ATO still plays unfair legal games against small business

The Australian, September 20, 2017, Robert Gottliebsen

It looks like the officials in the Australian Tax Office have learned little in the last 10 months and are still thirsting to play unfair legal games against small business.

Almost 10 months ago I thought we might see a better and fairer tax office because I had sat in the Federal Court in Sydney and watched lawyers for Australia’s Commissioner of Taxation, Chris Jordan, admitting he had made an unprecedented and humiliating error.

Normally people learn from their mistakes. But, from what I can see, not this time.

Readers will remember I had closely followed the case of the hero of Port Hedland, Rod Douglass, who had spearheaded the increased productivity in the port (and delivered the ATO big sums in extra profits tax revenue from BHP), being accused of fraud and tax evasion because he used partnership structures to provide his services to the port. Jordan and his henchmen went back some 10 years and falsely claimed penalties interest etc over that period.

Fast forward 10 months from that tax backdown. I have not followed the later developments in the same detail but the Commissioner decided again to prosecute Douglass for breaches of the personal services act, although this time not for 10 years but for around two years.

Douglass has already been well and truly financially destroyed by the ATO and now lives in Columbia but the legal team defended the second case. I must confess I have not studied the second case developments in the same way as the first one so this time around I am relying on Self Employed Australia’s material. I stepped back because it seemed a fairly straightforward test case: Was Douglass in breach of the personal services legislation and should he have been an employee? In straight forward cases like this the tax office is required to be a model litigant and, given the earlier back down, that’s what I expected. I was wrong.

The case, while simple, was important. The Parliament has set out a series of clear rules as to when a person is self-employed. They include an apparently unambiguous overriding clause which states: For the purposes of paragraph (1)(a), (b) or (c) or (3)(a), (b) or (c), regard is to be had to whether it is the custom or practice, when work of the kind in question is performed by an entity other than an employee.

So the Douglass legal team presented to the court a series of examples, which showed that it was custom and practice for contractors performing these sort of tasks to be organised as businesses/partnerships because they were not employees. And my earlier work certainly confirmed this.

But nevertheless Chris Jordan and his people were perfectly entitled to bring foreword a series of “custom or practice “ situations in the industry to muster an opposing case. The court would then make a decision. And if Jordan had acted as a model litigant, as he is required to do, then he would have no argument from me although I would have thought after the backdown there would be better situations to run a test case.

But instead his people played legal games. Apparently for Douglass’s people to get the Commissioner’s “industry and practice” papers they had to nominate the documents but could not nominate them because they didn’t know what documents to ask for. There are apparently a multitude of legal precedents that enable such games but they should not be played by Jordan’s people because of his model litigant obligations.

The whole matter also came before the Inspector-General of Taxation where the Commissioner’s people revealed that the real truth was that they did not have any “custom or practice” papers in that industry. In other words they ran a test case without key evidence and hid behind a legal smokescreen. I can’t believe it but Self Employed Australia assures me that is true.

It would seem that the ATO does not usually face the need to have “custom or practice” material because small enterprises do not have the resources to take the commissioner to court. This underlines the basic unfairness of the system

My whole argument has been that Australia, as a society where small entrepreneurs are going to be more and more important in creating employment must have a low cost independent body or mechanism that enables small enterprises to have their tax disputes judged. Currently the ATO knows that if they play legal games in most cases small business cant afford the defence.

I am afraid we keep seeing example after example where the tax office culture that led to the Cranston affair goes very deep. But an independent low cost appeal process for small business can reverse it.

Large enterprises have the resources to use the courts and Chris Jordan has been brilliant in his prosecutions in this area. The government has taken a series of steps that are pro-small business but they are all of no account until this is fixed.