ATO assessments and statutory demands

The ATO has many enforcement measures it can use for the collection of tax-related liabilities from a company.

These include director penalty notices, garnishee notices and freezing orders.

When a taxpayer has defaulted on a lodgement obligation, the ATO can make an assessment of the overdue obligation.

The ATO can then take enforcement action, e.g. by issuing a creditor’s statutory demand for payment.

A company served with a statutory demand has only 21 days from the date of service of the statutory demand to comply. Failure to comply with the statutory demand could result in the company being wound up .

Foxhat

In Foxhat Employment Service Pty Ltd v DCOT [2014] VSC, the Supreme Court of Victoria has provided further guidance on whether a company can challenge a statutory demand on the basis of there being a dispute as to the amount specified in a default assessment.

It is bad news for the taxpayer.

In Foxhat, the statutory demand arose out of audits that resulted in an assessment being issued for superannuation guarantee charges (SGC).

The company asserted there were a number of errors in the assessment, including amounts being assessed for persons who were not employees (or otherwise entitled to superannuation).

The company argued that it had a genuine dispute in respect of the SGC debt claimed in the statutory demand because the assessment was not raised in good faith due to the errors in the assessment.

Conclusive evidence provisions make it difficult to challenge default assessments

Section 75 of the Superannuation Guarantee (Administration) Act 1993 (Act) provides that a notice of assessment is conclusive evidence of the due making of the assessment and that the amounts and all of the particulars of the assessment are correct except in proceedings for a review or appeal relating to the assessment under Part IVC of the Taxation Administration Act 1953.

In Foxhat, the Court applied earlier decisions of the High Court of Australia and, in particular, the decision in DeputyCommissioner of Taxation v Broadbeach Properties Pty Ltd.

In applying the early authorities, the Court said:

  • Section 75 of the Act (like section 177(1) of the Income Tax Assessment Act 1936) is a conclusive evidence provision intended to require the taxpayer to appeal against the assessment in the specific manner set out in Part IVC.
  • An application to set aside a statutory demand cannot be used to side step the conclusive evidence of the assessment.
  • There is a limited exception: the assessment must be issued in a bona fide attempt to exercise the power to issue the assessment. This does not mean the assessment must be based on facts. The Tax Office is entitled to guess the correct assessment amount, but the power must be exercised  for the purpose of the income tax legislation and not for some other purpose.

Absence of good faith is a high threshold for the taxpayer to prove

In relation to the taxpayer’s argument that the assessment was defective because of an alleged absence of good faith, the Court said:

  • The taxpayer had the onus of establishing that the SGC assessment was made in bad faith.
  • Although there may have been errors in the assessment, the existence of the errors did not establish that the assessment was not made in good faith.
  • An assessment is not invalid merely on account of differences between the amounts assessed and the amounts properly assessed.

Decision Impact Statement

In the ATO Decision Impact Statement for Broadbeach Properties, the ATO says:

  • The Commissioner recognises the seriousness of taking recovery action where a taxpayer is disputing their assessment. Action taken to recover disputed debts is based on the assessed risk to the revenue.
  • While it is not common for the Tax Office to take recovery action before the outcome of the dispute process, the Commissioner will take such action if the circumstances indicate unacceptable level of risk to revenue, for instance, in cases where it is clear the taxpayer is disposing of assets.
  • Even where the level of risk necessitates action to secure payment of the disputed debt before resolution of a dispute, the Commissioner may offer a taxpayer a number of options as alternatives to the instigation of legal action for recovery of the debt. These options are outlined in the ATO Receivables’ Policy.
  • The Commissioner will continue to use statutory demands in appropriate cases in accordance with the ATO Receivables’ Policy.

The discretion of the Tax Office to take recovery action (before the outcome of an appeal relating to an assessment) is not limited to the situation where a taxpayer is disposing of assets.

The history of a company’s non-compliance with its tax-related obligations and the amount of any other outstanding tax liabilities are also likely to be material to what recovery action is taken by the Tax Office.

Implications for the taxpayer

Given the conclusive nature of an assessment (except for a review or appeal relating to the assessment) and the ability of the ATO to take enforcement action such as issuing a statutory demand, taxpayers should proactively deal with non-compliance issues and carefully manage communications with the Tax Office.

If there are errors in the assessment, you should not delay in objecting to the assessment. This may help with debt negotiations as the ATO will register that there is a dispute on foot. A comprehensive objection may also assist to demonstrate the taxpayer’s prospects of success are good and that it is appropriate for the ATO to defer debt collection activity – or agree to an interim arrangement.

Be aware that the ATO may ask you to pay part of the disputed assessment or to provide security pending the outcome of the appeal.

You do not want to be served with a statutory demand based on an assessment.

Further comments on statutory demands

Although it will be almost impossible to challenge a statutory demand based on errors in an assessment, this does not mean you cannot challenge a statutory demand if you have a genuine dispute as to the existence or amount of other taxation liabilities claimed in the statutory demand that are not based on an assessment. There may also be other grounds for challenging a statutory demand.

Whether a statutory demand can be challenged will depend upon the facts of the case.