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Archive | Objections

The onus of proof on taxpayers and the common good

As I mention in my 2015 blog post on the onus of proof:

the onus on a taxpayer is an outlier and “reversed” when compared to the onus in other kinds of legal disputes.

Even when compared to the civil case onus, where disputes are also resolved on a balance of probabilities, the tax onus of proof is unusual. It is unlike the civil case standard which generally requires a litigant taking civil action to prove their case. That differs from disputes over Australian tax assessments where it is the taxpayer who must prove their position taken in their tax filings.

Beginnings of onus on the taxpayer

This has long been the case with Australian income tax even before the introduction of the self-assessment system in the late 1980s. Paragraph 190(b) of the Income Tax Assessment Act (ITAA) 1936, which imposed the burden of proof on taxpayers on objections and appeals over tax assessments, was in the original 1936 legislation.

Advent of self-assessment

In a sense tax legislation caught up with paragraph 190(b) with the onset of self-assessment in the late 1980s. The self-assessment system moved responsibility to assess one’s tax viz. to get tax filings right, wholly onto the taxpayer. The Australian Taxation Office (ATO) website explains how self-assessment works:

we accept the information you give us is complete and accurate. We will review the information you provide if we have reason to think otherwise
Self-assessment and the taxpayer

Mutual reliance

It is a corollary of reliance on the taxpayer to get their tax filings right that a taxpayer can also demonstrate the completeness and accuracy of those filings when called on to do so by an ATO review, audit or investigation.

This proposition is made clearer when considered in the wider context of the body of Australian taxpayers meeting their tax obligations. Taxpayers, who can demonstrate accuracy and justify their tax filings, expect, or might be entitled to mutually expect, that other taxpayers, under the same obligations and contributing to the same pool of revenue; are also able to so demonstrate.

How the tax burden of proof can work

Let us say:

a taxpayer T returns no income in an income year;
the ATO reveals that T has received $1m in that period;
T asserts that the $1m was a gift given to T by an overseas relative, and that is why T believes T’s income tax return was correct; and
the ATO see a possibility that the $1m could have been income of T and T’s claim of a gift may not be true.

With the onus of proof on T, T must produce the information which supports T’s claim of a gift and T’s return of no income. That seems reasonable in the context of the $1m receipt being T’s own affair with which T is familiar enough to have excluded from T’s income in T’s income tax return. Having omitted to return $1m that way it follows that it should be up to T to demonstrate that the $1m is not T’s income on review.

If the onus of proof were the other way, and on the Commissioner, then where the Commissioner has scant information to demonstrate that the $1m or some part of it was income and the Commissioner may then be unable to positively prove the $1m was income of T so:

T would avoid tax liability on the $1m even though the $1m may have been T’s income; and
it would be in T’s interests to conceal information, including information about the possible income character of the $1m from the Commissioner, which is then unavailable to the Commissioner or costly to the ATO to establish with other means or from other sources, rather than to disclose information to positively show that the $1m was not T’s income which T would be compelled to do if the onus of proof is on T.

Parliamentary inquiry

A House of Representatives Standing Committee on Tax and Revenue (Committee) inquiry into tax administration has made recommendations on 26 October 2021 including for:

increase in transparency of and communication by the ATO of ATO compliance activities;
reversal of the onus of proof (from the taxpayer to the Commissioner) after a certain period where the Commissioner asserts there has been fraud or evasion;
introduction of a 10 year time limit on the Commissioner for amendment of assessments where there has been fraud or evasion; and
a moratorium on collection of tax debts by the Commissioner until a taxpayer has had the opportunity to dispute the debt.

The complexity issue

The long understood weakness with the self-assessment system, particularly with income tax collection in Australia, is the complexity of tax laws: see https://go.ly/x0MIU from the Australian Parliamentary website. This was not a significantly lesser weakness under the predecessor system where ATO resources in the ATO assessment process where sparse especially to assess activity where compliance with complex laws was in issue. Since self-assessment began income tax laws have only increased in complexity and, demonstrably, in volume. Yet, over the same period there has been:

improvement in the drafting, clarity and usability of tax laws epitomised by the ITAA 1997 and its style;
a release and expansion of public and private rulings, determinations and guidance on tax laws and guidance on the completion of tax returns; and
access to them over the internet.

Role of professional tax advisers

Even before these advancements under self-assessment, 97% of corporate taxpayers and 74% of individual taxpayers used tax agents to assist them with meeting their tax obligations. Clearly tax agents and other professional tax advisers continue as a vital resource to taxpayers, especially business taxpayers, albeit at cost; to help them ensure obligations to comply with tax laws, especially complex laws, are met.

When the ATO overreaches

A difficulty I have faced in tax disputes is where a client does have information or proof which adequately does demonstrate the position taken in a tax filing but the ATO does not accept that information as sufficient proof. A related difficulty is where complex law is involved leading to protracted difference with the ATO over how tax law applies to what a taxpayer has done.

Taxpayers, especially business taxpayers reliant on professional tax advisers, are up for significant inconvenience, costs and expenses while a dispute with the Commissioner continues including where disputes arise when the taxpayer has made little or no mistake. The use of extensive debt collection powers by the Commissioner before disputes resolve is rightly a matter of controversy in tax disputes where:

it can be established that the tax dispute is genuine; and
deferral of the disputed tax debt poses no or minimal risk of permanent loss to the revenue and the community.

