Sydney property investor battles ATO for five years over tax bill on property sold at a loss

A special investigation finds the Tax Office is aggressively pushing aggrieved taxpayers into settlements to protect its own people, with one property investor saying he’s been ruined by fighting big firms hired by the ATO.

Sydney architect Gary Kurzer and his partner sold two investment properties in 2006 under direct instructions from their bank. They had cash losses from the sales, and were told by the ATO that GST did not apply to their circumstances. But the ATO then launched an audit and handed them a tax bill of $207,000 in “GST and penalties” plus tax on “profits of $655,000” never earned.

After a five-year battle that Kurzer says ruined his health, relationship and finances, the ATO finally agreed to determine liability based on the information he had previously provided. This was communicated to Kurzer at the 11th hour at the doorstep of the Administrative Appeals Tribunal hearing room prior to a hearing before a senior member of the AAT.

Despite the matter settling, the ATO issued another incorrect revised assessment of $120,000. Angered by the continued mistakes and mistreatment, Kurzer pursued the ATO for compensation under the Scheme for Compensation for Detriment caused by Defective Administration —?established to help Commonwealth agencies compensate persons who have suffered detriment as a result of an agency’s “defective” actions or inaction, and who have no other avenues of redress?—? including the latest revised incorrect assessment.

The ATO has power to engage legal counsel under the Legal Services Directions, which is administered by the Attorney-General, when there is a legal claim. The Finance Circular 2009-09 is clear that the Legal Services Directions do not apply to a CDDA claim?—?it’s more a moral obligation to assist those who have suffered. Despite this, the ATO hired big law firm Minter Ellison to handle the CDDA claim. The ATO said in a statement: “It is not unusual for us to obtain legal advice where there is no legal claim or litigation on foot. Our views on CDDA claims comply with the Department of Finance’s guidelines.”

The ATO advised Kurzer of its decision after receiving advice from Minter Ellison, that no defective administration arose and no compensation was payable. Kurzer continued to owe $120,000. Minter Ellison charged the ATO $128,000 for this advice, as documents obtained by Crikey under freedom of information laws show.

Kurzer was relentless, eventually pushing the ATO to review the CDDA claim for the second time, where it was uncovered the Tax Office made major mistakes in the revised assessment?—?Kurzer only owed $8,554. The ATO continued to deny any liability for mistreatment during the audit and objection stages but now admitted it made mistakes in the revised assessment. Despite Minter Ellison being engaged to review Kurzer’s tax liability, it found no mistakes.

At a mediation meeting chaired by former royal commissioner Tony Fitzgerald and attended by Kurzer, ATO officers and Kurzer’s lawyers (appointed by the Tax Office), the deed of release shows the ATO offered $70,000 in compensation contingent on Kurzer releasing the ATO and every officer, employee and agent from any liability beyond the scope of the major calculation errors, and equally for all future claims, whether related or unrelated to the dispute.

The ATO also sought a confidentiality clause. Kurzer accepted the $70,000 and agreed to release the ATO from any future liability on the basis the ATO does not stop him from pursuing his rights in relation to his mistreatment during the audit and objection processes and to delete a blanket ban on all future claims unrelated to the dispute. The ATO then refused to pay the $70,000 compensation.

In direct contradiction to this, the ATO told Crikey: “There is no compulsion for taxpayers to settle matters they do not want to settle. Settlements made in relation to a particular dispute do not affect future claims arising in relation to a completely unrelated dispute.”

In addition to Minter Ellison’s fee of $128,000, Fitzgerald’s fee for conferences, preparation and the mediation was $12,650?—?according to a tax invoice released under FOI?—? while ATO appointed lawyers for Kurzer, LAC Lawyers, were paid $19,992 for legal advice and attendance at the mediation. The ATO refused to pay LAC Lawyers for any assistance to Kurzer after the mediation. In addition, the ATO expended $47,599 in relation to the CDDA claim. In total, $208,241 was spent on a case with an offer of $70,000 in compensation that was ultimately rejected by Kurzer.

