Two recent court cases in the Federal Court of Australia where the Australian Taxation Office (ATO) obtained freezing orders against the assets of two prominent foreign property developers and their associates remind us of the very broad powers of the ATO for collection of tax. The cases have been widely reported in the media and it is clear that the ATO nowadays pays close attention to foreign property developers and will act quickly to exercise its powers because of difficulties of collecting tax from foreigners once the money has left Australia.

The freezing orders in the two cases were pursuant to special court rules permitting such orders. The ATO may apply for orders urgently without serving notice on the affected parties and the court will grant the order if satisfied there is a likelihood that any liabilities to the ATO will not be satisfied. In both cases assessments for more than $100 million of tax had been issued in relation to profits from property developments after audit of the taxpayers by the ATO and the ATO then immediately applied for the freezing orders. Under Australia’s tax laws the ATO can sue for the tax once an assessment is issued and the right to collect is not suspended even if the taxpayer appeals against the assessment.

In granting the orders the court noted a variety of factors indicating that there was a risk to the collection of tax such as:

  • Taxpayers or their families living overseas, even if the taxpayer is an Australian resident for tax purposes.
  • The size of the tax liability being significant and the taxpayers having the means and the motive to remove funds from Australia.
  • A history of transfers of significant funds out of Australia.
  • Incorrect or false statements in documents provided by taxpayers to the ATO.
  • Failure to record transactions with related parties in writing.
  • Indications of an intention to depart Australia such as resigning as director of multiple companies or being removed as a beneficiary of various trusts.
  • Complexity of business structures controlled by taxpayers.

In both cases the ATO was following up the freezing orders with garnishee orders requiring third parties to pay moneys they owed to the taxpayers or their associates to the ATO under a general power to that effect in the tax legislation. The tax legislation also contain a power to similar effect in relation to moneys owed to non-residents which is used against non-resident taxpayers.

The ATO has wide information gathering powers including the power to request information from taxpayers and third parties, as well as to compel them to attend for examination by counsel. While legal professional privilege is preserved in such cases, the privilege against self-incrimination is not.

At the extreme the ATO can issue a departure prohibition order preventing a tax debtor who is present in Australia from departing the country until the tax debt is paid or secured.

Similar powers are also relevant to the avoidance and evasion of goods and services tax (GST). Currently further powers are being added to the ATO’s armoury as part of attacks on tax avoidance and evasion including a power to visit the GST liabilities of companies on their directors under a director penalty notice if the liabilities are not paid on time.

The ATO is well known as a strong enforcer of Australia’s tax laws and it is a mistake for foreign investors to think that they can fly under the radar in relation to Australian tax liabilities or pay little attention to tax compliance.