The high cost of taking on the Tax Office

Updated

Fighting back against the mistakes of the Australian Taxation Office can destroy small businesses.

The Australian Taxation Office is making mistakes that can destroy small businesses and leave individuals financially and emotionally ravaged if they try to fight for a correct assessment, a major joint investigation by Four Corners and Fairfax has revealed.

With the burden of proof on the taxpayer to prove they are innocent, it can be an expensive and protracted battle for those willing to attempt to show the ATO it has made an error — and calls are growing for increased oversight of the tax office.

Evidence gathered from businesses, current and former ATO staff, lobby groups, lawyers and academics, and examined court records and freedom of information documents, indicates disturbing behaviour and practices by one of the most powerful institutions in the country.

Mark Freeman's tax troubles began in mid-2011 with a random ATO audit of Blackwater Treatment Systems, a company he set up on the New South Wales south coast to develop sewage recycling technology, turning it into reusable water.

"In dealing with the ATO I've never come across such a mongrel bunch of bastards in my entire life."

The company had won research and development grants from the Government's innovation arm, it was working in collaboration with the University of NSW and had third-party support from Standards Australia.

But the Australian Taxation Office decided Blackwater was not eligible for those grants and tax offsets and hit the business with a tax bill of about $250,000 in September 2013.

"During the audit, they wouldn't tell us what was going on. We were kept completely in the dark, despite repeated requests," Mr Freeman said. "It became difficult to progress the business and attract investors because of the stigma of the tax office auditing us.

"It was like a horror story."

He tried to appeal against the decision but the Tax Office rejected it.

In a mammoth seven-year battle, Mr Freeman alleges he has been subjected to "defective administration, predetermined outcomes, fabricated debts, denial of procedural fairness and targeted malice".

He said documents were lost or misplaced and key documents ignored by the ATO to build its case.

Mr Freeman is one of thousands of small businesses that take on the ATO and lodge objections to a tax audit each year.

Many more roll over and pay the debt even if they think the ATO made a mistake. Last year the ATO amended the tax assessments of 253,000 taxpayers, including individuals and businesses.

Out of those, fewer than 25,000 appealed. Of those, 456 kept going and took legal action.

Some businesses collapse after the ATO comes knocking. In 2017, the ATO wound up or bankrupted 37 businesses a week.

"They [taxpayers] say, 'Taking on the ATO is just too difficult. It'll cost us too much. We'll end up with a black mark beside our name. We'll just pay it. We think it's wrong, but we'll just pay that,'" said Small Business and Family Enterprise Ombudsman Kate Carnell [pictured].

There is growing unease that the ATO sometimes does not play fair, and calls are getting louder for the oversight body, the Inspector General of Taxation (IGT), to get more resources and power to do the job properly.

Ms Carnell believes the IGT's powers should be looked at, so it has greater ability to assist vulnerable taxpayers.

"Not much point in having an independent entity if it doesn't have the powers or the capacity or the size to actually deal with the issues that we're talking about … if you're going to have an independent entity, it's got to have teeth, and it's got to have size," she said.

However the ATO's Deputy Commissioner for Small Business, Deborah Jenkins [pictured below], believes the ATO has more than enough oversight.

"I don't believe the Tax Office needs any more oversight — we have a number of people looking at everything that we do and I'm confident that at the moment, at the present time, we have sufficient oversight," she said.

"… We've got various [parliamentary] committees, we've got the Inspector General, and there's a whole other range of people who are doing various reviews."

Ms Jenkins declined to discuss individual cases but rejected negative commentary about the ATO or that there was an image problem.

"People talk to me very, very positively about the work that they're doing with the ATO. I work very closely with a number of small businesses in the community, industry associations, and they are very positive about the changes they've seen within the ATO," she said.

"I think they all accept that we are going to make mistakes, but the mark of us is going to be how we deal with those mistakes and how we learn from those mistakes."

There are also questions being asked about how the ATO handles disputes when it has made the mistake.

Ms Carnell told Four Corners and Fairfax that the compensation process was slow, opaque and inadequate.

Last year the ATO paid just over $800,000 in compensation payouts, equivalent to a median of about $500 and average of about $8,000.

"For the ATO to determine what compensation they should get seems a bit … maybe not totally a level playing field," she said.

There are two ways of seeking compensation. First, the scheme for Compensation for Detriment caused by Defective Administration (the CDDA Scheme), which is used for government agencies. Second, the court system.

But payments under CDDA are discretionary; there is no automatic entitlement to a payment. The ATO decides if you get compensated and how much.

Mr Freeman estimates the fight with the ATO has cost him $750,000, excluding the endless hours he has spent collecting information to prove his innocence. His office, a room in a house he rents in Ulladulla, is jam-packed with boxes of paperwork on tax-related matters.

"It's like having two jobs, running the business and fighting the ATO," he said.

On November 23, 2015, the ATO admitted it had made "errors" and completely wiped the debt it said Mr Freeman owed.

He received a letter from the office of the Minister for Small Business, Kelly O'Dwyer, saying: "The Commissioner of Taxation has advised that errors identified during the audit process have been dealt with following your objection application. The Commissioner apologises for any stress or inconvenience these errors have caused."

In October 2016, the ATO offered him $1,500 in compensation, a long way from the $750,000 he estimates he has lost.

He appealed, and six months later the offer was bumped up to $11,500 — still well below his estimated costs.

Mr Freeman is not backing down.

"In the beginning people would say, 'Pay them. You'll never win'.

"But we did win. We got an apology and we beat them on the debt. Now we're fighting for proper compensation."

Watch "Mongrel bunch of bastards", the Four Corners/Fairfax investigation into the Australian Taxation Office, on Monday at 8.30pm.

Credits

Reporting: Adele Ferguson

Design: Alex Palmer and Peta Bormann

Digital production: Stephen Hutcheon and Brigid Andersen

Photography: Mathew Marsic

Topics: government-and-politics, tax, business-economics-and-finance, small-business, australia

First posted