Serious hardship - Business owners are not always eligible

The current ATO policy provides decision makers within the ATO the guidelines for determining whether serious hardship exists, and if so, where the taxpayer is liable. 

There are three ways a taxpayer can be ‘released’ from a debt described in the ATO guidelines:

• The ATO does not pursue a tax debt as it is not economical or legally recoverable,
  
• The ATO permanently releases an individual from a tax debt on the basis of serious hardship, or
  
• The Finance Minister utilises their power to permanently waive debts.
  

Serious hardship does not have a special meaning within the tax laws. Instead the ATO decision makers consider the personal circumstances of the individual and their ability to pay the tax debt. To assist this process, there are two tests and a series of factors considered. 

Income/Outgoings test

This test determines the individual’s capacity to pay their tax debt from their current income. The ATO considers the circumstances of the individual including the household income and reasonable expenditure. 

Being able to provide necessities to those, like family members, for whom the taxpayer is responsible  is also considered. 

Assets/Liabilities test

This test looks at the individual’s assets and liabilities to third parties, and whether the individual has capacity to utilise equity in the assets to pay the tax liability. Some assets may be required to be surrendered to the ATO in payment of a debt.

Assets that are generally not ‘chased’ by the ATO include:

• Family home
  
• Household goods
  
• Car
  
• Tools of trade
  
• Cash to meet daily expenses
  

Other Facts considered

The ATO considers factors around the taxpayer and their tax liability – such as whether:

• the individual has considered their ability to pay that tax liability prior to selling or purchasing assets, 
  
• preference has been given to other debts over the tax liability,  
  
• the compliance history of the individual has been good or poor – like has the individual previously lodged their tax returns in a timely fashion, or 
  
• they have structured their business affairs so that they are not able to pay tax liabilities when they become due. 
  

Ballintine v FC of T – Serious hardship denied to previous CEO

In the world of COVID, we are seeing more and more business struggling to make it through lockdowns and various restrictions. Many small and large companies that lost their customer base due to COVID, many now be facing cashflow issues impacting their ability to pay tax liabilities.

In a recent Administrative Appeal Tribunal matter, the Tribunal decided to uphold the Commissioner’s decision to not release an individual for serious hardship – despite the individual meeting the serious hardship tests. This case saw the  previous CEO and Founder of a large public company fail in his attempt to claim relief for serious hardship. 

Facts of the case

Ballintine was the Founder and CEO of NewSat Ltd, until he was made redundant in May 2015. The taxpayer had extensive experience as a director and businessperson, with involvement with over 12 other companies. 

In 2013, NewSat was rapidly growing, with over $1 billion in customer contracts. Ballintine’s remuneration arrangements as CEO included the issue of options to acquire shares under an employee share scheme. In 2013, he was paid a salary of $1.2 million and a bonus of a further $1.2 million. 

Ballintine requested that NewSat not withhold PAYG from the bonus payment, as he intended to reinvest the gross amounts to another related venture. 

 In 204, NewSat’s affairs took a turn for the worse. In 2015, the company was put into receivership and a liquidator was appointed. There was extensive litigation in relation to the collapse, including Ballintine’s involvement in the creation of false and misleading invoices. These events resulted in the shares and options Ballintine held in NewSat becoming worthless, and the costly litigation left Ballintine in a position of serious financial stress. 

Ballintine made an application for the release from his tax liability in 2018 on the grounds of serious hardship. He stated that he had requested that NewSat not withhold PAYG from his bonus payment as he believed the investment would give him the financial capacity in the future to pay the tax himself. 

Ballintine claimed that to he was unable to pay the tax liability and had no remaining significant assets. If he were to declare himself bankrupt, he argued that it would impact his future employment prospects. 

Tribunal decision

Despite Ballintine meeting the serious hardship tests (income/outgoing and asset/liabilities), his actions to request the company not withhold PAYGW from his bonus payment resulted in the tax liability not being paid in advance through that withholding. The tribunal was of the view that his action resulted in a series of events, and it was utlimately his responsibility to pay the outstanding tax. 

Ballintine was a sophisticated and experienced businessperson and was expected to have a higher level of understanding of the PAYGW tax system than the lay person. 

Lessons for Taxpayers

It is important that business owners understand their taxation obligations and how they could impact future liabilities. Ballintine had expected that he would be in a place to pay the tax, based on the growth of the company, but unexpected events can occur. 

How can Tax Controversy Partners help you?

Firstly, it is important that you carefully consider your position as early as possible if you are thinking about making changes to payments made to your as an owner or director of a company – to understand the tax liabilities that will sit with you or your company. 

Obtaining legal advice before it is too late is important, as expert tax lawyers we can provide you with detailed advice on your circumstances, guide you through making the best choices for you and help you to manage any engagement with the ATO. 

At Tax Controversy Partners, our experienced lawyers can represent your best interests in providing advice that is compliant with the current case law and based on understanding likely ATO actions. 

Please contact us to help using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.