Is the Tax Man looking for more from you?
How do tax disputes arise?
Under “Self-Assessment” the onus is on you to determine how much tax you should be paying. However, the Tax Man can come back later and question if this was enough. If you get it wrong, not only do you pay the tax, but you are also likely to incur a penalty. A tax dispute therefore generally arises sometime after you have lodged your income tax return, or a BAS, with the Tax Office. A tax dispute may still arise even where a return has not been lodged, for example, if a person does not think they are liable to any tax, but the Tax Office thinks otherwise.
Where the Tax Office thinks there may be a risk that you have not paid enough tax, the first step is generally to conduct a Risk Review during which further information is requested from you. This is usually in the form of a questionnaire which requests copies of relevant documents, and in some cases, interviews with you and your advisers.
If the Tax Office considers that the issues identified during the risk review warrant further investigation, it may commence an Audit. In some cases, the Tax Office may skip the Risk Review and go straight to an Audit. This process is more thorough than a Risk Review, with a greater amount of information collected and more time spent analysing the information.
At the end of the audit, the Tax Office may issue an Assessment (which will either be an original assessment, an amended assessment, or a default assessment, depending upon the circumstances) and/or a Penalty Notice. In some cases, the Tax Office may issue an Assessment without an audit – but this generally only happens in extreme cases.
The Tax Office can only amend an Assessment within a defined period of time:
|Type of Taxpayer
|Time to Amend
|Individual taxpayer, small business entities
|2 years from issue of original Assessment
|Other taxpayers (i.e. large businesses)
|4 years from the issue of the original Assessment
|Where there is fraud or evasion
What do I do during the review or audit period?
Depending upon the issues at the heart of the Risk Review or Audit, you may wish to take legal advice to understand your rights and obligations in dealing with the Tax Office.
Get everything in writing
In all cases, you should make sure that the Tax Office gives you written notice of the scope of its enquiries and the information that it seeks from you. If the Tax Office has requested an interview, you should ask for a list of questions ahead of time, so that you can prepare for the interview appropriately.
Get the information needed
Before the interview, make sure you have all of the information available that has been requested, or that you are able to provide the Tax Office with an indication of when the documents will be available. You should only provide the information that is requested – this will help the Tax Office to deal with your matter quickly and will also ensure you are not inadvertently raising issues that are not on the Tax Office’s radar.
There are a number of benefits in being co-operative with the Tax Office. Remember that the Tax Office has a wide range of formal information gathering powers, with which you are obliged to comply. For example, the Tax Office can require you to allow them full access to your office and documents, and it is an offence if you do not allow this.
Claim legal professional privilege
Having said that, there are some documents which may be protected by legal professional privilege, which means that the Tax Office cannot use these in making a case against you. There are particular ways in which you should deal with the Tax Office when it comes to these types of documents. It is best to seek legal advice to assist with this.
I’ve made a mistake in my tax return – what should I do?
Amend your return – Now
If you realise that you have made a mistake in your tax return – for example you claimed a deduction for an expense which you were not entitled to deduct, or you forgot to include certain income in your return – you should make voluntary disclosure of this to the Tax Office. This can be done by amending your return using the form available of the Tax Office website.
Tax Shortfalls and Penalties
If the amendment results in you being required to pay more tax than previously calculated, then you will have a Tax Shortfall, which must be paid. Generally, you will also be charged Penalties, calculated as a percentage of the shortfall. There are a number of different types of penalties which may apply. The most common of these is the penalty for making a false and misleading statement that results in a shortfall. The amount of the penalty depends upon the taxpayer’s behaviour that led to the shortfall:
|Failure to take reasonable care
|25% of shortfall
|50% of shortfall
|75% of shortfall
If you make voluntary disclosure to the Tax Office during the Risk Review, these penalties can be reduced by either 80% (if the disclosure is made before an Audit commences), or 20% (if the disclosure is made after the Audit commences).
The Tax Office has issued me an Assessment and I think it is wrong – what should I do?
Lodge an Objection
If you do not agree with an assessment made by the Tax Office, you should make an Objection to the Assessment.
Depending upon your exact circumstances and the timing of the Tax Office’s Assessment, you may have as little as 60 days in which to lodge your Objection. You can seek an extension to this time period if required, but there is no guarantee that it will be granted.
Either during the audit process, or at the same time as you receive the Assessment, the Tax Office should also issue you with a document called either a ‘Position Paper’ or ‘Reasons for Decision’. This document explains the facts on which the Tax Office has based its assessment and the way in which it has applied the law to these facts.
When making an Objection, it is up to the taxpayer to prove that the assessment made by the Tax Office is excessive.When you prepare an Objection, it is important that it is as comprehensive as possible. You will need to say more than “I disagree with the amount”; you need to explain why you disagree and provide evidence to support your position.
Appeal to tribunal or court
If your Objection is rejected by the Tax Office and you decide to take your argument further (either to the Administrative Appeals Tribunal (the AAT) or the Federal Court), you may be limited to arguing the grounds that you raised in your Objection. It is therefore a good idea to have a tax professional (such as an accountant or a lawyer) to assist in preparing your Objection.
Once you have made your Objection to the Tax Office, the matter is allocated to an officer within the Tax Office who was not involved in the Audit or the decision to issue you with the Assessment.
How long does the Tax Office take to respond to my objection?
Generally, the Tax Office should make a decision regarding your Objection within 60 days of the day the Objection was lodged. If the Tax Office requests further information from you, then the Objection decision is due within 60 days of you providing all information.
