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Potential Increase to the powers of the Administrative Appeals Tribunal in relation to small business taxation

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On 11 May 2021, the Budget Measures Budget Paper No. 2 2021–22 was circulated by The Honourable Josh Frydenberg MP, Treasurer of the Commonwealth of Australia. The paper included further commitment and details of proposed measures to assist small businesses in reviewing debts purportedly owed to the Australian Tax Office (ATO).

The Government intends to extend the power of the Administrative Appeals Tribunal (AAT) to allow it to stay or modify the recovery action of the ATO against small businesses.

Appealing and Reviewing Decisions of the ATO

The proposed amendments to the powers of the AAT are particularly significant, as presently the judicial options for seeking an internal review of a decision of the ATO are either an:

  1. appeal to a single judge of the Federal Court of Australia; or
  2. application for a review of the decision of the ATO by the AAT.

Generally, an appeal to the Federal Court is the less favourable option due principally to the substantial professional legal services required to commence and conduct an appeal and the costs associated with such, which often can outweigh the quantum on the decision being reviewed. Further, it is not guaranteed that even if the appeal is successful, that the Federal Court will grant a cost order in the appellant’s favour. If the appellant is unsuccessful, they may be ordered to pay the substantial legal costs of the ATO.

This leaves the more cost-efficient, but more protracted option of seeking a review of the ATO’s decision through the AAT. A fundamental problem with this course of action is that legislation empowering and governing the review by AAT, the Tax Administration Act 1953 (Cth) (the “Tax Act”) has a seemingly fatal flaw. That flaw arises by virtue of section 14ZZB of the Tax Act, which in effect can extinguish the powers of the AAT to stay the decision of the ATO which is the subject of the review by the AAT. Pursuant to section 14ZZB of the Tax Act the AAT cannot grant a stay with respect to tax assessment decisions.

A review by the AAT can take months or even years and during the process, penalties such as interest and other charges can accrue, and certain enforcement action may be taken by the ATO. In certain cases, these actions by the ATO may force the small business into bankruptcy or liquidation and effectively render the review by the AAT a nullity.

Proposed Changes

The proposed changes will empower the AAT to pause or modify ATO debt recovery actions, such as garnishee notices and the recovery of general interest charge or related penalties until the underlying dispute is reviewed and resolved by the AAT.

This measure will take effect from the date of Royal Assent of the enabling legislation.

To qualify, a small business, including individuals carrying on a business, must have an aggregated annual turnover of less than $10 million per annum.

The current proposal is to allow the AAT to pause or modify ATO debt recovery action in relation to disputed debts that are being reviewed by the Small Business Taxation Division (SBTD) of the AAT.

This measure will provide an avenue for small businesses to ensure they are not required to start paying a disputed debt until the matter has been determined by the AAT.

It seems that to qualify to seek to have the AAT exercise this proposed new discretion, a small business must:

  1. after the commencement of the extended powers of the AAT, file an application with the AAT in relation to tax matters before the SBTD of the AAT;
  2. put before the AAT sufficient and compelling evidence so it may consider the potential effect on the integrity of the tax system and ensure that applications are in relation to genuine disputes; and
  3. provide carefully crafted submissions and reasons to convince the AAT to exercise such discretion in their favour.

It must be kept in mind that these extended powers of the AAT are discretionary, and the power for a Tribunal or a Court to grant a stay is generally not exercised lightly and should not be seen as a matter of right. The AAT will be required to carefully consider the substantive merits, together with a preliminary assessment of the chances of success of the smalls business review of the decision of the ATO.

Consequently, any small business seeking a review of a decision of the ATO, be it through the AAT or the Federal Court, should be seeking to obtain appropriate legal advice as soon as possible to ensure that their initial application has the best prospects of success, and if necessary, of successfully applying to the AAT to exercise its power to stay or modify the decision of the ATO.

Should you require assistance, please contact one of our highly experienced lawyers at Marino Law.

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