It could well be that there needs to be greater control and oversight of the Commissioner’s use of collection powers in these cases as there appears to be unconstrained and disproportionate use of them by the ATO when risks of loss to the revenue may have been low. The recommendation for checks and further transparency about ATO use of its compliance powers thus makes sense. Unfortunately debt collection in Australia, including collection from business, frequently involves unscrupulous and globally mobile debtors and even the Commissioner is not always well placed to judge risks of loss to the revenue or not of using the range of collection powers available to the Commissioner. It seems inevitable that some uses of collection powers by the Commissioner are not always going to appear proportionate when considered in retrospect.

Limitation periods

The limitation periods imposed under section 170 of the ITAA 1936 are already a departure from the taxpayer expectation, related to the expectation described above, that other taxpayers will pay tax based on the way they have filed or demonstrably should have filed their taxes. Amendments are restricted after expiry of limitation periods which also means the expectation can no longer be met by assessment amendment. The limitation periods, or periods of review, are there to ensure that the Commissioner and taxpayers properly finalise tax liabilities broadly not only within the expectation but also expeditiously without the prejudice to the other party of delay. Veracity of tax filings get harder to prove after a longer period of time especially once records are archived or lost beyond the expiry of record-keeping obligations to keep those records. Belated moves to amend can thus be unfair on the other party for that reason and for others.

Fraud and evasion

The reversal of the onus of proof proposed by the Committee seems limited and justifiable as a narrow exception. It would only apply where the Commissioner alleges fraud or evasion and only after a “certain” period has elapsed. In other words the onus of proof would remain on the taxpayer to disprove fraud or evasion if the Commissioner makes the allegation (which the Committee proposes must be signed off by a senior executive service (SES) officer of the ATO) within that period. But after that period it is only then proposed that the onus is to move to the Commissioner to prove fraud or evasion.

Alleging it for the right reasons

I have been involved in tax disputes where the Commissioner has alleged fraud or evasion even though available facts are just as much explainable by taxpayer inadvertance without there having been fraud of evasion. It was apparent in those disputes that the Commissioner was alleging fraud or evasion because the period for amendment of assessments, which can be as little as two years under section 170, in the absence of fraud or evasion, had expired. The difficulty for a taxpayer, with the onus of proof on the taxpayer, is that if the Commissioner makes a fraud or evasion allegation it is then up to the taxpayer to disprove it under current law: Binetter v FC of T; FC of T v BAI [2016] FCAFC 163 and, it follows, to disprove it at a time which may be remote from when the taxpayer may have had access to or opportunity to obtain evidence to disprove it.

It is perverse that, under current rules, the Commissioner can use unsubstantiated fraud and evasion claims against taxpayers to overcome a limitation period bar that would otherwise block the Commissioner from amending a tax assessment. That may well justify the Committee’s recommendations that the onus of proof of fraud or evasion in these delayed cases should move to the Commissioner but that the onus of proof remain on the taxpayer with respect to disproving other aspects of an assessment.

10 year limitation period for fraud and evasion cases?

But is it also necessary to impose a 10 year limitation period where there has been fraud or evasion by a taxpayer once:

SES officer sign-off is required for making a fraud or evasion allegation; and

the onus of proof of fraud or evasion is imposed on the Commissioner;

as also recommended?

Why would or should a taxpayer whose filing is tainted by demonstrable fraud or evasion, and is thus improper, be entitled to expect that the Commissioner must move to finalise taxes within a limited period of time, especially if there has been delay in the Commissioner getting information indicating shortfall of tax due to fraud or evasion by the taxpayer?

Australian Tax Office maps lawyer-lodged objection decision process

The Australian Taxation Office has recently reviewed how it engages with lawyers. They have released the chart below (best viewed on a large screen) setting out how lawyer-lodged objections for lawyers’ clients progress to decision.

Some comments and explanation

RDR is Review and Dispute Resolution, an ATO section (business line) established by the ATO in 2013.

We have had positive experience of the “triage” process and the aid of competent triage officers to help resolve procedural dilemmas so that the objection officer can focus on the grounds of objection.

The chart encourages lawyers’ use of Objection form – for tax professionals (NAT 13044) to achieve “direct routing”. We have said on this blog why this form is not so helpful. We don’t use this form to prepare an objection for a client and we haven’t had routing trouble we have noticed.

The odd way disputes over PAYG deducted from salary are resolved

A recent Federal Court case Price v. Commissioner of Taxation [2019] FCA 543 demonstrates the divergent way a taxpayer must go about contesting a dispute with the Commissioner of Taxation over pay as you go (PAYG) tax withholding amounts taken from salary or wages received by the taxpayer.

Right to object about PAYG credits not available

Although the credit for PAYG withholding amounts is notified on a notice of assessment of income tax the PAYG credit is not one of the matters that can be disputed by objection, or more specifically, an objection under Part IVC of the Taxation Administration Act (C’th) 1953 (“TAA”) as discussed on this blog in: Is an objection needed to amend a tax assessment? https://wp.me/p6T4vg-k.

