ATO ramps up its aggressive campaign against small and family businesses
It’s not extreme to say that the Australian Taxation Office is conducting a brazen financial bombing campaign against small and family businesses across Australia.
Last week we informed you about the ATO’s taking a position where, at law and in its administration, it can (and is) creating and imposing tax debts where the taxpayer has not received any income. It’s gobsmacking but the High Court has said that this is ‘legal’ even though it also remarked that it’s clearly unfair. This is happening with family businesses using trusts—but watch the ATO expand this agenda.
Now we have more news of the ATO’s small business destruction campaign. In February the ATO released draft rulings that would declare family trust payments to adults to be illegal. What? This throws out decades of accepted, legal, small/family business income distributions. It would be like declaring that dividends from public companies (eg Telstra, BHP, CBA) were illegal. But more! Such declarations were to be backdated to 2015. So distributions that were legal over the last eight years could now be declared illegal. This is small/family business-hating, ATO madness.
Then last week, just before the election was called, the government and the ATO issued a ‘sort of‘ backdown. Well, not really. The statement says they’ll still deny distributions but will not apply them retrospectively. In other words, the attack continues but not as bad ‘sort of’!
There’s more for us to report on this intensifying ATO small/family business tax ‘bombing’ campaign. More pressing at the moment, however, is the need for solutions to fix this destructive ATO behaviour.
Jason Falinski MP has been the greatest friend of small business in the Australian Parliament over the last few years. He’s been doing real stuff. Not simply talking.
Jason chairs the parliamentary committee that keeps watch on the ATO. He’s guided and pushed the review that’s come up with some common-sense, balanced ATO reform recommendations. At the heart of these is a legislated ‘Taxpayer Rights’ Act. We reported on this in October last year.
Taxpayer Rights would:
- Ensure that the ATO could not collect a debt until all appeals have been finalised.
- Reverse the onus of proof of fraud or evasion so that it lies with the ATO.
- Establish the office of Taxpayer Advocate to ensure that the ATO complied with the Taxpayer Rights Act.
The ‘Falinski’ Report is a huge step forward for Australian small and family businesses in particular.
As we’re now in the full-blown election campaign period, we need to know from both Scott Morrison and Anthony Albanese where they stand on Taxpayer Rights. Frankly, it’s the critical issue for Australian small and family businesses.
If Scott Morrison and Anthony Albanese both remain silent on this issue, it really means that they both endorse the current anti-small business behaviour of the ATO.
Government gets massive tax windfall from Australians who have received no income
How would you like to be forced to pay tax when you have received no income? That’s what’s happening to a taxpayer following a High Court ruling this week. And it’s happened because the Australian Taxation Office has the legal power to act like a ‘Mongrel Bunch of Bastards’—something it’s rather good at.
The case involves a legal interpretation of an obscure 1936 tax law affecting trusts. You might think that trusts are only used by wealthy people. But no! There are 900,000 trusts in Australia, used mostly by small/medium-sized family businesses.
In this particular case, the ATO ‘formed an opinion’ that a medium-sized family business made a (theoretical) profit in 2014. It’s a ‘theoretical’ profit because the ATO decided to ignore the business’s expenses in its assessment. That’s exhibit number 1 of ATO bastardry.
Because the business didn’t make any profit, the father who ran the business didn’t distribute any money to his daughter who was a ‘beneficiary’ of the business’s trust. Sounds sensible! And the ATO accepts that no money went to the daughter. But the ATO decided that it would test the 1936 law in the High Court. (Bastardry exhibit number 2.)
On the strict wording of this obscure tax clause the High Court has ruled that, with trusts, tax must be paid even if no ‘profit’ is distributed. It’s a blatantly unfair situation.
But there’s a further stinger not covered in this High Court decision. That is, that under the general powers of the ATO, the ATO only has to ‘form an opinion’ of a profit having been made for it to become a legal ‘profit’ and hence creating a tax debt. And the debt must be paid immediately. Unfair! Unfair! Unfair!
The High Court’s job, however, is not to decide public (tax) policy but to rule on the meaning of the law. But in this case the Court nonetheless recognized the unfairness, saying that:
“That unfairness arises because Div6, and s97(1) in particular, is drafted to tax a beneficiary by reference to present entitlement, not receipt.”
