Archive | January, 2016

Getting a deduction for tax objection and income tax advice costs

A tax deduction is available for costs of preparing and lodging an income tax objection under section 25-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 25-5 provides a deduction for taxpayers for the costs of managing their tax affairs.

Further, fees for taking income tax advice, including obtaining a position statement, are deductible where the advice is provided by a “recognised tax adviser”: paragraph 25-5(2)(e). A recognised tax adviser is either a registered tax agent or a legal practitioner.

Legal professional privilege

A further advantage of taking income tax advice from a legal practitioner is that written advice attracts client legal privilege. Unless the taxpayer waives the privilege, the privilege protects the advice from compulsory disclosure to the Commissioner of Taxation or to a tribunal or court.

Deduction for costs relating to tax affairs of a capital nature not excluded

If the expenditure is not of a capital nature then it may also be allowable as a deduction under sub-section 8(1) of the ITAA 1997. If the expenditure relates to tax affairs of a capital nature then that has no impact on the deduction available under section 25-5: sub-section 25-5(4).

Getting ready to object – the analysis

A key stage in objecting to an assessment is analysing it. The notice of objection is then based on the key numbers drawn from the analysis (see numbers in bold in the analysis in What an analysis might look like below).

The Tax Objection prepares these analyses but is always helpful if the tax agent of the taxpayer prepares an analysis too to give further insight into and understanding, as a comparative, about the tax liabilities assessed.

Example – amended assessments received by a resident individual

You have received two notices of amended assessment for a resident individual from the Australian Taxation Office which show a hike in taxable income for the 2014 and 2015 years and an increase in tax liability. Not only has taxable income increased but there is an increase in medicare levy (that goes up with taxable income), and shortfall penalty and shortfall interest have been imposed.

The notices have scant information about why assessable income and allowable deductions numbers for these years have been amended, explain how and by when the amended assessment needs to be paid and remind the taxpayer of the right to object if dissatisfied with the amended assessment.

Amendments by the Commissioner are disputed

You don’t accept that the amendments have been correctly made in the notices and you believe the original assessments, which were based on the income tax returns you prepared, remain correct.

If an objection to the amended assessments is viable, then we can do the analysis of the amended assessments to identify:

  • whether there really is a dispute justifying an objection;
  • what that dispute is, or what they are; and
  • the tax dollars hanging on what is in dispute.

We can then understand the importance of the relevant arguments and facts and their impact on the possible tax dollar outcomes. Disputing an assessment has a cost so the viability of the objection turns on there being reasonable prospects that the objection can decrease the assessment liability by more than that cost.

What an analysis might look like

The analysis can be done in a number of ways. A spreadsheet is a very useful tool in performing the analysis. For example:

ObjectionAnalysis

The analysis is an insight in to the amended assessments and the reasoning behind the amended assessments giving understanding of them as a whole numerically and in context.

The analysis reveals if the taxpayer has a case

In the above example, it can be seen that the amended assessments arise from specific increases in assessable income and specific disallowances of allowable deductions. It is those specific increases and disallowances that need to be carefully considered to understand whether the taxpayer can gather the facts and evidence needed to ground a challenge to the amended assessments. It could be that the taxpayer only has reasonable prospects of success in relation to some of the adjustments made by the Commissioner and so that should be reflected in the analysis and  taken into account in working out whether an objection is feasible.