The woman was a self-employed tradesperson in her late 50’s. She had always lodged her income tax returns and her quarterly business activity statements and income activity statements. She had always paid superannuation contribution for her employees. She had always paid all of her taxes on time. She was, throughout her working life, the epitome of a compliant taxpayer – except for the last 8 years.
She had been charged by the ATO with failing to lodge 8 years’ worth of tax returns and business statements. She had, of course, paid no tax or GST over those 8 years. These are serious offences carrying potentially very heavy penalties, including imprisonment.
As far as the ATO is concerned, there was simply no excuse. The woman had clearly chosen to disregard entirely her tax responsibilities and it was appropriate that the Magistrate throw the book at her – which meant a conviction, or convictions (depending upon whether the offences were treated globally as one offence for the purpose of conviction and sentencing), heavy fine and, potentially, imprisonment.
Imprisonment is intended to be a last resort. However, if a Magistrate concludes that a taxpayer is a serial offender, and that there is no appropriate penalty in the case other than a term of imprisonment, that will be the outcome.
I have dealt with many cases of individuals and their companies charged with non-compliance with tax lodgment and payment. Is it always as simple as the bare facts set out by the prosecutor suggests? In many cases, the answer is no. It can be far from that simple.
The obvious question is: what has happened to turn an otherwise exemplary taxpayer into a serial non-complier? The answer, I have learnt, often lies in at least one, and often a combination, of the following:
- Psychological trauma or the emergence of a long-standing and debilitating underlying psychological problem, e.g. depression. Rational behaviour can go out the window and procrastination over compliance obligations can become overwhelming.
- The impact of complex family relationship issues – sometimes festering for a long time and then finally erupting very disruptively can be causative of depression and its consequences – see above.
- Overwhelming financial problems – sometimes developing suddenly, such as the impact of a building sector collapse, or the immediate effect of longstanding problems that have reached a culmination: can generate compliance procrastination so that presently unpayable tax debt is not created.
Usually, the identification of these true causes of the events of non-compliance will provide no defence to the charges but it is extremely important that the Magistrate be fully informed as to these issues and how they have caused or contributed to the non-compliance: because these are matters to be taken into account as “mitigating” i.e. lessening, culpability for the offence and to therefore be taken into consideration in deciding what, in all the circumstances, is the appropriate penalty.
Obviously, in most cases the defendant taxpayer will be ill-equipped to be able to adequately explain to the Magistrate what has actually happened to them to cause them to fail to comply with their obligations under the tax laws. In many cases, the defendant will not be capable of identifying / recognising what has truly gone on in their lives to cause them to be in the position that they find themselves. Expert evidence may be required such as from an accountant and psychologist. Statements from other witnesses may be necessary.
The problem, of course, is that the work to be done to identify and describe the full story and present all the necessary evidence to the Magistrate can often be a very time consuming and expensive exercise. Unfortunately for many taxpayers caught in a tax debt spiral it may be impossible to find the money to spend on all the detailed work that might be required in order to be able to present a comprehensive and corroborated explanation to the Magistrate. However, whatever can be done, should be done. The Magistrate should be informed of all circumstances relevant to his / her consideration of the appropriate sentence. If there is in fact a defence to the charges, that evidence should obviously be presented too.
In this case the Court permitted an adjournment for long enough to get an expert (psychologist) report, determine all of the other contributing causes of the non-compliant behaviour, get all of the outstanding returns lodged and a payment plan put in place with the ATO and prepare detailed submissions to the Magistrate in mitigation of penalty. The outcome: a fine towards the lower end of the normal range and no imprisonment.
- Don’t bury your head in the sand – get legal representation / advice.
- If you have returns outstanding, do everything you possibly can to get them prepared and lodged ASAP and certainly before appearing before the Magistrate for sentencing.
- If there is tax outstanding, then if it can conceivably be paid, pay it ASAP or enter into a payment plan with the ATO – again, before you appear for sentencing.
- Don’t be ashamed to tell the full story to your lawyer and permit your lawyer to provide that information to the Court. It can have a dramatic impact on the outcome.
- If you are ordered by the Court to lodge outstanding tax returns, do it. Failure to comply with a Court order to lodge is even more serious than failure to comply with your obligations under the Tax Acts and Regulations to lodge returns.
- Take the situation seriously: the tax laws can have very harsh consequences for non-compliance.