A recent decision by the Administrative Appeals Tribunal to disallow the release of tax debts of nearly $1.2 million owed by a surgical registrar is a timely reminder of the importance of properly managing your tax affairs. This is particularly relevant for medical professionals who earn their income through an ABN, where no tax is withheld at the time of earning.
During the period from 2004 to 2016, the registrar received income as both an employee and a sole trader using an Australian Business Number (ABN). Having moved from the United Kingdom with his wife (also a doctor), he found that managing his tax returns was complicated. He didn’t understand the Australian tax system and was also unfamiliar with the patient billing system in Australia. The registrar therefore started to use a billing service to assist with invoicing and collecting his income from health funds. He did not keep any records of the work he did outside of sending information to the billing company which rendered invoices for him. In addition he did not budget or put aside a portion of his income for tax payments.
Due to his demanding job and personal responsibilities, he had little time to manage his tax affairs. He consistently failed to lodge his tax returns on time and only lodged returns for the 2014-2017 income years after the Australian Taxation Office (ATO) raised a default assessment against him. His tax debt was largely comprised of $520,310 in Pay As You Go (PAYG) instalments, $443,909 in income tax, and $233,570 in General Interest Charges (GIC).
The registrar applied to be released from the tax liability, claiming that it would cause him to suffer serious financial hardship if enforced. Ultimately, the tribunal agreed with the ATO and assessed that he had not met the serious hardship test and upheld the decision to not release him from the debt. The Federal Court also upheld this decision after an appeal was lodged by the surgeon.
When will ATO consider a release of debt for serious financial hardship?
The ATO had previously issued a Practice Statement which provides guidance in relation to making decisions involving serious financial hardship. In particular, they will look at:
- Income/outgoings test: to assess a taxpayer’s capacity to meet their tax liability, taking into account household income and expenditure;
- Assets/liabilities test: to assess whether a taxpayer can access equity in assets in order to meet their tax liability; and
- Other relevant factors: including whether serious hardship is likely to be only short term, whether the taxpayer has a poor compliance history; whether the taxpayer is unable to show they have planned for future tax debts; whether the taxpayer has paid other debts in preference to their tax debt and whether the taxpayer has disposed of income or assets without considering their tax liability.
The registrar failed to meet the tests as it was held that he would not experience serious financial hardship. In particular, the tribunal noted that the debt had built up over a number of years and would have been more easily managed if the taxpayer had stayed up to date with their tax affairs. Additionally, the tribunal ruled that there were a range of viable options available to the registrar and his family to reduce their expenditure. In particular, the tribunal noted rent and school fees could be reduced whilst maintaining a reasonable standard of living.
What does this mean for me?
While this case may be an extreme example, it serves as a helpful reminder for medical professionals in relation to:
- Staying up to date on your tax responsibilities – the registrar’s poor compliance history was a factor in the decision not to grant a release from tax liabilities. We have also seen a poor compliance history impact the granting of payment arrangements.
- Saving for tax – there is no tax withheld on income earned using an ABN. The tax is paid when the income tax return is lodged, or by way of quarterly PAYG instalments. Both the ATO and the tribunal expect business operators to make a provision for their upcoming tax liabilities. Although the tax system is ever changing, the ATO will not accept ignorance as an excuse.
- Budgeting – as above, taxpayers in business are expected to budget for their tax liabilities. Additionally, the ATO and tribunal were particularly critical of expenses the registrar paid which are not “considered necessities according to normal community standards”. Therefore, it is important to have a budget for tax liabilities as well as everyday household expenditure.