To formally dispute a PAYG credit, especially where the salary and wages from which the withholding is made are not disputed, court action may need to be taken instead. The proceeding that can be taken by a taxpayer is further limited as the Commissioner’s refusal to allow PAYG credits cannot be challenged under the Administrative Decisions (Judicial Review) Act (C’th) 1977: Perdikaris v Deputy Commissioner of Taxation [2008] FCAFC 186. So in Price, the taxpayer (Robert) sought a declaration from the Federal Court of his entitlement to credit for PAYG withheld by his employers under section 39B of the Judiciary Act (C’th) 1903.

Price v. Commissioner of Taxation

In paragraphs 6 to 8 of the Federal Court decision in Price, Thawley J. outlined the legislative basis of the PAYG withholding regime including in the context of the predecessor PAYE (pay as you earn) regime which operated until 2000. In paragraph 2 Thawley J. confirmed that the taxpayer’s proceeding under section 39B of the Judiciary Act, rather than under Part IVC of the TAA, was correctly instigated.

Why the taxpayer risked heavy costs in the Federal Court

Action in the Federal Court is expensive, and an unsuccessful litigant in the court is generally liable for the legal costs of the successful litigant. Those legal costs are significantly more than the costs of lodging an objection or appealing against an objection decision with which the objector is dissatisfied in the Administrative Appeals Tribunal (AAT) which are costs risked in Part IVC of the TAA disputes. The AAT does not award legal costs.

It follows that considerable PAYG credits need to be in dispute before action against the Commissioner in the Federal Court is worth the risk of legal costs at stake.

In Price, Robert was employed as a truck driver by four entities controlled by his brother Jim from the 2001 to the 2016 income years. Robert claimed PAYG credits for the entire period so considerable PAYG credit entitlements were at stake. Robert hadn’t lodged tax returns returning his salary and wages income until 26 September 2016 when all sixteen income tax returns were lodged together. Robert sought all sixteen years’ worth of tax credits then.

The employer and not the Commissioner is tested

One would think that the Commissioner could easily ascertain PAYG credit from amounts remitted by an employer for a recipient of salary and wages. If amounts withheld from salary and wages haven’t been remitted to the Australian Taxation Office (ATO) then that would seemingly be conclusive or near conclusive.

But the point of remittance of PAYG credits to the ATO is not the point at which the TAA operates to confer a PAYG credit entitlement to a taxpayer. Sub-section 18-15(1) of Schedule 1 of the TAA allows PAYG credit to a taxpayer where there has been withholding by the party with the withholding obligation, viz. the employer in the case of an employer who pays salary and wages, of the amount withheld. Sub-section 18-15(1) necessitates an enquiry into whether or not the amounts claimed for PAYG credit were “withheld” by the employer whether or not the amounts “withheld” were ever remitted to the Commissioner. In the Federal Court, in its original (non-appellate) jurisdiction, whether amounts have been withheld is a matter of fact to be established to the court on the balance of probabilities.

In another Federal Court decision cited with approval in Price, David Cassaniti v Commissioner of Taxation [2010] FCA 641 at paragraphs 163 to 165 Edmonds J. thus focussed on the actions of the employer. Edmonds J. explained and contrasted the evidential value of an employer’s apparent withholding to a (its own) bank account which, on the one hand, “clearly demonstrates” a withholding and an employer’s apparent withholding by book entry, which may be insufficient to demonstrate withholding by the employer depending on the surrounding circumstances, on the other. It was also relevant in David Cassaniti, as it was in Price, that the employer had been a company enabling Edmonds J to accept the books of account of the company as first instance evidence of what the books of account contained in accordance with section 1305 of the Corporations Act 2001.

Employers were wound up companies

In the Cassaniti line of cases, which also included the Full Federal Court decision in Commissioner of Taxation v Cassaniti [2018] FCAFC 212, relevant company records of the employers were thus sufficient to establish to the Federal Court that amounts had been withheld by the party with the withholding obligation. As in Price, in which the Cassanitis were also involved, the relevant employer companies had been wound up but nevertheless, by virtue of section 1305 of the Corporations Act 2001, the financial records of these companies in the (earlier) Cassaniti cases were sufficient evidence to show that the companies had made the relevant withholdings despite no record of remittance to the ATO. Robert’s case in Price relied on PAYG payment summaries produced from accounting records of the employer companies being accepted as financial records of the companies.

Robert was unsuccessful. The tax returns and PAYG payment summaries were produced from MYOB in September 2016 after the employers were wound up so the court refused to accept the PAYG payment summaries as financial records of the wound up companies. Thus the PAYG payment summaries were not first instance evidence of the PAYG withholdings asserted in them. In paragraph 87 Thawley J. listed findings showing that withholdings were not made for Robert:

the absence of any records from the ATO to that effect or supporting inferences of withholding;
the absence of any contemporaneous record of any person or entity who paid Robert evidencing withholding;
the fact that every year or thereabouts Robert asked for but was not provided any PAYG payment summary;
the fact that no superannuation was paid by any of the employer companies for Robert;
the fact that Allyma Transport Services did prepare PAYG payment summaries for other employees; and
the fact that the bank records suggest a number of different entities paid the weekly amounts into Robert’s account (including NT TPT Pty Ltd, PMG Transport, CJN Transport) and that at least one of those entities (PMG Transport) probably treated the payments to Robert on the basis that he (or a partnership of which he was a partner) was a subcontractor rather than an employee.

