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How might complex issue resolution by the ATO help?

A useful service for tax professionals

A new and useful service from the Australian Taxation Office (“ATO”) is Complex Issue Resolution (“CIR”). An escalation is offered for complex or multiple related tax technical issues and abnormal administrative issues which officers contacted through regular channels into the ATO, or who are acting in a regular ATO compliance role, would not usually be able to address.

The limitations of Complex Issue Resolution

CIR is accessible only by tax professionals including tax agents and legal practitioners.

Guidance from CIR is not binding on the Commissioner of Taxation. It is not a substitute for objecting against an assessment, seeking a private binding ruling or making a complaint about how the ATO is dealing with the taxpayer.

Value proposition

The inherent benefit of restricting CIR to tax professionals is twofold:

the restriction is a filter to ensure that issues put by taxpayers to CIR are actually complex better targeting the CIR resource; and
it is more likely that a tax professional can pinpoint and explain a complex issue/s. Careful and thorough explanation can be vital to the ATO correctly appreciating the complex issue and to how the ATO may ultimately deal with it. The Tax Objection is a tax professional and we understand how complex issues should be presented to the ATO.

Thus a taxpayer, through his or her tax professional, can drive recognition of complex tax technical issues and abnormal administrative issues including where an officer of the ATO may not grasp the issue and may not be willing to escalate the issue within the ATO to a more senior or experienced officer who is better equipped to deal with the issue. Equally CIR may be limited to where other escalation has not occurred within the ATO such as allocation of the issue to Interpretative Assistance (IA) or comparable ATO officers who decide objections and private ruling applications.

CIR in a tax dispute/objection strategy

In our post “I’m objecting – do I need freedom of information (FOI)?” we looked at the kinds of tax disputes where seeking freedom of information before, or concurrently while, objecting to a tax assessment is advantageous. It is all about understanding what the ATO position is, or is likely to be, before committing time, effort and resources to a tax objection and dispute.

Applying for CIR may have a number of advantages over applying for FOI in the process of readying to object against a tax assessment:

it looks like obtaining CIR guidance will generally be quicker than obtaining FOI although this is not yet certain as CIR is so new. Where time is running out against the time limit to object to an assessment it may be invaluable to receive guidance from CIR before finalising a notice of objection; and
applying for CIR may resolve the matter entirely. The escalation of a complex issue to a senior and experienced officer may lead to CIR guidance which puts a view either:
- which the taxpayer is inclined to accept for one reason or another; or
- which shows that the ATO has sufficiently adopted the view contended for by the tax professional in the application for CIR.

Either way the problem can be resolved before an objection or application for private ruling is completed saving costs and effort.

Although non-binding, CIR guidance is likely to firm either as the position, or as one of the positions, of the Commissioner on the complex issues on which the dispute turns. This gives a taxpayer objecting to an assessment who has CIR guidance the opportunity to make nimble inclusions in the notice of objection and to revise or abandon arguments to raise prospects of success in the dispute.

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:

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.

Alternative Dispute Resolution (ADR) options

A request for an amendment to the Australian Taxation Office (“ATO”) can be to resolve a disagreement about an assessment with alternative dispute resolution (“ADR”). The ATO offers ADR services including:

by an ATO in-house facilitator (mediator); or
for large and complex disputes only, appointment of an expert external mediator.

What does a mediator in ADR do?

The role of the mediator is to assist the ATO and the taxpayer to identify the real matters in dispute in the assessment and to assist the parties to find a way they can work through to an outcome on which they can agree to end the dispute over the assessment.

When does ADR work?

ADR can be useful for isolating matters in dispute, identifying prospects of success in the dispute and working towards resolution of the dispute with the ATO at lower cost. However this usefulness will depend on the type and the scope of the dispute over the assessment.

The ATO and the taxpayer will not necessarily have common ground on which resolution can be reached with the aid of mediator. The success of the mediation will turn on how far apart the ATO and the taxpayer are over the facts, their collection and how the tax law should be applied to those facts.

ADR surely preferable as an adjunct strategy

If the ADR does not track towards an acceptable outcome for the taxpayer with the aid of the mediator, to where does the taxpayer then turn? The taxpayer will have no leverage in ADR with the ATO should the ATO understand that the taxpayer’s rights to contest the assessment have expired or will expire during the course of the ADR. It is thus up to the taxpayer to ensure that an objection is either made or will be made on a timely basis so the ATO can foresee that the taxpayer has or may exercise rights to contest or even appeal the disagreement should the dispute not resolve through ADR.

Just an ADR request to the ATO is as problematic as other isolated forms of request for an amendment as a request alone does not give the taxpayer a fall back position. An ADR arrangement with the ATO makes more sense as an adjunct to a submitted or proposed objection on time.

ATO In-House Facilitation

The ATO have released an informative video explaining the in house ATO facilitation service in simple terms:

The Tax Objection can act is a representative in in-house facilitation by the ATO or in other ADR with commissioners of taxation.

