Retired small business owners granted more than $85,000 tax relief in dispute with the ATO

small business tax

The Administrative Appeals Tribunal (AAT) has overturned the Australian Taxation Office’s (ATO) decision to pursue $106,576 in tax debts from the former owners of a family freight and transport business. 

Garry and Glenda Smith, a married couple in their 70s, operated a small interstate transport and freight business in Benalla, Victoria prior to their retirement.

Eight years ago, the business faced a series of challenging events after a large contractor went into voluntary administration while owing the business approximately $80,000. The couple wasn’t able to recover any money from the contractor, as the contractor was liquidated and their business wasn’t secured as a creditor.

Between 2016 and 2018, the couple’s business received two notices of assessment from the ATO, which set out their tax liability in income years 2015, 2016 and 2017.

The couple responded by lodging three appeals to the ATO to have their tax debts reconsidered. However, the ATO refused all of these requests.

In February 2019, the couple applied for the AAT to review the ATO’s decisions. At the time of the AAT hearing in Melbourne in May, the ATO confirmed that the total outstanding tax debt was $106,577.

The AAT had to decide whether the couple’s tax debt fell within the taxation liabilities of section 340-5 of Schedule 1 to the Taxation Administration Act 1953 (“TAA”). This section gives the ATO a discretionary power to release a taxpayer from certain taxation liabilities, if it is satisfied that the taxpayer would suffer serious hardship if required to pay out their debts.

The ATO has developed guidelines that set out tests for determining when to exercise the discretion. For example, the ATO is required to consider whether a taxpayer has unreasonably acquired assets ahead of paying their tax, or has a poor compliance history.

The AAT heard that several adverse events caused serious cash flow pressures for the business, which ultimately led the couple to put the business on the market.

After trying to sell the business for a number of years, the couple sold the business in May 2017, leaving them with approximately $70,385 of net proceeds. 

The couple told the Tribunal that during this period they felt significant personal pressure to pay debts owed to people they had long-standing business relationships with, including paying superannuation and leave entitlements owed to an employee.

The Tribunal heard of the couple’s financial circumstances, including the value of their assets such as property and superannuation.

The ATO argued that its discretion to waive the couple’s debt should not be exercised because the couple failed to meet their tax obligations by lodging late returns on multiple occasions.

The ATO also contended that the couple had realised assets, including their house, business and a boat, and paid out creditors and an employee in priority to meeting their tax obligations.

For these reasons, the ATO said that there was no justification for treating the couple differently to other taxpayers, who are required to meet their tax obligations.

Ultimately, the Tribunal found the couple’s evidence to be “consistent, frank, truthful and compelling”.

“There is no doubt in the mind of the Tribunal that the applicants are very decent, hard-working people,” the AAT said in its decision.

Satisfied that the couple could contribute $21,000 to pay down their debts without incurring serious hardship in the future, the Tribunal overturned the ATO’s decision.

The couple’s tax debt for the 2015, 2016 and 2017 income years was reduced to a total amount of $21,000, or $10,500 each.

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