Blogs
Managing Tax Disputes Can Be Like Wrestling With a Superhero - 13th June 2018
It is sometimes said that a
superhero like the DC Comics character Superman can be an uninteresting
character because he is, for all practical purposes, indestructible. Critics
have said the knowledge that he will most likely win can make Superman's
adventures monotonous.
A similar accusation could
be levelled at the Federal Commissioner of Taxation (the flesh and bone
personification of the ATO). To most people, including a hefty majority of small
and medium businesses, the Commissioner appears to be immune from defeat. He
has extraordinary powers - he can require a taxpayer to produce almost any
documents even if he doesn't know whether the taxpayer has done anything wrong; his assessments (or amended assessments) are generally valid even if he doesn't
follow the requirements of the taxation legislation; and, perhaps most
worryingly to taxpayers, he can often (but not always) enforce those
assessments and recover tax debts even if that tax is subject to a dispute.
But despite all his powers,
our real life superhero (or supervillain, depending on where you stand) can
sometimes be successfully opposed, if not entirely defeated. But to do this you
must move quickly, know the rules of engagement and have a clear vision of the
outcome.
Starting the process: Speed is key
Except in the extremely
rare scenario where an amended assessment is invalid, the only way to challenge
a taxation decision is to commence so called "Part IVC proceedings" (which is the
part of the tax act that permits a taxpayer dissatisfied with an ATO decision
to have that decision reviewed).
To do this, it is necessary
to lodge an objection in the approved form and within the relevant time period
(generally either two or four years for an amended assessment). This may seem a
trite observation, but it is crucial that these formal requirements are met. If
they are not, you may be left with no recourse against the ATO, regardless of
the facts of the matter.
Even though you may in theory
have up to four years to challenge a decision, in practice the time to act may
be much shorter. Unless you are willing and able to pay the disputed tax before
the issue is resolved (and not many people are willing to do that) you may find
that the ATO can begin to insist upon payment even while you are contemplating
an objection.
It is important to remember
one of the ATO's most specific "superpowers" - a notice of assessment,
including an amended assessment, is conclusive of the correctness of the amount
shown on it. In other words, the Commissioner could sue for the amount of
disputed tax at any time after it becomes due (generally 21 days after the date
of the amended assessment) and the fact that you intend to dispute the
assessment would be no defence to the action.
In practice the
Commissioner will usually give the taxpayer a reasonable amount of time to
consider their position and (if appropriate) lodge an objection before
commencing recovery action. But once recovery action has commenced, it gathers
a momentum that can be difficult to stop. Unless an objection is lodged in a
timely manner, you will soon find yourself dealing with debt recovery officers
who have no interest in hearing about upcoming objections. So if you intend to
object, or even if you just intend to get advice on whether to do so, act as
quickly as you can and keep the ATO informed of your intentions.
Dealing with factual disputes
Balancing the need to act
quickly is the necessity of properly considering what is really at issue. This
is because the notice of objection and materials that support it must properly
deal with the matter in dispute. There are essentially two kinds of disputes
relating to taxation decisions - factual disputes, and disputes regarding a
point of law.
The first kind is a factual
dispute. This may arise where an auditor or other ATO officer simply does not
accept your version of events. Often people can get indignant about the
resulting amended assessment and will want it rectified as a matter of
principle. But, before blindly charging into an objection, consider whether
there is any further evidence that can be produced to support your position.
Are there any further
documents that could prove your case? Are there any independent witnesses that
could provide evidence on the matter? Could the existing materials be better
explained or presented? If not, you may find that the decision maker to the
objection comes to the same conclusion as the original decision maker (a
different tax officer to the original one is generally appointed to preside
over objections).
Disputes regarding points of law
The second kind of dispute
is where the facts are agreed, but there is a dispute as to the application of
the relevant law. These sorts of disputes can be less emotive, but are often
harder to have successfully changed on objection. This is because the objection
decision maker will be bound by the ATO's position on the application of the
law, as stated in its public rulings. Objection decision makers may also be
influenced by so-called "non-binding decisions" that the ATO may have issued,
such as "interpretative decisions".
If you are involved in this
kind of dispute and wish to have any chance of succeeding at the initial
objection stage (as opposed to, say, a subsequent review by the Administrative
Appeals Tribunal (AAT)) you will need to demonstrate that the outcome you are
looking for does not deviate from the ATO's publicly stated views.
If you can't distinguish
your position from the Commissioner's public rulings, then in practice it may
be necessary to accept that the initial objection decision by the ATO will be
unfavourable to your preferred outcome. In such a case you should only object
if you are willing to follow up with an application to the AAT for a review of the
objection decision or an appeal to the Federal Court.
Litigation and compromise
If you have been
unsuccessful in your objection, all is not lost. An application to the AAT for
review of the objection decision is open to you, whether the dispute is factual
or regarding a question of law. Such an application may be particularly
appropriate if there are large amounts of penalties involved, even where the
principal amount of tax is not in dispute. The AAT can sometimes be more
reasonable in deciding the appropriate level of penalty or in exercising the
discretion to remit penalties.
If there is a question of
law at stake, an appeal to the Federal Court is also possible, however it is
outside the scope of this brief article to cover the litigation process itself.
However a quick word of caution is warranted - litigation tends to highlight
the Commissioner's "superpowers".
First, the burden of proof
is shifted; it will be up to you to prove the ATO's assessment is excessive. In
practice, this means that if facts are in dispute you will rarely be able to
rely on bare assertions. Documentary evidence is strongly preferable.
Further, compared to almost
every ordinary taxpayer, the Commissioner has practically infinite resources.
He is also required to administer the tax law according to its terms. This
means that the ATO cannot, and will not, simply compromise on an arbitrary
figure for the sake of saving further legal costs.
But this does not mean the
Commissioner cannot compromise at all. Like every government agency, the ATO is
very aware that litigation costs money that can sometimes be put to better use
elsewhere. If you can demonstrate that there is a real risk to the ATO that it
will lose on a particular issue, it may be willing to compromise by amending assessments
in relation to that particular issue if, for example, you agree to withdraw
your application in relation to other issues. There may also be some scope to
compromise by reducing penalties or remitting interest in appropriate
circumstances.
Do the good guys ever win?
Many taxpayers, and many of
us tax practitioners, agree that the Commissioner is, in fact, "overpowered".
But successive governments have chosen to accept, and often further entrench,
this situation. Debating its merits is no more useful than entering into an
twitter argument over whether the Incredible Hulk could defeat Superman. The
best we can do is to keep what small amount of kryptonite we can get and use it
very strategically once in a while.
AV Chartered Accountants - Committed to Your Business Success
Two convenient locations:
WARATAH +61 2 4629 5533 | MAITLAND +61 2 4933 6100
Email: mail@avca.net au
Go Back