
to negate the option to remit under these two rulings.
Also
to this day no reason has been given as to why Budplan Personal Services
(research) attracted a final 5% penalty and most agricultural projects a final
10% (until the 2002 settlement offer). The ATO talks of mischief levels but has
refused to tell us which projects were in which mischief
level.
If
all this seems complicated to the Committee, it is, but it is what Parliament
(and the ATO) has given the taxpayer.
Interest:
We
believe this has been satisfactorily dealt with in recent legislative changes
arising from the IGT report. There were certain instances prior to that, pointed
out by the IGT report where the ATO was applying interest charged even
though it could not fairly be said that the taxpayer was using the Commonwealth
as a cheap source of finance.
We
believe that reassessed tax, interest and penalties should not automatically be
shown as a debt payable to the Commonwealth and in Commonwealth books as an
asset while they are subject to dispute. This has had as we said a devastating
effect on families and individual taxpayers.
In
respect of promoters we note that only one second group of accountants/tax
advisers and their associates were ever to our knowledge prosecuted over MMTEIs,
despite lines of legal attack being raised in the 27-28 May 1999 PtIVA
Panel/Workshop meeting on 18 MMTEIs. (see Appendix J of the Word Attachment). By
contrast there were no prosecutions involving projects in which the big four
firms were involved. (see Appendix D of the Word
Attachment).
The
ATO will not disclose which were used as models for up to 174, and even to
taxpayers who ask, which project was used as a model for their project. Yet the
information for the entities in around 70 of the projects is available in
prospectuses lodged with ASIC.
As
far as we are aware ASIC has never prosecuted over projects for which no
prospectuses was lodged (apparently the relatively few that were franchises were
exempt and it may be that some were under the threshold of $5m aggregate for
associated entities, but this doesn’t account for nearly 100 projects). A list
of prospectuses lodged Dec 1994-Dec 1998 (which may have one or two inadvertent
omissions) is shown in the Word Attachment as Appendix
K.
Geoff
Taylor
for
Australians for Tax Justice Inc
WA
6850
08
9457 6487