The unremitted PAYG no man’s land

Cases such as the Cassaniti cases and Price are relatively rare. In that context we can observe that it is precarious to be in the position of an employer, or of a director of an employer, obligated to withhold PAYG amounts from employees’ salary and wages where those amounts have not been remitted to the ATO. The employer and, in the case of a company, its directors personally where director penalty notices issue to the directors and trigger personal liability under Division 269 of Schedule 1 of the TAA, are liable to the Commissioner for these amounts. Further failure to remit PAYG withholding on salary and wages is a strict liability offence under Division 16 of Schedule 1 of the TAA.

The pursuit of unremitted salary and wage PAYG withholdings from the Commissioner can potentially be a fraud against the revenue where employers and their directors have overtly arranged their affairs so that they are not exposed to the above liabilities and prosecution for failure to remit. Confinement of salary and wage earner remedy to proceedings under section 39B of the Judiciary Act does operate as a bulwark against that type of fraud.

It is to be hoped that reporting of and liability for PAYG withholding on salary and wages can be reformed and streamlined so that employees can better monitor withholding for them in real time and opportunities for “phoenix” PAYG credit frauds on the revenue can be reduced.

Small business now has its own dedicated taxation division of the AAT

To give effect to a bi-partisan initiative, changes aimed at making it easier, cheaper and quicker for small businesses to appeal to the Administrative Appeals Tribunal (AAT) against decisions by the Australian Taxation Office (ATO) commenced on 1 March 2019. Small business taxpayers contemplating a tax appeal to the AAT with scant legal knowledge or representation will benefit most from the changes. Represented small business taxpayers too can benefit from the easier, cheaper and quicker AAT tax appeals and may improve their prospects of obtaining funding by the ATO of legal representation costs of their appeal.

Under the changes small business taxpayers can appeal adverse tax objection decisions to the new Small Business Taxation Division (SBTD) of the AAT. The Small Business Concierge Service (SBCS) within the office of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) also commenced on 1 March 2019 to assist small business taxpayers with appeals to the SBTD.

Tax and related review by the AAT

The AAT can review decisions on objections against tax assessments and other specified decisions made by the Australian Taxation Office (ATO) in the ATO domain on appeal under the Taxation Administration Act (C’th) 1953 viz decisions on:

Commonwealth taxes: income tax, goods and services tax, excise, fringe benefits tax, luxury car tax, resource rent taxes (petroleum and minerals) and wine equalisation tax;
Australian Business Numbers, fuel schemes, fuel tax credits, the ATO’s superannuation administration; and
penalties and interest relating to a. and b.

The SBTD can review these decisions where the taxpayer/applicant is a small business entity under section 328-110 of the Income Tax Assessment Act (C’th) 1997. A small business entity is an entity carrying on business with an aggregated turnover of less than $10 million in the current income year.

Cheaper – fees for AAT review

The ordinary filing fee for review of (appeal against) a reviewable decision by the ATO in the Taxation & Commercial Division of the AAT is $920 as at 1 March 2019. A single fee can apply if there are related multiple decisions in relation to the same appellant. A concessional fee of $91 applies for disadvantaged appellants: https://is.gd/1s5Vtt

The ordinary filing fee for review by the SBTD is a reduced $500. AAT regulations apply so that a SBTD taxpayer/applicant who the AAT finds is not a small business entity must pay an uplift to the ordinary $920 fee and their appeal will transfer to the Taxation & Commercial Division of the AAT.

Easier – Small Business Concierge Service

The SBCS of the ASBFEO assists a small business taxpayer with the SBTD appeal process and with advice about the appeal or prospective appeal to the SBTD the small business taxpayer plans. Although the SBCS is within the office of the ASBFEO and does not itself give legal advice, the SBCS:

offers a one hour consultation with an experienced small business tax lawyer to an unrepresented small business taxpayer prior to the appeal so the lawyer can review the facts pertaining to the ATO decision and provide advice on prospects of success of the appeal. In arranging a pre-appeal consultation the taxpayer needs to be aware of the 60 day time limit that generally applies for making appeals to the AAT on these decisions. A co-payment of $100 for the consultation is required from the small business taxpayer and the balance of the small business tax lawyer’s fee for the consultation is paid by ASBFEO;
assigns an ASBFEO case manager (not to be confused with the AAT case manager who will manage the appeals for the AAT) to help the small business to compile the relevant documents to maximise the benefit of the one hour pre-appeal legal consultation;
assists with the appeal to the SBTD if the small business chooses to go ahead with the appeal. The ASBFEO case manager assists with the applications and submissions to the SBTD and with engagement by the small business taxpayer with the AAT process; and
offers a second one hour consultation with an experienced small business tax lawyer to an unrepresented small business taxpayer after the appeal commences with the cost of the second consultation met by the ASBFEO without a co-payment.

Even if an unrepresented small business taxpayer utilises both hours of consultation with the assistance of the ASBFEO case manager it is still cheaper for the small business taxpayer to commence their appeal to the AAT for $600 in the SBTD, including the $100 co-payment, than to commence for $920 in the Taxation & Commercial Division.

Quicker – 28 day turnaround of reasons for decision

Decisions of the SBTD are to be “fast tracked” so that reasons for decisions will be given to the small business taxpayer usually within twenty-eight days of the hearing where the appeal goes that far. Where practicable an oral decision is to be given at the end of SBTD hearings.

