Administrative overpayments – the Commissioner of Taxation is not empowered under s8AAZN to recover tax refunds from registered tax agents

By Richard Ung, VanderFox Lawyers and Stratos Lawyers Principal Director and Ian Young, Barrister.  Acknowledgments to John Glover, FTI, Barrister[1]

On 7 March 2022, the authors were successful in obtaining an order for 50% of the applicant’s costs against the Commissioner of Taxation (“ATO”) in connection with the voluntary withdrawal of defective notices purportedly issued pursuant to s 8AAZN of the Taxation Administration Act 1953 (TAA) to a registered tax agent in respect of certain tax refunds paid to the agent’s trust account.  The decision on costs is reported in Sibai v Deputy Commissioner of Taxation [2022] FCA 1306 (Sibai).

Relevantly, the ATO’s conduct in unilaterally withdrawing the s8AAZN notices in the week after the applicant commenced proceedings in the Sibai litigation is consistent with the conclusion of the litigation in the matters of MWB Accountants[2] and Auctus Resources[3].

Despite the ATO’s capitulation in  the MWB Accountants litigation by filing a notice of discontinuance of its appeal, the interim decision impact statement for the MWB Accountants decision of Judge Marks issued 22 April 2020 is yet to be finalised to reflect both the discontinuance of the MWB Accountants appeal or the administration of taxation law with regards to defective s 8AAZN notices issued to registered tax agents as evidenced in the Sibai litigation.

Additionally, the ATO has not seen fit to withdraw or otherwise amend PS LA 2011/5 Recovery of administrative overpayments and PS LA 2008/11 Suspected fraud by a third party or tax practitioner in light of the outcomes in the MWB Accountants and Sibai litigation.

It is worth noting the litigation in Auctus Resources did not factually involve tax refunds being paid to a registered tax agent and as such Auctus Resources did not consider the issues in MWB Accountants or Sibai.

The MWB Accountants litigation

On 20 September 2019, Judge Marks of the Victorian County Court in MWB Accountants, held that s 8AAZLH(5) of the TAA did not authorise the issuing of notices to tax agents in respect of client refunds received into the tax agent’s bank account as the taxpayer’s nominated account.

On 3 September 2020, the Victorian Court of Appeal (Niall, Hardgrave and Sifris JJA) heard the ATO’s application for leave to appeal and also the merits of that appeal, but on 18 September 2020, the ATO  filed a notice of discontinuance and on 24 September 2020 that Court ordered the discontinuance of the appeal.

The Sibai litigation

The Sibai litigation occurred against the background of freezing orders against a registered tax agent.  Those freezing orders were still in effect and relied in part upon notices issued to the agent under s 8AAZN of the TAA, which had the effect of increasing the debits recorded against the agent’s running balance accounts (RBAs) totalling over $3 million in much the same way as occurred in MWB Accountants.  The total of the 8AAZN Notices and interest charges was over $5 million.

The freezing orders relevant to the Sibai litigation included the debits raised in the agent’s RBAs in respect of the s 8AAZN notices, not just beyond the September 2019 decision of Judge Marks in MWB Accountants and the abandonment of the ATO’s appeal in September 2020., It was not until the MWB Accountants decision was brought to the ATO’s attention by Sibai’s affidavit and submissions did the ATO then act in reducing the ambit of the freezing orders to exclude that debt and general interest charges in September 2021.

Moreover, despite the reduction in the ambit of the freezing orders given effect by excision of the s8AAZN related debits to the agent’s RBAs, the ATO specifically reserved its position and refused to withdraw the s 8AAZN notices.

Thereafter, the ATO took some 40 days to make a decision in the period from 23 September to 4 November 2021, during which Sibai’s RBAs continued to record the debits in his RBAs and maintaining general interest charges accruing daily while that decision was being made.

On 3 November 2021, the agent commenced the Sibai litigation in the Federal Court seeking to have the s8AAZN notices withdrawn and the related debits of over $5 million expunged from his RBAs.  The following day, on 4 November 2021, the ATO made a decision to withdraw the s8AAZN notices and to expunge over $5 million in debits from the agent’s RBAs.

There were a number of remarkable comments in the decision of Bromwich J in Sibai which are extracted below for the reader’s consideration.

At [9], Bromwich J said:

Once the Deputy Commissioner had made the decision to abandon the appeal from the September 2019 decision in MWB Accountants in September 2020, it must have been, or should have been, clear well before September 2021 that a decision had to be made as to whether or not to seek to distinguish that situation from the present one by reason of materially different facts so that the legal conclusion might be different. Having noted that, it seems that those conducting this proceeding may not have been aware of the interstate decision in MWB Accountants until Mr Sibai brought it to their attention.

(our bolded and underlined emphasis)

Relevantly, the MWB Accountants litigation was conducted in Victoria whereas Sibai was conducted in New South Wales.  It should be expected the statutory authority charged with administration of Commonwealth taxation laws ought to administer the taxation laws with a measure of consistency nationwide.

At [10], Bromwich J said:

I do not intend to go down that rabbit hole of determining whether or not the course of distinguishing MWB Accountants was viable, because the simple and incontestable fact is that the Deputy Commissioner could not ultimately have thought that there were sufficient prospects of success to warrant defending the validity of the 8AAZN Notices and instead decided to withdraw them altogether. That is a sufficient basis for a conclusion that the ultimate likelihood, not necessarily certainty, of success of Mr Sibai’s challenge to the 8AAZN Notices was conceded by that step being taken. One is left with the distinct impression that the Deputy Commissioner’s delay in making the decision to do so might not have been due to this case alone, but perhaps due to the ramifications for other cases. Or it might have been a function of being caught off guard, and things simply moving too slowly in the shadow of threatened litigation. Irrespective of whether either is so, there is no sufficient explanation given for why, a year after the abandonment of the MWB Accountants appeal, it took from 22 September 2021 until early November 2021 to make a decision on whether the 8AAZN Notices would be maintained against Mr Sibai, especially as he had foreshadowed the commencement of this proceeding on 23 September 2021 if they were not withdrawn.

Conclusion

In closing, there is a real possibility the ATO, as foreshadowed by Mr Glover in his TIA article in November 2020, may be continuing to rely upon s8AAZN to support the charging of debits against the RBAs of registered tax agents in circumstances where he discontinued his appeal in MWB Accountants in September 2020 and his conduct in unilaterally withdrawing the s8AAZN notices in Sibai in November 2021.  Such concerns remain heightened in the absence of any corrections being made to the abovementioned PSLAs or the interim decision impact statement for MWB Accountants.

If you are a registered tax agent or are aware of other registered tax agents who have received s8AAZN notices in respect of client tax refunds, please contact the authors or John Glover immediately

[1] See J Glover, FTI, Barrister, Victorian Bar, Tax Agents: Beware of “administrative overpayments added to your RBA, Taxation In Australia November 2020 for a detailed consideration of the decision in MWB Accountants and Auctus Resources, noting the decision in Auctus Resources at first instance was subsequently overturned on appeal after the date of publication of this article

[2] Deputy Federal Commissioner of Taxation v MWB Accountants [2019] VCC 1516

[3] See Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; with special leave refused by the High Court of Australia in [2021] HCASL 155