Serious hardship exists when payment of a tax debt would leave you unable to provide basic living necessities for yourself and your dependants.
The Tax Commissioner has the discretion to release you from eligible tax debts. However, the Tax Commissioner is not obliged to exercise the discretion in your favour, even if he is satisfied that serious hardship would result from payment of the tax debt.
The Tax Commissioner’s discretion to release an individual taxpayer from payment (in whole or in part) of a tax liability can be exercised if satisfying the liability would cause that person serious hardship. The discretion may also be exercised if the payment of a tax liability by the trustee of a deceased’s estate would cause serious hardship to the dependants of the deceased.
The tax liabilities eligible for release are as follows:
- income tax
- the Medicare levy
- the Medicare levy surcharge
- fringe benefits tax (FBT)
- pay-as-you-go (PAYG) instalments
- FBT instalments, and
- penalties and charges (including the general interest charge and the shortfall interest charge) associated with those liabilities.
Good and services tax (GST) is not eligible for release, and neither are director liabilities arising under the director penalty regime.
Individual taxpayers and taxpayers who are operating a business as a sole trader can apply for release, but entities such as companies, trusts and partnerships cannot. An application for release from an eligible tax liability must be in the approved form. It must also be submitted with supporting documentation such as family income and assets. In particular, the supporting evidence should demonstrate how paying the tax debt would cause serious hardship.
The Commissioner’s discretion will not apply if the tax liability is merely an additional burden and the taxpayer would suffer serious hardship in any event. In other words, the taxpayer must show that serious hardship would be alleviated by the release of the tax debt.
Even if the Commissioner is satisfied that serious hardship would result from payment of the tax liability, he is not obliged to exercise his discretion in favour of the taxpayer (or trustee of a deceased person’s estate). Nevertheless, it is clear that the ATO is obliged to act reasonably and responsibly, and should not act arbitrarily or capriciously.
The Commissioner must notify the applicant in writing of his decision within 28 days after making his decision. If the Commissioner decides to release a person from a tax liability, he can take any action necessary to give effect to the decision, including amending an assessment. If the Commissioner decides not to release the debt, the person may object. If the Commissioner still refuses to release the debt, the person can seek legal measures, such as applying to the Administrative Appeals Tribunal (AAT) for a review of the Commissioner’s decision.
The ATO has produced Practice Statement PS LA 2011/17 that broadly explains the Commissioner’s discretion to relieve individuals of their tax debts. A key consideration when making the decision is whether the payment of an eligible tax liability would result in “serious hardship”.
In this regard, the Practice Statement states that, if the taxpayer is left without the means to obtain food, clothing, medical supplies, accommodation, education for children and other basic requirements because the taxpayer has paid a tax liability, then this qualifies as “serious hardship”. The ATO has indicated that it would generally not expect taxpayers to sell normal and reasonable assets such as the family home, motor vehicle, household goods, tools of trade and savings for such basic necessities in order to pay tax debts.
There are no guidelines in tax law to help the Tax Commissioner determine whether serious hardship will result from the payment of a tax liability. However, PS LA 2011/17 states that the Commissioner will examine, in particular, the income, outgoing expenses, assets and liabilities of the taxpayer, either immediately or over a period of time. Ownership of assets such as holiday homes, luxury motor vehicles, boats, substantial life assurance or annuity entitlements, shares and other investments will generally be regarded by the ATO as an indication of a capacity to pay, either through disposal of the assets, or use as security for borrowings, without involving serious hardship.