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As more resources are directed at compliance, tax disputes are likely to rise and the burden of proof is on the taxpayer.
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Excessive ATO assessment? Know your rights to object
11 November 2022
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A taxpayer who is dissatisfied with an assessment may object against it in accordance with Part IVC of the Tax Administration Act 1953. While an amended assessment constitutes an assessment, the right to object against an amended assessment is limited to the “particular” that has been amended by the Commissioner.
A person making an objection must: [1]
- Make it in the approved form.
- Lodge it with the Commissioner within the required time period (though an out of time objection can be made, which is itself a reviewable decision). [2]
- State “fully and in detail” the grounds that the person relies on. This element is important, as any subsequent appeal from an unfavourable objection decision AAT or Federal Court, unless leave is granted, will be confined to those grounds. This stands in contrast to the position of the Commissioner, who can defend an assessment on any grounds (provided the taxpayer is not prejudiced and there is procedural fairness). [3]
To succeed with an objection, the dissatisfied taxpayer must persuade the Commissioner (or subsequently the AAT or court) that the assessment is “excessive”. The burden is on the taxpayer to prove this on the balance of probabilities (more likely than not).
The term “excessive” has been described as unfortunate, but it has been held to mean going to the “substantive liability” of the taxpayer. [4] Generally, in the absence of the Commissioner making a concession, to meet this threshold and prove the assessment is excessive, the taxpayer will need to show its actual taxable income — and it will need to be shown to be lower than what is in the assessment. Given the Commissioner’s obligation to be a “model litigant”, the Commissioner should make appropriate concessions in each case. [5]
Establishing a mere technical or procedural error by the Commissioner will not assist in proving an assessment is excessive, as a technical deficiency does not go to the “substantive liability” of the assessment and is protected from being challenged. [6] For example, if the Commissioner includes too much income, but also has allowed an equivalent excess deduction, despite the errors, the substantive liability is correct and so the assessment will not be excessive.
The Commissioner is generally limited to a period of four years to amend an assessment unless he has formed the opinion that there has been fraud or evasion. The High Court has held that bypassing this does not give rise to a mere procedural deficiency, as forming an opinion that there was fraud or evasion is a “criterion of liability”, because without first forming that opinion, the Commissioner would have no power to amend the assessment (and so it will mean the assessment is excessive). [7] It is worth noting however, that despite such an assessment being “excessive”, in the absence of maladministration, the assessment would still be valid and could be used by the Commissioner in recovery proceedings unless and until the objection decision is allowed (by the Commissioner, AAT or the Federal Court, etc). [8]
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In the case of a Part IVA or transfer pricing “determination”, given those provisions “exhaustively set out the criteria for liability” — and it is the existence of those criteria that will determine the question of excessiveness — the Full Court has held that an improper “determination” will not result in excessiveness (provided there is at least a purported determination). [9]
Putting these technical issues to one side, given a taxpayer’s onus to prove the assessment is excessive, many objections (including if referred to the AAT or the Federal Court) will be decided by the factual evidence that a taxpayer is able to adduce. For example, on questions of intention (e.g. for a capital revenue dispute), even if to be objectively determined, there is no substitute for contemporaneous documentation. Often key employees may no longer be around, memories may have faded, and the Commissioner will often view self-serving statements with scepticism. Accordingly, the ability to point to objective contemporaneous documentation such as board papers, business plan(s), and external loan documentation will be more persuasive.
For other disputes involving, say, valuations, the outcome may come down to experts. In such cases, it will be important to ensure that appropriate experts are retained and that they are asked the right question(s) in light of the relevant provisions, as otherwise their evidence may not be relevant. Experts will also need to remain impartial in order to preserve their credibility.