Cheaper – further support for legal costs for SBTD appellants

Although the AAT, and the SBTD and the Taxation & Commercial Division in particular:

is not a court;
does not make cost orders;
isn’t bound by the legal rules of evidence; and
of itself, imposes no imperative to have legal representation;

the reality is that, where significant tax is in dispute in an appeal to the AAT, most informed appellants are legally represented and present their case in conformity with rules of evidence as if the AAT was a court. The ATO, too, selectively attends the AAT with external legal representation and, if not, ATO officers who conduct cases and appear at the AAT for the ATO are likely to have legal skills and experience. AAT decisions are reported/published and are used as legal precedent. Appellants can, though, more readily request and obtain anonymity from the AAT in tax cases than they can in courts which operate on the principle that justice is to be done in public.

The SBTD initiative partly synchronises the legal representation choice of a small business taxpayer and the ATO in a SBTD case. The ATO has transparent policy positions on when the ATO will use external legal representation in the AAT. The ATO’s position generally is that the ATO will use external legal representation where the case has high legal or factual complexity or where the case has implications for other taxpayers. Where the ATO is to engage legal representation in the SBTD then the ATO:

must inform the appellant that it proposes to engage external legal representation; and;
may meet the legal costs of the legal representation of the small business appellant that do not exceed the ATO’s legal costs of its own external legal representation. That is a possibly contentious integer as the ATO has and uses its leverage, which a small business doesn’t have, to negotiate lower fees from legal counsel with expectation of more ATO briefs.

Cheaper – greater opportunity for ATO litigation funding

This opportunity for a small business taxpayer to obtain the assistance of the ATO with their costs of legal representation in the SBTD dovetails with the test case funding policy of the ATO. Like under that policy the decision to assist a small business taxpayer with its legal costs of a SBTD appeal is with the ATO. Where the case has implications for other taxpayers then it is more likely that the ATO will both seek its own external representation and will fund the small business taxpayer’s legal costs up to the same level. Although time will tell, a small business taxpayer appears to be in an enhanced position to obtain ATO assistance with their legal representation costs in the SBTD as compared to taxpayers generally who appeal to the Taxation & Commercial Division of the AAT or who appeal directly to the Federal Court which involves significantly greater costs.

Unlike the Federal Court, the AAT does not order costs. That means that the legal fees and costs of a small business taxpayer running an appeal in the SBTD will only come from the ATO SBDT case funding or ATO test case funding, if not self funded, as legal costs won’t be awarded by the AAT even where the small business taxpayer is successful in a tax appeal case.

ASBFEO already acts as a gateway and assists small businesses to access funding for small business disputes. It is understood that the SBCS will be similarly resourced to act as a gateway to assist small businesses to obtain legal representation funding under both SBTD or ATO test case funding guidelines.

Rights to object to a tax assessment lost when waived under a deed to settle a tax dispute

In EE&C Pty Ltd as Trustee for the Tarcisio Cremasco Family Trust v. Commissioner of Taxation (Taxation) [2018] AATA 4093 (30 October 2018) the taxpayer, after concluding a minute of terms of agreement with the Commissioner of Taxation (the Commissioner) on 18 January 2011, entered into a deed to settle a tax dispute with the Commissioner for the 1999 to 2005 years of income on 23 March 2011 (the Deed of Settlement).

Assessments in line with settlement

On 2 June 2011 the Commissioner issued a series of assessments for those years primarily increasing, and in some income years reducing, the taxable income of the taxpayer in line with the Deed of Settlement.

Under the contractual terms of the Deed of Settlement the taxpayer was precluded from objecting against the assessments which issued as negotiated and set out in the terms.

Despite that the taxpayer had its lawyers prepare and lodge “objections” against the 2 June 2011 assessments on 4 June 2014.

Right conferred by statute overrides the terms to settle?

Apparently the lawyer had explained to the taxpayer that the taxpayer’s right to object against a taxation assessment, or more precisely a “taxation decision” under Part IVC of the Taxation Administration Act (C’th) 1953 (the TAA), is a statutory right which had lead the taxpayer to understand that their right to object persisted despite the apparent waiver of their right to object against the assessments in the Deed of Settlement.

Commissioner relied on the taxpayer’s waiver in the Deed of Settlement

The Commissioner took a contrary view and refused to treat the 4 June 2014 “objections” as valid objections.

Waiver did impact the statutory right to object

The AAT found that the Commissioner was correct in his approach. Deputy President Forgie of the AAT concluded that, as the 4 June 2014 “objections” were invalid, the AAT had no jurisdiction to review how the Commissioner dealt with them under the TAA and the Administration Appeals Tribunal Act (C’th) 1975.

Capability to waive right to object/appeal an imperative in settling tax disputes

At paragraph 89 of the AAT decision, Deputy President Forgie described a functional imperative that a taxpayer can waive their statutory right to object or appeal to settle Part IVC review and appeal proceedings:

The authorities of Cox, Grofam, Fowles and Precision Pools all support the Commissioner’s reaching a settlement with the taxpayer. The taxpayer must be permitted to forego his rights of objection and review or appeal just as the Commissioner may fulfil his obligation to decide the objection and respond to the review or appeal in terms that do so but are reached by way of agreement with the taxpayer rather than by, for example, imposition of a decision of the Tribunal or judgment of the Court. Agreement may be reached before a taxpayer engages in the formal processes of taxation objection leading to an objection decision and on to review or appeal or at some point during the process.

