There are a great many people in Australia affected by ATO debt collection at the moment.

Most people would already intuitively feel that the Government tends to be up and down when it comes to debt collection. As someone who is on the coalface of people on the receiving end of these debt collection attempts, I can verify that, at least in my experience, there is a clear cycle, and it goes something like this:

1. There is some sort of crisis, such as the GFC or Covid, and the Government loosens the purse strings, and also goes easy on debt collection.
2. Debts balloon. The Government comes to the conclusion that there are a lot of businesses out there that probably should not still be there, and are only there because of generosity or lax collection practices in the past.
3. Aggressive collection. The Government starts to tell the ATO to collect the debts more aggressively. The Government criticises the ATO for the size of the debt. The ATO starts to collect aggressively.
4. Economic problems. People start to suffer and scream out. The collection is too harsh. It is affecting the economy. The Government starts to ease up and the generous part of the cycle begins again.
5. Debts balloon. The generosity results in increased debts. And the cycle continues.

I started this story with a crisis, because that is the genesis of more extreme action. Normally the action is less extreme. There is still a cycle.

I have a client who had paid $50k in interest. I asked the ATO to forgive it, and the ATO said no. I know for a fact that if I had asked the ATO a year earlier then it would have been forgiven. I know this because another client of mine was the recipient of that generosity. Its all about the cycle.

The cycle is a lagging indicator. It takes a while for people to realise that there has been a change and adjust their behaviour.

Today, we are in the aggressive part of the cycle. Its extremely aggressive, which is made worse by automation. The ATO has changed, the world has changed. Now human to human interaction is decreasing and decisions are increasingly made by people based off very limited written information. I make this specific point because, as most people know, most communication is non-verbal. It could be tonal or based on body language. These things make a real difference. An ATO decision maker who is deciding on your written payment plan, who doesn’t know you, has never heard your voice, and knows you only as a number is not going to be making decisions at a human level, but rather a robotic level. The ATO is increasingly robotic, as are all revenue agencies, and the staff are forced to be robotic and operate within limited parameters. While the ATO in general may have great powers, in practice each person working there is extremely limited, and must follow specific parameters and constraints. There is a real effort to stamp out the human element of any interaction, other than to use it to sell you the outcome, which cannot be changed – to attempt to soften the blow so to speak – if any attempt to do so is made at all.

I have found that most success in dealing with the ATO is based on understanding that you are dealing with a robot. Most humans think that if they could just speak to a person, or if that person could understand them, then everything will be OK. They won’t believe that it is any other way – and why would they? They desperately wish that could be true. The reality is, its a system. Each person at the ATO is a bureaucrat with a limited brief and a checklist. There is no real scope to go outside the checklist. The best they can do is listen and offer a comforting ear. They certainly cannot help you if you use this method.

Dealing with a robot has its advantages, and that is it is programmed a very specific way, to do very specific things. Its cause and effect relationship is always the same. Its non-adaptive. Just as no human can intervene to help you, no human will intervene to help the robot initially unless there is a bug that needs to be fixed and that is discovered at a system level. Its just you vs. the robot. The predictable robot.

The robot makes errors. The ATO was sending out statements of clam en masse to people. There was no human involved in them other than superficially. We decided to defend one, and it forced the allocation of a human on the ATO end because someone needs to turn up to Court, and the human realised there was an error and the ATO was forced to back down and pay our legal fees. The robot executed the function perfectly, it copied the template perfectly, its just the template was wrong when applied to our clients particular situation.

The same issue with director penalty notices and all of these other mass one size fits all solutions to individual problems. There is always a gap. The computer basically relies on people not knowing how to respond or what to do – basically just roll over or bury your head in the sand. But if someone decides to challenge the computer, especially in a unique way, you’ll find it doesn’t know how to fight back.

If you’ve made a gain on crypto, you might be wondering what your options and possibilities are. In this third part of our four-part series, our tax law specialist, Adam Ahmed, discusses the most frequently asked questions for crypto gains. 

Question 1: Is inflation taken into account at all?

Inflation is characterised by a rise of the general level of prices, which then equates to a decline of the purchasing power of a currency. In 2021, inflation was sitting at about 3.5% for the year when calculated through the Consumer Price Index. 

If your crypto assets had also risen 3.5% in value over the same period, you might then argue that you haven’t actually made a gain because its real value (compared to other goods and services in the economy) has stayed the same. If you were to cash out on the gain and spend it on goods such as groceries, the amount you would be able to buy with your crypto would not have changed. 

However, the ATO expects you to pay tax on your nominal gains and it therefore does not take into account inflation. The tax laws are rigid and designed to tax you on any increase in the Australian dollar, nominally. 