Here’s the High Court’s ruling—see paragraph 26 (we’ve highlighted it.)
The ramifications of this ATO behaviour are massive. 900,000 people/businesses with trusts will now never know if the ATO will ‘form an opinion’ that they have made a profit and create from thin air a tax debt that it can enforce.
But how many other obscure tax clauses exist that the ATO might use to impose a tax debt where no income has been received? We are all at risk from this ‘bastard’ ATO.
So who’s to blame for this mess? Doyen business commentator Robert Gottliebsen has said of this case in The Australian that, “Many tell me that the tax commissioner is ‘out of control’. I think the truth is different—the commissioner is ‘not in control’”.
Frankly, this is a terrible way to run a country. For more than a decade we (Self-Employed Australia) have been exposing ATO bastardry and calling for a fix. In early 2020 we offered a specific and detailed fix based on the rules the United States uses to control its tax authority (the IRS). What has the Morrison government done in response? Nothing that has made any difference. They have merely fiddled, while seemingly pretending to do something.
This recent act of ATO bastardry takes the unfairness of this fouled-up tax administration system to a new low. It could have been stopped with a decent government having rules to control the ATO (like the USA) instead of the ATO ruling over the government.
We’ll have more to say on this!
Former ATO boss Michael Cranston misused power to benefit his son, Sydney court hears
A Sydney court has heard that a former Australian Tax Office deputy commissioner misused his position to influence a colleague in order to benefit his son.
- Michael Cranston is accused of having a "clear" conflict of interest
- The Crown alleges he used his influence to get ATO staff to undertake tasks at his son's request
- His lawyer said he was trying to avoid bad publicity for the ATO
Former deputy tax commissioner Michael Cranston has been accused of trying to set up a meeting between the ATO and payroll company Plutus, which was facing a bill of up to $40 million in taxes and other charges.
Mr Cranston's son, Adam Cranston, was associated with Plutus which handled services such as pay and superannuation for government departments and businesses.
The Crown said that between April and May of 2017, Mr Cranston told an employee to contact the audit team handling the Plutus matter, following a request for assistance from his son.
A tax office investigator who handled the secret audit of Plutus told the court she received a letter from the employee inquiring about the case and "it brought a number of concerns" which she then discussed with her supervisors.
Mr Cranston's lawyer, David Staehli SC, argued his client had a right to enquire as the letter containing the Plutus tax assessment actually had Mr Cranston's electronic signature on it.
Shortly after the letter was sent, the ATO obtained a garnishee order effectively freezing a Plutus bank account and preventing it from paying contractors and conducting business.
Mr Staehli said contractors then started talking to the media.
"There was significant publicity at the time, there were a whole lot of contractors who hadn't been paid," he said.
He said the ATO was going through big changes about how it dealt with clients.
Mr Cranston then tried to have a meeting organised between ATO officials and Plutus.
"[Mr Cranston] was trying to make sure the tax office didn't get this type of publicity, where it was seen to have misused its powers."
Colleague asked to search son's business associate
Mr Cranston has also pleaded not guilty to a charge of using his position to dishonestly obtain information to benefit his son between January and February of 2017.
In opening statements for the Crown, Peter Neil SC said Mr Cranston had a clear conflict of interest.
The Crown alleged Adam Cranston asked his father to find out if the ATO was auditing a business associate named Simon Anquetil.
It said Mr Cranston got a subordinate to try to search confidential tax office records but found out the matter was "restricted".
Mr Neil said Mr Cranston conveyed the information to his son, putting his son in a position to "tip off" Mr Anquetil.
"[He had a] clear conflict of interest as a deputy commissioner of taxation who was involved in investigating major suspected tax abusers threatening large amounts of money … some may in fact be criminal at a high level.
"He should have recused himself immediately and denied the request."
Mr Neil added that the accused also had a duty to report his son's request to the ATO.
The trial before a jury in the Sydney District Court continues.
