Chris Jordan’s last shot at righting a wayward ATO

The Australian, November 29, 2016: Robert Gottliebsen

In the Douglass case before the Federal Court, I have witnessed the Australia’s Commissioner of Taxation, Chris Jordan, make an unprecedented and humiliating admission of error.

While that confession, given by his barrister, applies to just one tax case where tax officials tried to falsely bankrupt a small businessperson, I fear the same flawed technique has been used to bankrupt hundreds if not thousands of small enterprises.

I hope Jordan does not resign over Douglass because the lessons from the mistake can be used to fundamentally improve the tax system.

Indeed, Chris Jordan now has a unique opportunity to bring certainty to parts of small enterprise taxation.

I really wish the commissioner had personally joined me in the Federal Court because, had he heard his own humiliation, I have no doubt he would have already put in place the policy changes required.

The commissioner’s barrister confessed that the facts in the Douglass case as presented were “incorrectly formed” and so the allegations of tax fraud and tax evasion “are withdrawn”.

The actual formal statement from Chris Jordan to Douglass’s legal team read: “The Commissioner has carefully reviewed his position in relation to the opinion as to fraud or evasion. As a result of that review, the Commissioner will no longer contend that there has been fraud or evasion on the part of your client in respect of the issues identified in the objection decisions which are the subject of this proceeding”.

As Chris Jordan’s dramatic confession was read, the Federal Court fell silent. Douglass’s lawyers seemed stunned and Jordan’s legal team looked embarrassed.

Mr Justice Pagone promptly dismissed the case subject to costs.

Readers will remember that from time to time I have been writing about the anti-small business cultural problems deep within the tax office.

The commissioner, face-to-face, denied the ATO had a cultural problem and challenged me to come up with specific examples. Knowing Douglass and other cases were coming, I willingly accepted the tax commissioner’s challenge and subsequently wrote a series of commentaries showing the total injustice in the Douglass case and how it threatened Mum and Dad partnerships. (ATO attacks mum and dad partnerships, October 19 and Landmark case will reveal the extent of the ATO’s cultural problem, September 29).

Rod Douglass is one of the world’s greatest mining/port productivity experts with globally recognised talent. BHP’s Port Hedland operation was a mess and, as is industry practice, an army of contractors, each of whom brought their own IP and remedial skills, was assembled to help BHP out of the situation.

Given his expertise, Douglass helped co-ordinate their contracting knowledge. (BHP shareholders should be grateful)

In accordance with a clear tax ruling from former commissioner Michael Carmody and in line with industry practice, Douglass worked as a contractor in partnership with his wives (he married a second time). All his partnership income was faithfully and accurately reported. But the tax office (not Jordan) drummed up an unsigned opinion that fictitiously claimed that Douglass was guilty of tax evasion and fraud. The ATO, using this opinion, issued Douglass with a mammoth $500,000 assessment by going back 10 years and including penalties and interest.

The tax act allows the commissioner to go back only two or four years but in the case of Douglass, as the ATO officials claimed Douglass committed evasion and fraud they were then able to go back 10 years, with the aim of bankrupting the hero of Port Hedland.

As soon as I studied the case I could see the opinion was complete fiction unless the facts presented to me were wrong. Any other reasonable person would have come to the same view and so it was a perfect illustration of the ATO cultural problem.

I repeat that I fear the ATO may have bankrupted hundreds and possibly thousands of small businesses by issuing Douglass-style fictitious opinions. It looks like the taxation equivalent of what happened in the banks.

It’s important that Chris Jordan put all other matters aside and personally investigate every tax bankruptcy where the ‘fraud and evasion’ stunt was used. Most people don’t have the funds to fight.

In Roy Douglass ATO officials (not Jordan or his deputies) picked the wrong person and Douglass’s legal team are among the best tax lawyers in Australia. Douglass got to the courts by claiming that the ATO was acting unconstitutionally and in breach of the Judiciary Act 1903. In most other avenues the taxpayer would have been required to first pay the $500,000 to get to the courts.

Under the 1903 Judiciary Act, the commissioner must get judicial approval to go back so many years. Amazingly, despite all that happened in the court, the Commission’s legal people still claim the Douglass constitutional claim is “misconceived”.

Given the mistakes the ATO legal team made under Douglass, this is a very controversial view. But leaving aside the legalities, Australia and the Commissioner desperately need the protection of the 1903 act from Douglass-type events and to restore tax creditability.

If there is a legal problem with the 1903 act, it should be rectified by the 45th Parliament. But the Commissioner himself can solve it.

I believe that Jordan should now take the next step and tell his staff that in the future if they want to go beyond the two- and four-year limits they must get approval from the Federal Court.

This way we can stop ATO officials making up fictitious opinions as happened in Douglass. It would put real responsibility on tax officials to get yet right.

But the Douglass matter is not finished yet. The ATO still reckon he was an employee and want to amend his last two years of tax returns. (The bill has come down from $500,000 to $100,000).

It looks like another example of ATO legal fiction.

When Peter Costello defined what constituted a contractor and what constituted an employee he realised that if he was not very careful many of Australia’s barristers could become employees of their client.

Accordingly, he made sure that the legislation made it very clear that a person was a contractor if they were acting in a way that conforms to industry practice. Costello’s so called “barrister clauses” are even more powerful when it comes to engineers hired to improve productivity.

Chris Jordan needs to instruct his officials to read Peter Costello’s barrister clause and follow it in all such cases. It’s the law. Roy Douglass has a better case to be a contractor than any of the contractor tax barristers in ATO court cases.

But if Jordan still wants to proceed with this second leg of the Douglass case it will be the subject of an administrative appeals tribunal hearing next year.

If the tax commissioner goes ahead with the case and loses then I am afraid he will have to resign. But Jordan has the potential to be the nation’s greatest tax-reform asset.

Meanwhile, the Douglass case is not isolated and later this week or next week I will again take up the challenge Chris Jordan issued to me — the same combination of likely fiction and improper use of power emerges.

And, like Douglass, there is an easy solution to benefit the nation and the ATO.