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Soverign Citizens not paying tax is Illegal & the ATO process of Amending your tax return – Oxby and Commissioner of Taxation (Taxation) [2022] AATA 3239

“The Government may not actually constitutionally have the right to make laws – so tax may be illegal.”

I’ve had a few conversations with clients or others that have heard of this concept or say their friend is doing it.

If you are chatting with a mate who is suggesting this – just mention the ATO know all about this, tax you pay helps society and there are massive penalties if you get caught.  Oxby got caught – and I’ll also explain the typical process if the ATO decides to amend your return.

1. Oxby and Commissioner of Taxation (Taxation) [2022] AATA 3239

Oxby actually was lucky to only receive a “careless” 50% penalty rather than a “reckless” 75% penalty on top of the tax he originally saved. On top of the penalties you have interest from when the tax was originally due.

Oxby went to a “Sovereign Citizen” seminar and believed didn’t have to pay tax – so lodged his return claimed all his private expenses as deductions – got hit with 50% tax penalty (i.e. have to pay back 150% of tax he saved plus interest from when tax was due).

I feel a bit sorry for Steven Oxby for he got “caught up” in someone promoting that he was a Soverign Citizen – which is just mumbo jumbo that someone created and doesn’t have any legal standing and there are (I’ve heard) dozens – maybe even more than 50 of these types of cases and they always lose and the person is ordered to pay the tax (or council rates or fines, etc). Despite feeling a bit sorry for Steven (and frustated at the people who tell others to do things like this), there are a few “funny” legal arguments in the case – so it is a bit of a fun read.

Link to Oxby’s case is here: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2022/3239.html

15. The amount of $74,501.72 disclosed at “Other work-related expenses” within page 4 of the Tax return is an amount spent as living costs in sustaining the life of the principal creditor and living soul answering to the name “Steven Russell Oxby”.
16. The sum of $72,710.00 with held was derived from the productivity of the labour of the living soul answering to the name “Steven Russell Oxby”, being property of the living soul and is to be immediately remitted to the living soul.
17. Productivity of labour is not taxable and is omitted from the Tax Acts definition of the word “Income”.
18. All the facts and circumstances herein deposed to, in this my Declaration, I within my own knowledge true, correct, complete, certain and not misleading and with first-hand personal knowledge and made under penalty of perjury.

As a result, the ATO “added” back” $74,501.72 for this “work related expenses” as false or misleading.

The ATO imposed a “shortfall penalty assessment” of 50 percent (amounting to $14,354) on the basis that the statement was reckless.

 

What happens if the ATO wishes to amend your return?

While Oxby’s example is a bit scary in terms of everything it would have cost him – he paid to attend a Seminar, he lodged a dodgy return (maybe paid a substantial amount for a person recommended by the seminar to help prepare the return), he went back and likely paid his accountant to lodge an objection to the ATO, then he paid to have his case heard in court (the AAT is where ATO tax appeals go). In being heard in court he may have been lucky (in that the final result may have reduced his penalty from 75% to 50%) – but it still would have been a very costly exercise in time and money – and he is much worse off at the end of it.

Below are a few examples of the ATO’s typical process if they detect what they believe is something not correct in your return and that the ATO would wish to amend your tax return.

 

Example A – “Normal” Extra Tax Refund due to Additional Income/Medicare Levy Surcharge Payable, etc.

It is very common for people to forget to include interest, dividends, or perhaps they have a spouse/child not covered by private health from the date they were born/moved in together. The ATO would normally send a letter and say, we’ve detected you need to pay Medicare Levy Surcharge as you and your spouse earn over $180,000

Or (in this example) you didn’t include $100 of interest income in your return.

They would say, contact us within a month if you disagree, otherwise we will issue an amended assessment.

Then you’d have (say) $100 taxed at your marginal rate (say 37% as you earn between $120,000-$180,000) plus 2% medicare levy = 39%.

So you have tax of $39 PLUS interest at the ATO rate (usually 9 or 10% per annum) on the extra tax when it was originally due (usually 3 weeks after your lodgement due date – say 21 November based on 31 October if you don’t have a tax agent or 5 June based on 15 May if you did).

In this case say $8 interest + $39 tax – you pay $47 to the ATO – and you could claim the $8 interest as a tax dedution at item D10 Cost of managing your tax affairs when you (or your accountant) prepares next year’s tax return (it will normally show up in your ATO prefilling report).

 

Example B – Unlawful Expense

So say you lodge your tax return and you claim expenses you aren’t entitled to.

For simplicity sake – say you receive $5,000 tax more than you should.

The ATO detect the issue, send a letter and then amend your return.

In this case – they decide to charge 50% careless penalty.

So you have $5,000 original tax PLUS 50% penalty – another $2,500 = $7,500 you need to pay back PLUS interest.

So say 9-10% interest per year (say it was 2 year) – say $750 + $760 (the interest is often charged by the ATO monthly but can compound daily).

So $9,010 in this example of tax and penalties to repay. Or 180.2% of the original tax saved (say over 3 years at 60% per year).

If only you could “invest” your money in a similar way and have this principle work FOR you rather than AGAINST you.

Typically the person doesn’t have the $9,010 to repay either – so interest would continue to accrue for months.

 

Review Period – 2 years for most, 4 for complex, unlimited for fraud/evasion

Mostly the amendment period is 2 years (from the date of issue of your notice of assessment). This applies typically if you are an individual or a small business (run a business with under $10 million turnover).

It can be 4 years for more complex taxpayers, but most importantly there is no time limit if the ATO views you are committing Fraud or Evasion.

https://www.ato.gov.au/About-ATO/Commitments-and-reporting/In-detail/FOI/Fraud-and-evasion-guidelines/?page=2

 

How Does the ATO collect its taxes and penalties?

 

A few other links here:

PS LA 2004/10 | Legal database – Concise document where ATO tell their staff – here is why tax laws are valid – just send a basic letter to anyone who writes in.

 

3. I heard about a seminar helping people get “off the grid”. I didn’t attend but I strongly suspect they would be doing something like this.

TA 2016/5 Purported tax-exempt non-profit ‘foundations’ used to evade or avoid taxation obligations