It is possible to serve a notice on the Tax Office which requires a decision to be made within 60 days. If the Tax Office does not then make a decision within the required time, it is taken to be a disallowance of your Objection. This means you can then take the matter to the Courts for decision.
Challenging the Assessment in the Courts is not usually a straightforward process, so careful thought should be given to whether to use this power to ‘force’ a decision from the Tax Office.
I have objected and no decision has been made yet. Can the Tax Office still force me to pay them?
Yes. The tax law says that once an Assessment has been made, and the due date has passed, the amount set out in the Assessment is due and payable. This means that the Tax Office can go to court to have payment enforced – and ultimately it can bankrupt you, or wind up your company, if you do not pay.However, where there is a genuine dispute regarding the amount in the Assessment, you may be able to agree with the Tax Office that it will not seek to enforce the debt until the dispute is resolved, in return for you taking one of the following steps:
- Entering into a “50/50 arrangement”- where you pay 50% of the tax assessed against you. This is refunded, with interest, if it turns out that the Tax Office were wrong.
- Providing security for the full amount assessed.
- Entering into a payment arrangement with the Tax Office under which you agree to pay off full amount assessed over an agreed period of time.
What can I do if the Tax Office refuses my Objection?
If the Tax Office disallows your Objection, then you have 4 options:
- Pay the tax and penalties assessed against you, together with any interest that has been charged on the outstanding amounts;
- Complain to the Commonwealth Ombudsman;
- Apply to the AAT for a review of the Tax Office’s decision; and/or
- Appeal to the Federal Court.
What can the Ombudsman do?
If you are concerned that the Tax Office is not acting properly, you should first raise this with the Tax Office. If you are not satisfied with the response you receive, then you can complain to the Commonwealth Ombudsman.
The Ombudsman can investigate a range of issues relating to tax administration, including:
- The way in which recovery actions is taken.
- Decisions by the Tax Office to bankrupt or wind up a taxpayer.
- The way in which the Tax Office conducts audits.
- Delays in decision making.
If the Ombudsman finds that a complaint is justified, it may recommend one of a number of actions be taken by the Tax Office, including that the Tax Office should:
- Change its procedures.
- Change its decision in a particular situation.
- Issue an apology to the taxpayer.
Though the Ombudsman can make recommendations, the Tax Office is not obliged to follow these. As such, the Ombudsman is generally reluctant to be involved in a complaint where that issue would be better dealt with under the objections and appeals processes.
How do I decide whether to go to the AAT or the Federal Court?
The choice of whether to take your dispute to the AAT or the Federal Court is an important choice. There are advantages and disadvantages of each, depending upon the particular circumstances, and different strategies may be used in both forums. It is best to seek professional advice before making this decision.
Generally, you only have 60 days in which to make your application to either the AAT or the Federal Court.
Who pays my costs if I appeal a Tax Office decision?
The answer to who pays costs in a tax dispute depends on the circumstances.
Where an Objection is made and the decision is in favour of the taxpayer, it is still up to the taxpayer to cover all of their costs associated with preparing that Objection. The Tax Office will not provide compensation for these costs.
Whether the matter is then taken to the AAT or the Federal Court will have an impact on how costs are treated.
The AAT cannot make a costs order for the review of tax decisions. This means that each party must pay their own legal costs where the matter is taken to the AAT.
In comparison, the Federal Court can order the unsuccessful party to pay a portion of the successful party’s legal costs.
If a case falls under the test case litigation program, the Tax Office may provide funding to the taxpayer to pursue the litigation. This may occur where there is a public interest in having the legal issues resolved by the Courts, so that precedents are developed to provide guiding principles on how specific areas of the law should be applied.
How does the Tax Office select who it is going to review?
The Tax Office adopts a number of strategies in determining which taxpayers to review.
A media statement is released each year, which sets out the compliance steps that the Tax Office will look out for in the upcoming financial year.
For example, in the current financial year, the Tax Office will particularly focus on:
- Record-keeping by individuals and companies, to ensure claims have not been wrongfully increased, falsified or are unsubstantiated.
- Work-related expenses, especially those related to working from home as we begin to live with COVID-19.
- Income and deductions arising from rental properties, particularly from short-term rental agreements, rental bond payments and insurance.
- Capital gains acquired from cryptocurrency assets, property portfolios, and shares. This also includes non-fungible tokens (NFTs).
The Tax Office also uses very sophisticated data matching processes. Information is matched between taxpayers’ returns and data from financial institutions and other organisations (both inside and outside of Australia). More than 600 million transactions are reported to the Tax Office annually.
The number of audits conducted by the Tax Office has steadily increased each year. It is likely that around two million individuals and companies will be audited in FY2022-2023. In the previous FY2021-2022, the Tax Office issued fines totalling $1.65 million and successfully prosecuted nearly 200 cases of tax offences.
How can I minimise the risk of a tax dispute arising?
The most obvious way in which to reduce the risk of a tax dispute arising is to ensure that you pay the right amount of tax, and do so on time. However, the tax law in Australia is complicated and it is not always easy to know how much tax to pay in certain situations. Where you are unsure, you should seek professional advice (either from an accountant or a lawyer) or ask the Tax Office for assistance.
Depending on the circumstances, you may want to apply for a Private Binding Ruling, under which you explain your particular scenario to the Tax Office and it will provide you with a ruling as to how it views the tax law treats this scenario. This ruling is binding on the Tax Office, so that it cannot later amend your Assessment where you have relied on the ruling (provided that you have made full and frank disclosure of all relevant facts in your ruling application).
The information contained in this post is current at the date of editing – 16 May 2023.