Pleading grounds in a tax objection

We have mentioned how facts and evidence in dispute should be systematically presented in an objection in a considered and rigorous way.

Restriction on grounds that can be argued in a tax case

If an income tax objection is disallowed by the commissioner of taxation then the taxpayer is generally restricted to the grounds set out in the objection on appeal to the Administrative Appeals Tribunal or to the Federal Court. The grounds so set out become the equivalent of “pleadings” in a court claim or writ commencing litigation.

The law changed in 1986, to allow a limited discretion to the tribunal or the court, to alter the grounds of an objection on which an appeal could be based. The Treasurer then stated in the explanatory memorandum to the changes:

It is expected that, in exercising the discretion, the general principles on which courts have permitted amendments of pleadings in other areas of the law will generally be applied. For example, the discretion is likely to be exercised where the need for an amendment of the grounds of objection arises as a result of the Commissioner relying on arguments in defence of an assessment where the particular basis was not adverted to in the adjustment sheet accompanying the notice of assessment.

Lawyer-prepared pleading can be worthwhile

So we recommend legal input in to the preparation of a tax case at the objection stage:

where the case is of importance to the taxpayer; or
particularly where the taxpayer wants to be able to appeal the case if the objection is disallowed by the commissioner of taxation.

If a taxpayer has used a simple objection letter that does not adequately plead the taxpayer’s case, prospects of success on grounds not pleaded are diminished. Trained tax lawyers like The Tax Objection can prepare or review an objection with legal “pleadings” method to prevent loss of prospects of success on appeal like that.

I’m objecting – do I need freedom of information (FOI)?

A taxpayer has a right to freedom of information (“FOI”) to access tax office records about the taxpayer a commissioner of taxation has used to raise, or prepared in raising, a tax assessment.

Will FOI be useful in this case?

This inexpensive right to FOI is worth using if the information that can be obtained is useful. That said, useful information or evidence is not to be had with FOI about every unwelcome assessment. Of itself, applying for FOI doesn’t offer any tactical advantage in succeeding on a tax objection. Do not always expect that the commissioner has made some mistake by identifying tax owing which the taxpayer did not expect and, even if there is a mistake by a tax officer apparent in the documents released on a FOI initiative, that mistake might not aid the case of the taxpayer.

Has the assessment been poorly or inadequately explained?

FOI is most likely to be useful in exceptional cases where the assessment has been poorly or inadequately explained to the taxpayer. An explanation may be:

in what is said or given to the taxpayer and his or her tax agent;
in the notice of assessment or in the paperwork with it; or
made during the course of a tax investigation.

Has a tax officer acted strangely?

In some cases there may be a suggestion or suspicion that a tax officer may have acted oddly in relation to the tax affairs of the taxpayer. It may be useful to know more about that from FOI.

Adequacy of information given about the disputed assessment

More often the taxpayer and the tax agent will have been given enough before and with the assessment to understand the commissioner’s reasoning behind the increase in tax owing by the taxpayer in the assessment (even if they do not appreciate it).

If there has simply been an omission in documents received with the assessment, a “copies of tax documents” request (which is quicker and less confrontational that a FOI request) may suffice.

Careful review of these communications and analysis of the assessment will usually be sufficient to reveal the broad reasoning of the commissioner and the nub of the dispute with the commissioner without recourse to FOI.

Objecting within time is generally more important

Objecting on time, rather than including revelations from FOI in the notice of objection, will be the greater imperative. Useful information, if any, from a FOI request may not become available for a number of months following an application for FOI so, if a FOI application is to be made, it may need to be made early if it is be used to help formulate a tax objection before it is due.

Identify when more information is really needed from the commissioner of taxation

FOI could be needed in the case of a default assessment of income tax to understand the conclusions behind the notional “return” of income which the commissioner has prepared instead of or in addition to a copies of tax documents request.

The burden of proof in a tax objection

The onus or requirement of proof differs in different kinds of disputes in Australia. The most familiar is the burden or onus on a prosecution in a criminal court to establish a case beyond reasonable doubt. In civil court cases the burden or onus is on a claimant to prove a case on the balance of probabilities. In those kinds of cases the defendant may not need to prove anything.

Burden of proof in tax cases

In tax cases a reverse burden or onus applies. A tax assessment is taken to be right unless the taxpayer can prove otherwise.

Why is that? The answer is probably more practical than philosophical. In any case, it’s a bad idea not to return income and to wait for the commissioner to do the task because the commissioner’s findings will be hard to rebut if the commissioner is taken to be right to begin with.

Either in the case of a decision on an income tax objection:

which is being reviewed by the Administrative Appeals Tribunal; or
which is appealed to the Federal Court;

the burden of proving that the assessment is excessive or is otherwise incorrect and of proving what the assessment should have been is on the taxpayer under the Taxation Administration Act (C’th) 1953. Similar state laws putting the burden of proof on to taxpayers apply to state taxes.

Save dispute costs by getting your objection right

Usually a tax objection is the only feasible way to dispute a tax assessment.