Kurzer is highly distressed. In five years of attempting to gain justice he says he has lost everything he has worked for over 40 years, and faces imminent foreclosure. “Each day is a battle to stay afloat,” he told Crikey.

“Minter Ellison was hired to check the ATO view and they came up with zero errors and zero compensation, and I was intimidated by them in denying my rights. The ATO then attempted to silence me via an oppressive deed with a patronising offer of $70,000 to me as compensation for my losses and expenses over five years. Although that was a tiny fraction of my losses, to even accept this, they insisted on a massive legal gag on my rights.

“I will continue to fight, not just because of my circumstances but also because the ATO are doing this to innocent people across the country every day, decimating families and small businesses. In tough times it is heinous that the ATO can expend huge amounts of public money to bankrupt people. What is the net advantage? People are forced onto welfare, instead of being active taxpayers. I will now be seeking a realistic monetary claim that reflects my losses in the Federal Court for negligence, breach of statutory duty and misfeasance against the tax office.”

A senior Sydney tax lawyer who is involved in negotiating settlements with the ATO on a regular basis but did not want to be identified said: “Settlements are sometimes instituted by the ATO because they know they have done the wrong thing. Unfortunately, in these cases the wrong thing ends up being hidden from the public by the use of a confidentiality clause. They won’t talk about what they did wrong.”

Allegations about the ATO’s use of legal services coincide with the announcement last month by the Attorney-General’s Department that the ATO was the biggest user of legal services in the Commonwealth, spending $101 million dollars in 2012. The report shows a 30% increase in the provision of external legal services (such as Minter Ellison and Clayton Utz) in just the last two years. At the same time the average rise in external legal costs across all government agencies was just 7%. External legal services accounted for $64.9 million of the total figure, while $46.1 million was spent internally.

Crikey reported in September the ATO had offered Serene Teffaha a $250,000 settlement to walk away from litigation she launched for bullying as a result of a whistleblower complaint. She was prepared to accept the offer and release the ATO commissioner from vicarious liability as long as she was not barred from pursuing the senior public officials personally for their misconduct against her. The ATO refused to settle on that basis.

“My motivation is not money??—??just accountability,” she said. “It is perplexing the lengths the Commonwealth will go to, to protect the wrongdoers. Unfortunately for the Commonwealth they are now risking a whole lot more than just money.” Teffaha says she has been told the Commonwealth will back the personal defences of the officials involved by funding Clayton Utz’s services.

The Attorney-General’s Department is the guardian of how Commonwealth agencies pursue litigation. Crikey put a list of questions to the department and was told: “Questions regarding the ATO’s reasons for settling claims, legislative authority for engaging counsel, and its conduct in the handling of claims and litigation, should be directed to the ATO.”

“The difficulty with releases and confidentiality provisions is that they are exclusively for the benefit of the [ATO] commissioner,” David Hughes, a tax partner in law firm SMH Tax Lawyers, told Crikey. “Aggrieved taxpayers are silenced and ATO errors … are not brought into the public domain. This allows ATO officers the latitude to continue working without accountability to the public.

“Confidentiality clauses in settlement deeds have their place in commercial settlements, but the Commissioner is at pains to emphasise that he negotiates on a ‘principled’ basis, not a commercial one. If that is so, then the principle by which they reach settlements must be transparent. He cannot have it both ways.”

But some lawyers see the benefit of commercial settlements. Andrew Robinson from Robinson Legal, who gained notoriety as the outspoken lawyer for Paul Hogan and John Cornell in their very public dispute with the Tax Office, believes early settlements are good.

“Whether it’s right or wrong, making sure settlement discussions and settlement agreements don’t see the light of day probably means that all parties can be more open in their discussions which can lead to earlier settlements. While discussions take place they can’t be disclosed because they are without prejudice and if a settlement deed happens it’s bound by confidentiality so all parties know that nothing they say should hit the public record.”

This article first appeared on Crikey.com.au