THE Australian Taxation Office has long been the elephant in the room when it comes to business, investment, superannuation and financial matters. What is often not appreciated is how much the ATO uses its weight and size advantage to squash taxpayers into submission in its pursuit of maximising tax collections.
The ATO achieves this in two ways. The difference between the two methods primarily comes from when the ATO employs them. Under the first method tax assessments are issued based on the ATO's interpretation of the law and either result in tax deductions being disallowed, amounts received being classed as taxable income, or applying a higher tax rate.
An example of this last method was when the ATO during the 1980s charged taxpayers that had lost their jobs an extra tax on lump sum termination payments received. In this example the ATO, despite a great deal of evidence to show its interpretation was incorrect, was forced into doing the right thing by the passing of amending legislation. The second method is far more effective as it involves the ATO issuing rulings and guidelines that affect decisions made and actions taken by taxpayers. This is done by the ATO issuing statements, meant to help taxpayers understand certain aspects of the law, which are not backed by either case law or legislation.
These rulings place an interpretation that maximises tax revenue collection. By issuing these rulings the ATO uses its size, and the genuine fear of taxpayers and professionals of being dragged into a protracted dispute, to effectively rewrite tax legislation and reinterpret tax cases.
A recent example of how the ATO uses both of these methods relates to the taxation of family discretionary trust income. In March 2010 the High Court handed down a decision in favour of a taxpayer in a dispute with the Tax Office that has become known as the Bamford case.
The case revolved around a discretionary trust's ability to distribute different types of income, such as capital gains and franked dividends, to different beneficiaries in set amounts. The ATO had issued an assessment based on its interpretation that was challenged by the taxpayer.
The High Court ruled in favour of the taxpayer. At the heart of the judgment, the High Court decided that what a trust could do was decided more by trust law and the deed setting up a trust, and not by the ATO trying to place a self-serving interpretation on tax law. The judgment in this case also led to amending legislation that also forced the ATO into applying the decision of the court to all trusts.
In response to the court case in the new legislation the ATO recently issued an income tax ruling. The ruling is again placing an interpretation on tax law designed to force trustees and professionals into acting in a way that again potentially maximises tax revenue collections.
Allan Swan, a tax law specialist with Moores Legal, said: "The ruling has stretched beyond recognition the High Court's view of what constitutes trust income for a family trust or a deceased estate. There is no mention in the Bamford decision that the definition of trust income cannot be set to match the income tax definition."
With recent comments from the left wing of the Labor Party and the increasingly pugnacious attitude of the ATO towards trusts, trustees have two options. The first is to sit back and cop whatever comes their way. The second is to voice their objection and communicate this to their member of Parliament.