Why a Part IVC right to object or appeal is a type of right that can be waived

The AAT drew a distinction between a statutory right that can be waived under a contract and a statutory right that cannot. At paragraph 90, Deputy President Forgie referred to the general rule, expressed by Higgins J. in Davies v. Davies [1919] HCA 17; (1919) 26 CLR 348, at p 362:

Anyone is at liberty to renounce a right conferred by law for his own sole benefit; but he cannot renounce a right conferred for the benefit of society.

and gave examples of other statutory rights where the recipient of the right may abandon the right or not pursue the right. It follows that as a taxpayer is the sole recipient of the legal right to object under Part IVC, the taxpayer is able to renounce that right in the course of settlement of a Part IVC dispute.

Trouble objecting to a tax assessment again

In an earlier blog post we observed that the practical way and thus the only way to challenge Federal and State tax assessments is by objecting against the assessment with an objection.

The Taxation Office raises the tax assessment & decides the objection!

Like the decision to issue a tax assessment, the objection to that assessment, if any, is decided by the (office of the) relevant Federal or State Commissioner of Taxation too. The Commissioner will usually require that the objection is decided by an objections officer other than the officer who raised the tax assessment.

Still, even if that process is followed, an objections officer will be inclined to support the position of their colleague unless the taxpayer can show, with the objection, that the assessment is wrong. The burden of showing it is wrong is on the taxpayer. So the objection needs to make out a convincing case before the tax liability in the tax assessment raised by a colleague will be reduced by the objections officer.

Objection – a one off chance

Where the taxpayer has given the Taxation Office a hastily prepared document objecting against an assessment, the objection right is used up. If the objections officer disallows the objection then the tax law doesn’t give the taxpayer any further right to object against that assessment again.

After an objection against an income tax assessment is disallowed the taxpayer faces the generally expensive option of appeal to the Administrative Appeals Tribunal or the always expensive option of appeal to the Federal Court. Either way the taxpayer is usually required to appeal within sixty days of the disallowance and will generally be limited to the grounds and arguments raised in the objection unless the taxpayer can convince the tribunal or the court that there are reasons why further grounds not set out in the objection that should be taken into account.

Had the taxpayer known this then he or she may have been more wary about rushing to lodge an objection – in the case of a disputed original income tax assessment, the taxpayer will have either two years or four years following the original notice of assessment to lodge an objection.

It is important that the taxpayer uses this time advisedly to ensure an objection (only one per disputed tax assessment) is prepared which:

demonstates that the tax assessment is wrong; and
establishes grounds of objection rigorous and comprehensive enough to be used in a tribunal or court appeal should the objection be disallowed.

Withdrawal

Sometimes a hastily or inadequately drawn objection doesn’t raise valid grounds at all. The Australian Taxation Office has been known to invite taxpayers to withdraw their objection in these cases. Then they no longer have to decide to disallow the objection. In that situation it may be possible to object again, with better grounds, but it is open to the ATO to contend that the taxpayer has used up their right to object.

It’s clearly best objecting with rigour first time.

Objections and aged tax assessments

Challenging conclusive tax assessments

In an earlier blog post we looked at if an objection is needed to amend a tax assessment. We observed that, under the law, an assessment is taken to be correct and conclusive and an objection is the way by which a taxpayer can challenge that concluded correctness under the design of the law.

But, for reasons of convenience, cost and informality, taxpayers and tax agents often seek a request for an amendment of an assessment by the Commissioner of Taxation. But, as stated in our blog post, a request for an amendment is unassertive and the Commissioner has no particular obligation to consider and accede to the request.

Aged tax assessment

If a tax assessment is an aged assessment a taxpayer, who requests an amendment of the assessment, may be prevented by a time limit from obtaining the reduction in tax they seek. The Commissioner can amend an aged assessment of tax, including an amendment to decrease tax sought in a written request for the decrease by a taxpayer, within periods specified in section 170 of the Income Tax Assessment Act 1936. For individual taxpayers, with simpler income tax affairs, the period allowed is two years from the day on which the taxpayer was given notice of the assessment and, for individuals with more complex affairs, it is four years from that day – see items 1 and 4 in the table under sub-section 170(1).

If the period applicable to the taxpayer has expired then the Commissioner is prevented from making the amendment sought in a request for an amendment of the assessment by the taxpayer unless an exception in section 170 applies.

Amendment of an aged assessment following an objection

Time limits for amendments of assessments in section 170 are subject to:

an exception to give effect to a decision on an objection or an appeal – in Item 6 of the table; and
an exception where the taxpayer requests an amendment in the approved form before the time limit has been reached even if the Commissioner will not be able to amend the assessment by the time the time limit is reached: sub-section 170(5).

It follows that an objection is the only way to achieve an amendment of an aged assessment of tax if the assessment has aged so far that the applicable section 170 period for amendment has expired and the taxpayer is yet to seek an amendment of the assessment.

That only way, viz. by objection, has its own distinct time limits which match amendment of assessment time limits but with an important difference which has been in place since 1986 (see NT87/1594 and Commissioner of Taxation [1988] AATA 73; (1988) 19 ATR 3336; 88 ATC 381 at paragraph 22). If a taxpayer seeks to object against an aged assessment, where the applicable section 170 period has expired, then the taxpayer can apply for an extension of time to lodge the objection under section 14ZX of the Taxation Administration Act 1953. In the application the taxpayer must make the case why the extension of time to extend the period in which the objection can be lodged should be allowed. We have looked at late objections in our blog – Is there a time limit for putting in an objection.