One time opportunity

That said, an objection is a valuable and relatively low cost opportunity to put a case to a commissioner that an assessment needs to be corrected.

Don’t miss it

Costs ratchet up where a taxpayer still wants to dispute the assessment once the objection is disallowed. The objection opportunity should be taken. Assistance from a tax disputes legal professional, like The Tax Objection, can be valuable. The right lawyer can draft objection documents, or review documents already prepared, suggest a strategy and let you know the prospects of success of the proposed objection.

Appeal after disallowance of a tax objection

If an income tax objection is disallowed by the commissioner then the taxpayer has sixty days from the issue of the disallowance to appeal to either of the Administrative Appeals Tribunal (“AAT”) or the Federal Court of Australia. So time is a factor as well as cost if an objection is disallowed.

Administrative Appeals Tribunal

The AAT is a lower cost dispute resolution forum than the Federal Court. Generally the AAT will not award costs meaning that if a taxpayer loses an appeal to the AAT then the taxpayer will not have to meet the legal costs of the commissioner. Although the AAT is not a court and the AAT is not bound by the rules of evidence, the AAT is essentially a quasi-court in tax appeals and appellants will be at a disadvantage if the implications of the rules of evidence are not understood.

To commence an appeal in the AAT a fee of $861 usually applies. The AAT offers alternative dispute resolution services before a case moves to a hearing in the AAT. If a case in the AAT does not resolve and it proceeds to hearing a barrister will usually be required for the taxpayer. Legal costs will exceed $50,000 in many cases that reach the full hearing stage.

Federal Court

The Federal Court option is a more expensive alternative and, if the taxpayer loses, an order to meet the costs of the commissioner usually follows. Running a case in the Federal Court usually involves six figure legal costs.

Try to win at the objection stage

In that context making the most of the objection stage to a dispute a tax assessment before it reaches the pressing and expensive appeal stage does make sense.

How is a tax objection form done?

An objection:

Be convincing

The grounds on which the taxpayer relies, i.e. the contentions and arguments, should be robust and conclusive to convince the commissioner to allow the objection. In most cases, contentions and arguments alone will not be convincing and the objection submission should show:

the facts supporting the grounds; and
the evidence which supports the facts.

Presentation of grounds, facts and evidence

How grounds, facts and evidence should be presented varies case by case. Where facts or evidence are open to dispute then they need to be presented in the objection in a considered and rigorous way.

We advocate systematic organisation of grounds, facts and evidence in cases where facts and evidence supporting grounds are voluminous or complex.

If facts and evidence are presented wrongly then the credibility of the taxpayer and the contentions are undermined. It is also possible that:

the taxpayer may make unnecessary or unhelpful admissions;
the commissioner will:
- draw adverse inferences;
- further investigate the facts; or
- impose a penalty tax for a false or misleading statement; or
in the event of an appeal, the taxpayer and witnesses could be cross-examined about matters contained in the objection.

The not so helpful ATO objection forms

The Australian Taxation Office (“ATO”) has a generic and a “Professionals” version of its objection form to complete and send as paper or online. However:

as an objection is a taxpayer right;
the ATO objection forms do not accurately and helpfully reflect all objection requirements; and
a form of objection done in another way that does reflect the objection requirements is approved under the Taxation Adminstration Act (C’th) 1953 as a way to submit an objection (for instance, the rules mandate a declaration in the form of objection by the taxpayer);

a form of objection that does not mimic the ATO forms can be prepared for a taxpayer and submitted to the ATO in a number of ways including:

using the tax agent portal – although a “correspondence” rather than an “objection” gateway must be used so that the objection is not corralled to the ATO form and style of objection;
by post;
by delivery of the objection in person to an ATO shopfront – this way can be useful if the taxpayer needs to ensure and prove submission within the time limit.

Is there a time limit for putting in a tax objection?

Yes.

Objections need to be made within a specified time following issue of a tax assessment by a commissioner.

Will a late objection be accepted by the commissioner of taxation?

Late objections are permitted but only for a good reason which the taxpayer must establish. That is, to be certain the objection will be accepted, the objection needs to made within time.

60 days or four years from the assessment?

The good news, at least with objections against income tax assessments which are the most common, is that a taxpayer is allowed two years or four years from the issue of an original assessment to object and, in the case of an amended assessment (that is, an assessment altering an earlier assessment say following an ATO audit) the taxpayer has the later of the two or four year period from the issue of the original assessment or sixty days from the issue of the amended assessment to object.

The ATO has a useful aide memoir of objection time limits on their website. Unfortunately they frequently alter the url due to their frequent site makeovers and they do not use auto redirects so don’t rely totally on this link.

60 day time limit common for state tax assessment types

With state taxes specified times for objecting are largely unreformed which typically means that a sixty day time limit for submitting an objection applies to these types of assessments.

Extended time limits applying after an original income tax assessment

The two or four year time limit measured from the time of original income tax assessment varies with the type of taxpayer. In a nutshell a time limit of four years applies to taxpayers who run or participate as partners or beneficiaries of entities that are not small business entities.