The ATO is suing me for a tax debt – how do I respond?

Taxpayers can object to assessments through the process in Part IVC of the Taxation Administration Act 1953. However, taxpayers often face the simultaneous challenge of defending court proceedings where the ATO is seeking to recover the disputed tax debt.

It difficult to defend tax debt recovery proceedings in isolation. This is because of the rule in the tax legislation that an assessment is conclusive evidence:

• of the amounts and particulars of the tax, interest and penalties owing, and
• that the assessment was properly made.

In practice, this can mean that, even if a taxpayer has a genuine dispute about an underlying tax liability, the ATO can require the taxpayer to pay the amount stated in the assessment while the dispute over the underlying debt is resolved.

What happened in Deputy Commissioner of Taxation v Anglo American Investments Pty Ltd?

In Deputy Commissioner of Taxation v Anglo American Investments Pty Ltd [2016] NSWSC 975, the taxpayers argued that ATO officers obtained information from the Cayman Islands unlawfully and therefore the resulting assessments were invalid – and not protected by the conclusive evidence rule – because of conscious maladministration.

The Court acknowledged that, in tax debt recovery matters, a taxpayer can challenge the underlying assessment on the basis that there was conscious maladministration by the Commissioner’s officers in making the assessment. In that case, the conclusive evidence rule would not apply because the integrity of the assessment would be called into question. The Court referred to the decisions of the High Court in Federal Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 and the Full Court of the Federal Court in Denlay v Federal Commissioner of Taxation [2011] FCAFC 63.

However, the Court found that the defence wouldn’t succeed in this case. Even if the collection of the information from the Cayman Islands was unlawful, it didn’t mean that it amounted to conscious maladministration in making the assessment.

The maladministration needs to be ‘conscious’ and not simply mistaken – there needs to be actual bad faith by the Commissioner’s officers at the time of making the assessment.

The test is a high bar for any taxpayer to meet. These decisions highlight the difficulty for taxpayers in asserting a conscious maladministration case.

What can I do to avoid the ATO starting proceedings to collect the tax debt?

Both taxpayers and advisers need to act promptly in exercising Part IVC objection and appeal rights.

In some cases, taxpayers can work within the ATO’s own internal guidelines to deal with a debt before the ATO starts tax debt recovery proceedings. For example, it might be worthwhile considering:

• paying 50% of a disputed debt in exchange for the ATO agreeing to remit the general interest charge or penalties; or
• offering to provide security for the whole or part of the debt.

What can I do if the ATO starts proceedings to collect the tax debt?

In cases where the ATO has already started tax debt recovery proceedings, it is important that you form a strategy to preserve the position in the tax debt recovery proceedings while you object and appeal the underlying tax liability.

For example, a taxpayer may need to file a defence in the tax debt recovery proceedings or negotiate a payment plan for part or all of the underlying tax liability, while an objection is lodged on the substantive tax or penalty dispute.

Our team regularly helps clients manage the two aspects of a tax dispute at the same time. This often means responding to any tax debt recovery proceedings started in the District Court or Supreme Court, negotiating with the ATO for a deferral of collection activities and preparing evidence and submissions for objections to the underlying tax and penalty amounts.

Please contact a member of the team if you would like to discuss.