On 13 October 2021, the Federal Court of Australia in Wood v Commissioner of Taxation [2021] FCA 1236 upheld the decision of the Administrative Appeals Tribunal to not release the Applicant from his $1.2 million tax debt on the grounds that he did not demonstrate serious hardship.

Background to the case

The Applicant, Mr Wood, was a skilled medical professional who emigrated to Australia in 1999.

To determine if the Applicant should be exempt from his tax liabilities, the Court considered the following facts:

• The Applicant worked at NSW Health, Macquarie University and Adventist Healthcare while developing a practice as a surgical assistant.
• The Applicant’s income was $249,000, and his partner’s income was $66,500 after tax.
• His household expenditure was $271,135.
• His rent expenses were $91,248.
• His children’s private school fees were $110,724.
• His expenses on overseas travels were $63799.43.
• The Applicant provided monthly financial support to his mother and brother.

In January 2018, the Commissioner of Taxation (‘the Commissioner’) decided not to grant the Applicant a release from his tax liabilities. The Applicant then applied to the Tribunal for a review of the Commissioner’s decision.

It should be noted that under s 14ZZK(b)(ii) of the Taxation Administration Act 1953 (Cth) (‘Taxation Act’), the Applicant has the burden to prove that the Commissioner’s decision was incorrect.

When can the Commissioner release you from your tax liability?

Under s 340-5 of Schedule 1 to the Taxation Act, a taxpayer can be granted a partial or whole release from his taxation liability if he is an individual or a trustee of the estate of a deceased person and the Commissioner is satisfied that the tax liability would cause the him serious hardship.

Tests for serious hardship

There are 3 tests to determine whether you are facing serious hardship:

1. Income/Outgoings Test: This test takes into account household income and expenditure, plus the ability to provide the necessities of family members or others for whom you are responsible.

The Applicant did not satisfy this test because his and his partner’s income was considered ‘substantial,’ and their expenditure didn’t constitute as necessary according to normal community standards.

2. Assets/Liabilities Test: This test assess a taxpayer’s equity in assets which may be indicative of their capacity to pay

The Judge accepted that the Applicant’s debts exceeded his available assets, and thus he satisfied this test. However, the Court concluded that the Applicant did not meet the burden of proof that if he were required to meet his tax liability, it would result in serious hardship. Thus, serious hardship was not demonstrated.

3. Other Relevant Factors: Even if the aforementioned tests demonstrate serious hardship, a release may not be granted.

Hence, the following factors, in addition with what the Court considers relevant, may be considered to decide against granting release:

• The taxpayer has unreasonably acquired assets ahead of meeting his tax liabilities.
• The taxpayer appears to have disposed of funds or assets without considering his tax liability.
• The release would not alleviate hardship, such as where the person has other liabilities or creditors.
• The taxpayer has paid other debts in preference to tax debt.
• The taxpayer has not pursued debts.
• Serious hardship is likely only to be short term.
• The taxpayer has poor compliance history.

The takeaway:

To be granted a partial or whole release in tax liability from the Commissioner, the taxpayer needs to demonstrate serious hardship.