The vital difference

So the difference between an objection against an aged assessment and a request for an amendment on an aged assessment, where the statutory time limit to amend or object has expired, is that the Commissioner has the power to:

allow an application for an extension of time to lodge an objection against an aged assessment;
allow the objection lodged out of time; and
amend the relevant assessment accordingly;

but an aged assessment can’t be requested and amended out of time if the time period allowed to the Commissioner to amend the aged assessment has expired.

ATO in house facilitation – alternative dispute resolution with them?

Following a pilot program and formative adoption of the in house facilitation process, the ATO has introduced specific guidelines including:

a precise IHF process template; and
a statement of expectations from the IHF;

for in house facilitation (IHF) of tax disputes with the ATO. The ATO offers IHF as a general means of mediation of tax disputes where the facilitator (mediator) is an ATO officer.

ATO in house facilitation video

Getting serious about dispute resolution with in house facilitation

IHF can be a valuable alternative to a taxpayer with a dispute with the ATO. So the move to entrench a correct structure of the facilitation process is to be welcomed. This should overcome the reluctance and non-adherence by some ATO officers who have come less than well prepared and committed to altenative dispute resolution in the formative IHF processes experienced by some taxpayers so far.

Honing the facts and issues in a dispute and saving costs

Indeed one significant benefit to a taxpayer of using IHF should be to normalize how an ATO case officer is dealing with their problem. A case officer may be fixated on a matter or series of matters which are divergent with a taxpayer’s understandings or divergent with the facts understood to be relevant to the taxpayer. IHF can be a real opportunity to engage with and even press the case officer and maybe his or her leadership. That engagement is with the aid of a somewhat detached ATO facilitator in an effort to reach a common or improved understanding of the relevant facts and issues. Even if that facilitation doesn’t result in a final determination of the dispute, it can, at least, lead to a narrowing of issues in dispute. A big reduction in the ultimate cost and effort of resolving the dispute can follow.

Contrast with position paper exchange

IHF is aimed at, and available only to, individual and small business taxpayers. Not all disputes are complex enough, or have tax at stake, which justify the ATO committing resources to preparing a paper setting out their position. With IHF generally available the opportunity is there for both sides to put their positions without going through a time-consuming sequence of preparing and exchanging position papers and responses. If a taxpayer and the ATO observe the entrenched IHF process and the statement of expectations, and are both well prepared at an IHF session, both parties should leave the IHF with a better understanding and honing of the matters in dispute, if not a resolution.

IHF – an open-ended offering

That is not to say that a taxpayer should not pursue IHF and exchange position papers with the ATO too. The ATO offers IHF during and following audit, after audit and after an assessment is raised, before and after an objection is lodged and before or and after an appeal to a tribunal or court is sought. In the latter cases a facilitation may have limited use to a taxpayer because of its interaction with time limits for objections and appeals and the availability of mediation facilities outside of the ATO offered once the matter reaches a tribunal or a court.

Like with a position paper, the best time to pursue IHF will usually be before an assessment is raised, if that is possible. That is the best chance of being before the ATO has a view it wishes to entrench and defend.

Timing of engagement

IHF thus offers a taxpayer some opportunity to control the timing of engagement with ATO case officers. The ATO understands that this can afford both taxpayers and the ATO with opportunities to reach common ground and to resolve tax disputes sooner. That is in everybody’s interests. Even where little progress is made in an IHF due to the nature of dispute, objection and appeal rights are preserved and the IHF process can still be of strategic value to a taxpayer on the long haul to resolving a protracted tax dispute with the ATO.

Perils lodging a really late objection against a tax assessment

As mentioned in an earlier post – Is there a time limit for putting in a tax objection?

time limits for lodging objections have been based on sixty days but, for most of the significant federal taxes such as income tax, goods and services tax and fringe benefits tax, among others, extended four year and two year limits apply based on the issue of original assessments. Limits for amended assessments are based on the longer of:

sixty days from the issue of the amended assessment; and
the remaining limit on the original assessment.

Link between limits on time to object and on time to amend assessments

The extended four year and two year limits on lodging objections for these taxes are congruous with limits on the amendment of assessments which restrain both the Commissioner and the taxpayer.

Limit on time to amend an assessment doesn’t apply to an amendment following an objection

The taxpayer has a rare advantage over the Commissioner in the context of income tax because section 170 of the Income Tax Assessment Act (ITAA) 1936 provides an exception from these limits on the amendment of assessments for an amendment at any time as a result of an objection made by the taxpayer or pending a review or appeal.

Usually the Commissioner must assert fraud or evasion, or obtain the consent of the taxpayer prior to expiry of the limit, to extend the limit for the amendment of assessments under section 170.

Extension of time when outside limit on time to object

To take that rare advantage that taxpayer must be allowed to object either by right within the time to object or with an extension of time to object after that. If a taxpayer does not lodge an objection within the designated time under section 14ZW of the Taxation Administration Act 1953, then the taxpayer must seek the extension of time from the Commissioner under section 14ZX.

When will the Commissioner give an extension of time to object?

