The AAT has refused to grant a medical practitioner release from his tax debt after finding that he would not suffer serious hardship if required to satisfy his taxation liabilities. In so finding, the AAT duly observed that, along with various other expenditure, the taxpayer’s purchase of a Porsche Macan 5 days after his release application was not “consistent” with the financial circumstances he reported.

Facts

The taxpayer was a medical practitioner who emigrated to Australia with his then wife in 2006. Their 2 sons were born in 2011 and 2012 respectively. The taxpayer’s wife experienced increased mental health issues from 2007 and incurred significant gambling losses over the years. The couple purchased their marital home in October 2016 but separated soon after in 2017. The taxpayer’s tax liability (consisting mainly of unpaid PAYG instalments) began accumulating around that time.

The taxpayer incurred substantial legal costs on family law proceedings in 2018 and 2019, and in defending criminal proceedings brought against him in 2018 in relation to allegations of illegal prescribing. He was also suspended from duty at Canberra hospital for 3 months in 2018 following an allegation of physical assault against another staff member, during which time he received his basic salary but no bonuses. Concerned he might need to find alternative employment, the taxpayer commenced a 2-year MBA degree (incurring a HELP debt of $33,060) in late 2018.

The taxpayer assumed sole parental responsibility for his children in January 2020. Around that time the taxpayer’s father came to Australia to assist him domestically and ended up remaining in Australia due to the COVID-19 outbreak, supported by his son. The taxpayer purchased a property in Canberra in early February 2020. His wife died later that month.

On 24 June 2020 the taxpayer applied for a release of his tax liabilities due to serious financial hardship pursuant to s 340-5 of Sch 1 to the Taxation Administration Act 1953. At the time he declared monthly income of $25,000, monthly expenses of $18,550, assets of $516,221 and liabilities of $701,000. Nevertheless, the taxpayer purchased a 2019 Porsche Macan for approximately $120,000 on 29 June 2020 and, in December 2020, acquired another property in Canberra.

The Commissioner declined to release the taxpayer from the component that was eligible for release at the time ($229,350) but granted a full remission of GIC ($35,020). The Commissioner later confirmed his decision to not grant the release and disallowed the taxpayer’s objection. The taxpayer sought review of the objection decision by the AAT, where he was directed to provide updated financial information. He did so via Form 13, declaring weekly gross income of $10,057, weekly expenses of $10,189, assets of $614,614 and liabilities of $891,203.

At issue was whether the taxpayer would suffer serious hardship if required to pay his tax liabilities and, if so, whether the discretion to release him in full or part should be exercised. As at 2 December 2021, $206,797 of his outstanding tax liability was eligible for release (comprised of $185,638 in PAYG instalments and $21,159 in GIC). The taxpayer claimed that his circumstances were unique and had been extremely challenging. He contended that a determination of serious hardship should be confined to his known circumstances at the time of the release application, and that consideration of his current or future financial decisions was unfair, unjust and unethical.

The Commissioner contended that the taxpayer had failed to make a full and frank disclosure of his financial affairs and had failed to discharge his burden. He submitted the variation in income in the release application and Form 13 was significant and placed doubt on the veracity of the claimed amounts. No documentary records were provided to verify the amounts, which also varied from the taxable income declared. The taxpayer had also failed to declare interest income or dividend income.

In the alternative, it was submitted that the taxpayer had failed to prove he would suffer serious hardship if required to satisfy his tax liabilities. In the further alternative, it was submitted that payment of tax liabilities was not the cause of the serious hardship. The Commissioner contended that the hardship should be assessed at the time of the AAT’s decision, a position said to be supported by the fact that the AAT could release liabilities that had accrued since lodgment of the application.

Decision

In regard to the preliminary issue of when hardship should be assessed, the AAT held that it could consider circumstances that had arisen since lodgment of the release application. The AAT then went on to assess the taxpayer’s circumstances within the context of the income/outgoings and assets/liabilities tests and affirmed the objection decision under review.

Noting that the taxpayer’s income as declared in his tax return, the release application and Form 13 varied considerably, the AAT found that the discrepancies, as well as the omission of interest and dividend income, evidenced a failure by the taxpayer to make a full and frank disclosure of his income and outgoings. The AAT said that the outgoings included expenses that were not “necessities according to normal community standards”, such as annual school fees of almost $50,000, the taxpayer’s ongoing support of his father and excessive loan repayments. On the evidence, a reduction in the taxpayer’s household expenditure would leave a surplus that would allow him to meet his tax liabilities in a reasonable time without impacting on his ability to provide reasonable accommodation, food, clothing, medical supplies and education for his family. The income/outgoings test was thus not satisfied.

In respect of his assets and liabilities, the AAT observed that the taxpayer provided no documentary evidence to support the claimed value of his assets, did not declare interest from Australian bank accounts and did not admit the existence of overseas bank accounts until aware of the ATO’s knowledge of such. The AAT said that the taxpayer’s purchase of the Porsche 5 days after the release application, a second property later that year and additional shares between 1 July 2021 and 29 October 2021 was not consistent with the financial circumstances reported in the release application or Form 13. The disposal of funds on an MBA in circumstances where he had secure ongoing employment was also unnecessary.

The AAT concluded that, on the evidence, the taxpayer had not met his onus of establishing that being required to meet his tax liabilities would result in serious hardship within the meaning of s 340-5. However, if the discretionary power were enlivened, the AAT considered that it was not appropriate in the taxpayer’s circumstances that it be exercised.

Source: Dua v FC of T 2022 ATC ¶10-631; [2022] AATA 1520, 3 June 2022.