Committee calls for rethink on ATO powers to fight tax evasion

People and companies charged with tax fraud or tax evasion should be granted the presumption of innocence in court, according to a parliamentary inquiry that pushes the federal government to radically overhaul current rules.

At the moment, a taxpayer accused of tax evasion is deemed guilty and must prove their innocence. The Standing Committee on Tax and Revenue has recommended that change after hearing that the Tax Office often goes on “fishing expeditions” and uses its extraordinary powers to gather information that it then uses against the taxpayer.

The committee heading the federal inquiry into tax disputes also backed the Inspector-General of Taxation, Ali Noroozi, in recommending that a new independent second commissioner be appointed with the ATO to hear taxpayer appeals; a move the Tax Office has been resisting.

House tax committee chairman Bert van Manen said that if the allegation of fraud and evasion was being made, and the ATO was seeking tohit people with a tax bill dating back beyond five years, then all taxpayers – from small-business people to big companies such as Glencore and Commonwealth Bank – should be given the benefit of doubt.

The committee recommended the onus should be on the ATO to prove the accused taxpayer was guilty and that findings or allegations of fraud or evasion should only be made by an SES officer.

“There must be a substantial level [of] evidence,” Mr van Manen said.

The inquiry has heard from individual taxpayers and small businesses who have lost their businesses and livelihoods because of “cowboy” ATO auditors hitting them with tax bills that were later proved to have no basis.

The inquiry also heard how the practice of the ATO issuing small business taxpayers with garnishee notices “have sometimes been used inappropriately and this has caused hardship or injustice to taxpayers”, but stopped short of making a recommendation to scrap it.

Garnishee notices are a way that the Tax Office can recoup alleged debt. It can demand the taxpayer – or any person or business that holds money for the taxpayer, including their employers, financial institutions, real estate agents and solicitors – make immediate payments to the ATO, either as a percentage of their wages or a lump sum amount.

Not only is a garnishee notice issued before the taxpayer has a right to lodge a formal objection to the assessment, but hefty penalties and interest charges can be attached.

In a recent review, Mr Noroozi recommended the ATO not require taxpayers to pay penalty amounts until the dispute on the primary tax was resolved.

The committee also noted that given the ATO has significant evidence-gathering powers – under section 264 of the Income Tax Assessment Act 1936 – it suggested that the ATO give taxpayers written notice of issues and topics to be raised in section 264 interviews.

The other issue raised during the hearing was the fact that when a taxpayer was proved to be innocent, there were limited grounds for compensation.

The committee recommended that the ATO invite the Commonwealth Ombudsman to “advise on improving its compensation processes, including compensation liability and amounts”.

Tax Commissioner Chris Jordan said the ATO would make a formal response in due course but that many of the recommendations of the report “reinforce the strategies the ATO already has in place or is putting in place to improve dispute resolution” and that “historically, a very small number of disputes have been dealt with poorly”.

Mr Jordan insisted that the Tax Office already had an area to look at disputes independently, despite there being criticisms during the hearing that it’s not really independent, and despite the review function only being available to the big end of town.

The committee’s recommendation to have a new commissioner head up an independent area within the ATO stops short of earlier rumours – off the back of comments by Treasurer Joe Hockey before the Coalition took office – for a full split of the Tax Office.

The current appeals process is only available for large corporates, and has been labelled by tax experts as not being truly independent from original decision makers.

Assistant Treasurer Josh Frydenberg said the government would consider the committee’s recommendations, as well as those of the Inspector General of Taxation.

PwC’s tax dispute resolution partner and a former ATO assistant commissioner, Ashley King said the recommendation to have a separate commissioner hear taxpayer appeals made sense. “There’s a lot to consider in managing a tax dispute,” he said.

Chartered Accountants Australia and New Zealand head of tax Michael Croker said it was important that the ATO ensures all taxpayers are treated fairly when dealing with tax disputes. The body has previously suggested the independent review function be extended to smaller taxpayers, too.

The house tax committee’s deputy chairman, Jim Chalmers, said: “Having a separate appeals area in the ATO will help ensure a fresh look at disputes without all the administrative costs of setting up a new separate agency.”

NSW barrister John Hyde Page said reform was long overdue. “It still amazes me that we live in a country where citizens are guilty of tax evasion until they have proved their own innocence,” he said.