Michael Cranston acquittal: AFP loses its $26 million scalp
"I'm so happy mate," an emotional Michael Cranston told AFR Weekend on Friday morning immediately after a Sydney District Court jury found the former deputy tax commissioner not guilty of two counts of dishonestly misusing his position to benefit his son Adam.
"I've spent 40 years working in the Tax Office, and all that time I was trying to do my job and serve my country," he said as his wife wept beside him outside the courtroom. "At least the justice system's given the right outcome.
"I couldn't believe I was charged. I always knew I was doing the right thing."
The collapse of the case against Cranston raises questions about Operation Elbrus, the Australian Federal Police investigation into whether Cranston had any direct involvement in an alleged tax fraud that involved Adam Cranston's company Plutus Payroll.
In January 2017, investigators allowed the alleged tax fraud to continue for four months, even though they had already obtained the wiretap evidence they would later use to shut the operation down.
Court documents show another $26 million of tax payments was diverted by the alleged conspiracy in those four months.
While the AFP says it needed more time to finalise the case, Michael Cranston was always the prime target of Operation Elbrus, from the time it was set up in August 2016.
In the period from January to May 2017, while the scheme was still running – and costing taxpayers $2 million a week in lost taxes – the AFP was seeking evidence to incriminate Cranston.
AFP executed search warrants
When Operation Elbrus closed down the alleged scam with a massive series of raids on May 17, 2017, the AFP executed search warrants and asset seizures obtained the day before. These stated Cranston was a close associate of the conspirators and had acted as part of the conspiracy to defraud.
But when AFP Deputy Commissioner Leanne Close announced the raids at a press conference on May 18 she said: "Michael Cranston is not being considered for conspiracy to defraud the Commonwealth . . . We don't believe that at this point he had any knowledge of the actual conspiracy and the defrauding."
The massive media coverage triggered by the media conference had a devastating effect on Tax Office morale, with Commissioner Chris Jordan forced to defend his Reinvention of the ATO program that promoted more engagement with taxpayers.
In addition to the AFP's public statements, the media coverage was fuelled by a series of leaked prosecution documents that contained explosive quotes of Michael Cranston speaking to his son, without context. It now appears the AFP misunderstood some of the transcripts involving the then deputy commissioner.
Cranston resigned after he was put on leave without pay. It's estimated his legal bill exceeds $500,000.
"I never really did anything [for Adam]," Cranston told AFR Weekend. "I declared my conflict. I said, 'I can't get involved'. My son's a taxpayer like anybody else. I didn't know what he was up to."
He added: "I love my children, I always will."
While the jury was only told of the matters relating to the two charges against Cranston, a broader picture has emerged of how Operation Elbrus investigators tried to build their case against him.
He was the big prize
Starting in August 2016, Elbrus had focused on Plutus Payroll Australia, which investigators allege diverted tax payments from the payroll services the company offered to third-party companies and some government departments.
By January 2017, telephone intercepts had uncovered the alleged scam. But there was no sign Michael Cranston had any knowledge of what was going on. The AFP had got wind of rumours swirling in criminal circles that Cranston was involved in the fraud. He was the big prize they were chasing, but it turns out the rumours were wrong.
At the end of January the Elbrus team, which by now included ATO auditors operating out of Townsville, froze a number of bank accounts, as a test.
The AFP telephone taps would allow them to see how the Plutus operatives responded: if Adam would contact his father.
Michael Cranston knew nothing of this. The nightmare that would engulf him began with what looked like a Tax Office blunder.
In the last weekend of January, Adam visited him and said his associate Simon Anquetil had a tax problem.
He showed his father a letter the ATO had sent to Anquetil on January 24, under Michael Cranston's signature.
The letter said that a tax audit had found a $75,000 payment into Anquetil's bank account and the ATO concluded this was a consultancy fee. But if this was undeclared income, it was also eligible for GST, and Anquetil had not filed a Business Activity Statement.
The auditor had charged Anquetil $139,850 for unpaid tax plus penalties, plus $122,939 for failing to file BAS statements – and then slapped a garnishee order on Anquetil's bank account to seize the money, all without notifying Anquetil.
But the $75,000 this was all based upon had been part of the purchase price for selling Plutus to Adam's company Synep, Adam told his father. So it wasn't taxable income, nor was there any need for GST or BAS statements.