Question 2: If you’ve made a gain, how would the ATO find out?

The ATO may or may not find out that you’ve made a gain on crypto when you actually make it. However, when you actually come to spend the money, the ATO will find out. This is because it will need to somehow materialise in your account and they will question where it came from. This is especially true if the amount you’re going to spend is high compared to what your income or spending usually is. 

It makes more sense to follow the rules and focus on what your rights and obligations are. It’s important to have the right framework in place. That way you will be prepared if the ATO questions you or wants to see relevant evidence. 

Australia’s tax laws are based on a self assessment system where the taxpayer is expected to work out what their own tax should be and then notifies and pays the amount to the ATO. 

However, the ATO auditing powers are extensive. If they provide you with a number, which may or may not be correct, it takes a lot of time, energy and evidence to try and prove them otherwise. 

Question 3: Then what can you actually do if you’ve made a gain?

The possible approaches depend on whether the gain is realised or unrealised, and also on the unique facts of the situation. 

In Australia, we have set options for things to be categorised in and then taxed accordingly. Things such as crypto, which don’t fit neatly in a box, have multiple possibilities and also risks. 

Since the courts have said that it is not treated as a foreign currency, there are different possibilities for how it may be treated. It is most similar to shares, although there are some obvious differences between the two because shares are not being used to purchase other goods and services the same way crypto is. 

From the ATO perspective, the default is to treat it as a capital gain, on which you may be able to claim a capital gains tax discount. Currently, when you sell or otherwise dispose of an asset, you can reduce your capital gains by 50% if you have owned the asset for at least 12 months and are an Australian resident for tax purposes. 

However, the specific facts of a situation usually dictate what options will be available – it is dependent on things like who holds the asset and how they came to acquire it. 

In the next part, we will go through different examples to demonstrate the wide range of options that might be available. 

In the meantime, if you have any questions, feel free to contact us.

If you’ve made a loss on crypto, you might be wondering where that leaves you in regards to your tax position. Since Bitcoin was found by the AAT to not be a foreign currency, as we discussed in the first article of this series here, it is generally treated similarly to shares in this sense. 

For active traders: non-commercial loss rules may apply

If you are an active trader, you may be able to offset this loss against your other income. You generally can’t claim a loss for a business that is a hobby and unlikely to ever make a profit. The non-commercial loss rules determine whether you can in this case or have to defer the loss until you make a profit. 

To be able to offset this loss, you must satisfy two requirements. The first is the income requirement, which is met where the sum of the four elements for calculating your income is less than $250, 000. The elements are:

• Taxable income, which is the assessable income minus your allowable deductions for a year.
• Reportable fringe benefits, which is shown on a payment summary if it passes the threshold and takes part in this calculator.
• Reportable super contributions which include your reportable employer super contributions and your personal deductive contributions.
• Total net investment losses from 
  • Rental property investments such as negatively geared rental properties
  • Financial investments such as negatively geared share portfolios 

The second requirement is to pass at least one of the following four tests:

• Your assessable income, made up from your ordinary income (such as gross earnings excluding GST) and statutory income (such as capital gains) from your business activities must be at least $20, 000 for the year. 
• Your business has made a tax profit in three out of the five past years, which excludes any loss from that business that you had earlier deferred
• You are using real property, which includes land, structures and interest in both, of at least $500, 000 in your business activity on a continuing basis. 
• You use $100, 000 worth of ‘other assets’ in your business activity. This includes equipment, trading stock, items leased from another entity, and trademarks, patents and copyrights. This does not include real property or vehicles. 

If these two requirements are satisfied, then you may be able to offset your crypto losses against your income from other work. Otherwise, the loss would get parked to the side and you would only be able to claim it against your taxes if you later make profit off crypto.

For passive investors: capital loss rules may apply

If you have made a loss as a passive investor, capital loss rules will probably apply. This would mean you could deduct the loss you’ve made on crypto from your capital gains to reduce your capital gains tax. These must be used at first opportunity which means that if you’ve made a loss in the current year, you must use the loss to reduce any capital gains in the current year.

If your capital loss is greater than your capital gain, you could carry it forward and deduct it from capital gains in later years. There is no time limit for this. It is also important to note that a trading loss can be applied against capital gains but a capital loss can’t be applied against trading gains.

Conclusion:

Depending on whether you satisfy the non-commercial loss rules, your main two options are either to use the loss to offset your income or to use it to decrease your capital gains tax, with the option to park it if outweighs your capital gains.

If you have any questions or would like further assistance, please contact us.