Tag Archives: Commissioner’s discretions

Objections and aged tax assessments

Time Limit expires

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.

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:

  1. sixty days from the issue of the amended assessment; and
  2. 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:

  1. 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
  2. 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:

  1. 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
  2. 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.

A new statutory remedial power for the Commissioner of Taxation

As announced in the 2015 Budget, there is a bill before parliament to introduce a general statutory discretion for the Commissioner of Taxation to be known as the Remedial Power. The Remedial Power is proposed to be introduced in a new Division 370 of the Income Tax Assessment Act (ITAA) 1997.

It gives the Commissioner a power to make substance over form decisions to address technical shortcomings in tax legislation inconsistent with the policy behind the legislation. This power is not unlike the scope the High Court afforded to courts in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; 147 CLR 297. However, as with that scope, it can be expected that the power will only be exercised exceptionally and with particular caution.

That said there are many circumstances, including those impacted by Division 35 of the ITAA 1997 concerning non-commercial losses, which could potentially attract remedy by the Remedial Power. That should not be overlooked in the preparation of advice, applications for rulings and in objections.

Exercise of discretion not available for some reason rather than not there at all

The Commissioner will no longer be able to justify decisions that give rise to unjust tax outcomes on grounds that he has no relevant discretionary power under the ITAA beyond the limits of the general power of administration of the tax laws under the Taxation Administration Act 1953. Once the Remedial Power is in place it is expected the Commissioner will rather explain why an unjust decision counter to policy is not worthy of the Remedial Power if the power is not to be used to remedy that outcome.

When is the Remedial Power going to be used?

Broadly the Commissioner may exercise the Remedial Power:

  • where the outcome under the tax law is inconsistent with the purpose or object of the law by re-aligning the regime in the law applied by him with its purpose or object; and
  • where the outcome under the law is consistent with the purpose or object of the law, but in achieving that outcome the application of the law imposes compliance costs that are disproportionate to achieving the purpose or object of the law by aligning the regime to reduce those compliance costs in a manner consistent with the purpose or object of the law.

Perhaps the unlegislated regime in Practice Statement Law Administration 2010/4, concerning unpaid present entitlements under Division 7A of Part III of the ITAA 1936, is an example of the kind of modification by the Commissioner which could have legal force under Division 370 in future.

Progressing minor corrections

It is anticipated that this power will reduce the time it takes to give effect to minor legislative corrections.

It may also allow for some minor technical corrections to occur where this may otherwise not occur.

Limits on the Remedial Power

The Commissioner will not be able to use the power to:

  • alter or extend the purpose or object of the law;
  • directly amend the text of the law; or
  • make modifications to the operation of the law which will result in more than a negligible impact on the revenue.

In addition, a taxpayer can ignore a modification made under the Remedial Power if it would produce a less favourable result for the taxpayer i.e. modifications under the power will only apply in the taxpayer’s favour.

As the power is discretionary, the Commissioner cannot be compelled to exercise the power. A bureacracy will be established with the Australian Taxation Office to assist the Commissioner to manage the exercise of the power including a tax expert panel (similar to the General Anti-Avoidance Rules Panel) to advise the Commissioner particularly about costs and impracticalities to the revenue if a modification is to be made under the Remedial Power.