If the Commissioner disallows an objection, the taxpayer will have the choice of challenging that decision in the AAT or the Federal Court. The AAT may be preferred over a court because costs will be lower, a taxpayer will not be liable for the Commissioner’s costs if unsuccessful, it is less formal, and the strict rules of evidence don’t apply. Additionally, the role of the AAT is to stand in the shoes of the Commissioner and remake the decision. [10] This means that unlike in the Federal Court, at the AAT it is not necessary to establish an error of law. [11] It is for this reason that it may be especially preferable to select the AAT when a discretion is involved such as a decision on whether to remit penalties.
The ATO also now offers options to try to resolve a dispute prior to, or alongside, the objection process, especially for individuals and small businesses. Such avenues include internal reviews (prior to an assessment being made) and “in-house facilitations” (at any stage from an audit up to litigation). Larger taxpayers also have the option of an internal review. In certain circumstances, the ATO may also agree to abide by the decision of an independent decision maker as agreed between the parties such as a former judge, but this is somewhat less common and dependent on the circumstances surrounding the dispute.
While the private ruling scheme can also be used as a source of objection and appeal rights, any success will be confined to the facts in the ruling. If those facts materially change, the ruling may be useless.
While beyond the scope of this article, it is also possible to bypass the Part IVC objection process and to seek a (discretionary) declaratory order from the Court, declaring that, for example, roll-over relief is available. [12]
Frustrated taxpayers who claim that the Commissioner has acted improperly and with maladministration cannot challenge the assessment via the objection route under Part IVC as the argument presumes there has been no valid assessment. However, the threshold for such a challenge is extremely high. [13]
In recent years, the ATO has been more open to resolving disputes, provided that there is a legally justifiable basis for the settlement and there is no desire for the Commissioner to obtain a precedent and/or to send a message to the wider community. As the government’s financial position is further stretched, and as the ATO is equipped with greater resources, and further anti-avoidance provisions are brought into law, we anticipate further tax disputes to arise. Accordingly, it is now extremely important to understand your rights, options and how best to navigate and resolve disputes with the ATO.
Jeremy Makowski is special counsel in tax at law firm Cornwalls.
[1] S 14ZU of the Taxation Administration Act 1953.
[2] Refer to Practice Statement Law Administration PS LA 2003/7.
[3] Federal Commissioner of Taxation v ANZ Savings Bank Limited (1994) 181 CLR 466.
[4] W.R. Carpenter Holdings Pty Limited v Commissioner of Taxation; W.R. Carpenter Australia Pty Limited v Commissioner of Taxation [2008] HCA 33; (2008); George v Commissioner of Taxation (1952) 86 CLR 183.
[5] Shord v Commissioner of Taxation [2017] FCAFC 167, [174]; Commissioner of Taxation v Cassaniti [2018] FCAFC 212.
[6] Item 2 (a) of S 350-10 of Schedule 1 to the Taxation Administration Act 1953 and s 175 of the Income Tax Assessment Act 1936.
[7] Deputy Federal Commissioner of Taxation v Richard Walter Pty Ltd [1995] HCA 23 at [25]; 183 CLR 168; George v. Federal Commissioner of Taxation (1952) 86 CLR 18; McAndrew v. Federal Commissioner of Taxation (1956) 98 CLR 263; F J Bloemen Pty Ltd v Federal Commissioner of Taxation [1981] HCA 27 at [30].
[8] Commissioner of Taxation v Futuris Corporation Limited (2008) CLR 146; [2008] HCA 32; Chhua v Commissioner of Taxation [2018] FCAFC 86. It is also noted that new rules are proposed enabling the AAT to make an order that could limit the Commissioner’s ability to recover a debt for a small business taxpayer until after the Part IVC decision is made: Treasury Laws Amendment (Measures for Consultation) Bill 2022: Increased Tribunal powers for small business taxation decisions.
[9] WR Carpenter Holdings Pty Ltd v Commissioner of Taxation [2007] FCAFC 103, [43] and [56].
[10] S 43(1) of the Administrative Appeals Tribunal 1975
[11] Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353.
[12] Ellison v Sandini Pty Ltd [2018] FCAFC 44 [13].
[13] Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6; Commissioner of Taxation v Futuris Corporation Limited (2008) CLR 146.
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