Adam said Anquetil wanted the name of someone at the Tax Office he could talk to, to explain this, according to his father.
Michael Cranston testified that he thought the Tax Office's treatment had been harsh, and that it was his job as the ATO's head of serious non-compliance to rein in tax officers who had been too aggressive.
Son told Anquetil file was 'protected'
He subsequently asked Assistant Commissioner Scott Burrows to access the relevant Tax Office file, after mentioning his son's association with Anquetil, but Burrows found the file was blocked.
The first of the charges Cranston faced, that he used information obtained as a public officer "with the intention of dishonestly obtaining a benefit" for Adam, related not to the inquiry he had made, but to what he then told his son.
Cranston told Adam that the Anquetil file was "protected" by a "secret number", and that the audit was probably in the serious crime division of the ATO.
But what Cranston told his son wasn't true.There was no secret number, and the serious crime division was not involved, the court heard.
Cranston said he misled his son because he wanted to warn him to distance himself from some of his associates.
Adam had told him a story that a former associate, Peter Larcombe, had embezzled money from the Plutus companies.
Michael told Adam the Tax Office was probably using data matching to trace networks of people linked to Larcombe. Other accountants testified that the ATO had widely publicised such information.
The Elbrus investigators, however, saw it in simpler terms. By the first week of February they had the intercepts that would be used to charge Michael Cranston. But the evidence seemed equivocal. They let the Plutus operation keep going.
The alleged Plutus conspirators regrouped and set up new straw companies. The tax fraud was a $2 million-a-week drain in lost taxes.
It wasn't until Friday, April 28 – 13 weeks and $26 million later – that the final phase began and the money tap was turned off.
Late on that Friday afternoon an ATO officer in Townsville working with Elbrus slapped $46.6 million in tax assessments on Plutus and froze its accounts, leaving 2000 employees and contractors without wages.
For AFP, a critical conversation
Adam Cranston called his father that afternoon from the offices of Plutus' tax lawyer, Dev Menon, but Michael was about to get on a plane. He told his son, "We'll have to work out a strategy," about whether Adam should contest the assessment, negotiate with the ATO, or "walk away from the bloody thing".
"You just make sure you haven't got anything in anywhere – you could be subject to search warrants," he told Adam.
For the AFP officers listening in, this was a critical conversation. They thought they had him, but there was no elation. "There was not a single high-five in the room" when they heard this, AFP state manager Chris Sheehan later told the Daily Telegraph.
"Michael had been hovering about the edge of our investigation but it was sad that his judgment went that way," Mr Sheehan said.
"It gave us certainty about his position going forward but it was really quite deflating. We're all parents, we all think our children are amazing but parents can be blind."
But as it turned out, the way forward was not as simple as the AFP thought it would be. Despite the line about working out a strategy, Michael Cranston made no attempt to contact his son Adam over the weekend.
On Monday, May 1, Michael was ill but still fielded calls from Adam and then Menon, who told him 2000 contractors' wages had been frozen and that they were making complaints to the media about the ATO.
They asked him for the name of someone at the AFP they could speak to on Monday, because the Townsville auditor was unavailable on a public holiday.
Irate contractors caught up in AFP trap
It's not clear whether the Elbrus team timed their move to use the public holiday to increase pressure on the Plutus principals.
In any case, the irate contractors had unknowingly become part of the AFP operation to trap the deputy commissioner.
Michael Cranston called assistant commissioner Tony Poulakis, told him of his son's link to Plutus and said he was concerned about possible adverse media about the unpaid contractors. He asked Poulakis to have someone call Plutus because of the holiday in Queensland.
Poulakis called Menon, the Plutus lawyer, and advised him to stall any media coverage for a day. He emailed the Townsville officer about what he had done and took no further action.
Cranston "asked Mr Poulakis to do something which ordinarily would have happened the next day . . . because of the public holiday", Cranston's defence counsel, David Staehli told the jury.
"The whole case is less than a storm in a tea cup. It's a nothing in the context of Tax Office affairs. The whole thing is blowing in the wind, we say, and the door should have been slammed on it."