Generally speaking, the Commissioner is systematically open to granting an extension of time to object however the taxpayer must apply for a section 14ZX extension giving a plausible and acceptable explanation of the reasons and circumstances why the objection is to be lodged late.

In deciding whether to give an extension of time to object the Commissioner will preliminarily consider the merits of the case made out in the objection and whether there may be prejudice to the Commissioner, or to the taxpayer, including due to reliance on views of the professional advisors of the taxpayer, or of the Commissioner, by the taxpayer belatedly found to be incorrect.

Big dollars involved in really late objections

The recent case of Primary Health Care Limited v. Commissioner of Taxation [2017] AATA 393 involved an appeal by an ASX-listed company against a decision of the Commissioner to refuse extensions of time to the company to lodge out of time objections against its income tax assessments. The case is notable because it involved:

total net reduction in taxable income of the taxpayer over five years of income of $155,459,566 at stake in the refused objections; and
extensions of time sought on 23 June 2015 for objections dealing with assessments for five years of income being the years ending 30 June 2003 to 30 June 2007 inclusive. That is, the extensions were sought for objections which were up to seven years late on the time limits to object.

Following an earlier successful tax appeal by the company in relation to the 2010 income year, it had become apparent that significant business activities of the company group, who operated many medical centres, were on income account and not on capital account and so the company group was entitled to significant deductions under section 8-1 of the ITAA 1997 contrary to advice and understandings in earlier tax opinions received by the company from counsel. Importantly the Commissioner had held and communicated corresponding views about the availability of the deductions to the company. In the 2010 case these views proved to be incorrect.

Long delay explainable and no prejudice

The Administrative Appeals Tribunal (AAT) identified that the company had been misled by these incorrect stances, which explained the long delay in lodging the objections, and that the Commissioner suffered no prejudice due to the delay in lodging the objections. The AAT thus found for the company and allowed the extensions of time to the company to lodge its objections.

The long delay of the company beyond the designated time limits for lodging these objections raised the possibility of prejudice to the Commissioner and the tax system should the company be allowed to contest its case in those long past years of income. The sheer length of the delay contributed to the decision of the Commissioner to refuse the extensions of time.

It was only because:

the company was able to fully explain its delay, as the company justifiably understood that it had no case on which to object based on the law as it then stood, which was a misunderstanding to which the Commissioner had contributed; and
because prejudice to the Commissioner from allowing the extensions of time to the company could not be identified;

that the AAT found in the favour of the company.

Managing the GIC in settling an income tax dispute – Caratti

A general interest charge (GIC), which accrues and compounds daily, applies to compensate the revenue for the time value of unpaid tax debts. That is where a taxpayer has the use and enjoyment of money which should have been paid in tax for a period of time.

Opportunity to dispute GIC

The GIC is imposed on and follows a tax debt and, for a taxpayer, it is difficult to establish a basis in the objection and appeal process upon which the GIC applicable to a tax debt should be dealt with separately and reduced and remitted.

Resolution of a tax dispute by agreement with the Australian Taxation Office is one opportunity where the GIC can be revisited and reduced so long as the Australian Taxation Office is agreeable. By the time this point is reached significant GIC can have accrued if the taxpayer has not opted to provisionally pay a tax debt that is contention.

Dealing with GIC in an agreement with the ATO

So it was, in the Federal Court in Caratti v Commissioner of Taxation [2017] FCA 70, where $1,145,639.03 had accrued since 7 August 2015 on a tax debt of $10,948,507.45 which included GIC up to 10 February 2017.

On 23 September 2015 the taxpayer had entered into a deed of agreement with the Commissioner of Taxation under which the Commissioner refrained to recover the “Taxation Debt” defined in the deed as:

the amount of $10,948,507.45, which is comprised of Tax-Related Liability and applicable GIC due and payable by the Taxpayer as at 7 August 2015, subject to any adjustment to those amounts by virtue of the Determination of the Objection Process

However the deed also stated that:

The Taxation Debt will continue to accrue GIC daily from the due date for payment in accordance with and at the rate as may be applied from time to time under the TAA 1953.

So the taxpayer could assert that the “Taxation Debt” was a variable and, further, that that interpretation is sensible as the GIC that accrued after 7 August 2015 related to the same underlying debt or “Tax-Related Liability” which the deed made irrecoverable. Although the deed stated that the “Taxation Debt” will continue to accrue GIC the taxpayer asserted that, as the GIC was a part of the “Taxation Debt”, the deed also made that accrual irrecoverable. The Commissioner contended that the Taxation Debt was $10,948,507.45, as the Taxation Debt was expressly stated to be, and that this figure was the irrecoverable total or ceiling and not just a snapshot in time of the figure.

There were other provisions and context in the deed which supported the position of the Commissioner hence Robertson J. found for the Commissioner in the Federal Court.

Equivocal term in the deed gave the ATO a GIC recovery problem

Moving liabilities like the GIC cause difficulties. $1,145,639.03 was put at stake due to the inadvertent and equivocal use of Taxation Debt (capitalised as a defined term) in the formulation of the term in the deed dealing with the further accrual of GIC. A Federal Court challenge to the ATO might have been avoided by the Commissioner if it had been clear in the deed that the amount of the Taxation Debt (as at 7 August 2015) would continue to accrue GIC as a taxation debt which, in turn, was not part of the Taxation Debt made unrecoverable by the deed.