Tag Archives: complex issues

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?

$3,000 deduction cap for managing personal tax affairs – non-millionaires caught in the cross-fire?

Labor’s Fairer Tax System plan

The ALP’s Andrew Leigh and Chris Bowen announced their A Fairer Tax System for Millions, Not Millionaires plan on 13 May 2017. The plan is comprised of a number of laudable and progressive policy announcements including transparency improvements that will impede tax avoidance by wealthy taxpayers and multinationals.

These policies are:

$3,000 cap on deductions for managing their tax affairs for individuals.
Public reporting of country-by-country reports.
Whistleblower protection and rewards.
Mandatory shareholder reporting of tax haven exposure.
Public reporting of Australian Transaction Reports and Analysis Centre (AUSTRAC) data.
Government tenderers must disclose their country of tax domicile.
Develop guidelines for tax haven investment by superannuation funds.
Publicly accessible registry of the beneficial ownership of Australian listed companies.
Australian Taxation Office disclosure of settlements and reporting of aggressive tax minimisation.

The first measure, which this blog post concerns, is a proposed cap of $3,000 on the income tax deduction for managing personal tax affairs. There is no doubt this cap will restrict tax deductibility, which is substantially the funding by other taxpayers, of wealthy taxpayers’ tax professional costs of devising ways to avoid paying Australian tax.

Why an arbitrary $3,000 cap?

Still the $3,000 cap is arbitrary and there is, somehow, a disconnect in the announcement between the proposed cap and the millionaires against whom it is targeted. Why is the cap $3,000 rather than $30,000? My point is that it is not so unusual for ordinary taxpayers, particularly property owners who are not millionaires at whom the Fairer Tax System proposals are directed, to rack up tax professional costs of more than $3,000 for managing their tax affairs in an income year. The $3,000 cap includes tax agent costs for annual tax return preparation and lodgment so the remaining cap to deal with remaining tax difficulties or obligations will be something less than $3,000. So, although the measure will achieve its aim to curb deductibility of these costs to millionaires, there will be taxpayers who are not millionaires who will be collaterally caught with non-deductible tax professional costs in excess of the cap.

It is not so clear that the cap has been designed by someone who has real experience of seriously high individual tax professional costs and of situations where they may happen. Sure, all being well, a salary earner who owns real estate and who engages a tax agent, who charges moderately, will have tax professional costs in an income year comfortably under the cap. However, the salary earner with tax difficulties out of the ordinary may find himself or herself with a need to take a considered custom professional tax advice or to have his or her tax advisor non-prejudicially apply for a binding private ruling to protect himself or herself under the self assessment system.

The self assessment system

Out of the ordinary doesn’t mean tax avoidance is going on. Under the self assessment system a taxpayer is responsible for correct reporting and filing of tax information and severe penalties and interest apply if the taxpayer makes an error and a tax shortfall is assessed. If the taxpayer has an activity or activities where the tax treatment is unclear then it is the taxpayer who must ensure his or her return or other statements to the Australian Taxation Office (ATO) complies with tax law adopting, in the least, a reasonably arguable position on items in the return or statements that are contentious.

Something over $2,000 is not a big budget for obtaining a tax advice letter or a position paper or for professional preparation of an application for a private binding ruling or a complex objection. Often issues an individual can face can take a tax professional a couple of days or more to do thoroughly.

It can be costly just to understand obligations imposed by government

Not so long ago I was briefed to give tax advice to an owner of a heritage building about to enter into a sale of “transferable floor space” in compliance with local government heritage laws. The interaction of the relevant capital gains tax (CGT) and goods and service tax (GST) laws with property, environment and local government laws, cases and public rulings took considerable time to work through even in the absence of any live dispute about these matters with the ATO. $2,000 would have been a fraction of fees for the time needed to give advice so that the client understood the client’s CGT and GST obligations on the sale . The correct application of CGT events and tax rules that apply in this client’s situation are notably unclear and difficult and, in its rulings, the ATO takes positions which some may view as confused and ambiguous. A withering array of laws applied to this heritage building owner.

Each of these laws, considered separately, benefit or aim to benefit government, society and thus other taxpayers by the contribution of taxes, the stimulation of commerce and the preservation of heritage buildings. But is it fair for society to impose such a multitude of obligations on a not necessarily wealthy building owner yet severely reduce society’s contribution to the owner’s costs of compliance with them?

You see much of my work, and the work of many other tax advisors who act for clients who are not necessarily wealthy, is just to advise or explain how the tax law applies to them and what their position is. Generally, as the tax laws have been tweaked and greatly expanded over time, the tax laws do not present exploitative opportunities to ordinary taxpayers for avoidance. There are, of course, exceptions.

The CGT provisions are a good example of tax laws that are necessarily intricate and complex. $2,000 in professional advice costs just to understand a CGT position in an advice from a CGT expert won’t go far. The CGT rules can apply, and severely, to taxpayers who own property, securities and other valuables. If the owner dies or is a non-resident the complexity can ratchet up. Not all of the aforementioned are millionaires.

It can be costly to get a ruling or guidance from the Australian Taxation Office

It is frequently the case that an ordinary taxpayer is unable to articulate, or would be disadvantaged having to personally articulate, a technical capital gains tax problem to the ATO without professional assistance in order to obtain guidance or a binding private ruling from the ATO. So an ordinary taxpayer can be justified in seeking substantial tax professional help applying for a private binding ruling from the ATO. If a binding private ruling adverse to the taxpayer is issued by the ATO the taxpayer may seek to dispute the ruling and still further tax professional help is needed. The taxpayer’s professional tax advisor may need to attend the ATO or prepare an objection or appeal.

The intractability of many tax problems, notably capital gains tax problems, is usually not the fault of the taxpayer but is a feature of complex tax law seeking to impose tax obligations in a wide diversity of situations fairly on the tax paying community.

Costly tax problems not of concern to wealthy taxpayers

A taxpayer of modest means suffers an injury at work and receives an ongoing insurance payout. This taxpayer is the opposite of a millionaire. Still the taxation of the insurance payout gives rise to the income versus capital conundrum on which the Australian income tax system continues to rely. The payouts fall through the cracks of types of insurance payout that are afforded tax exempt status under the Income Assessment Acts 1936 and 1997. If the payouts are capital then capital gains on personal injury payouts are exempt from CGT so there is a lot of tax at stake if the payouts should be treated as capital rather than as assessable income.

Pursuing capital treatment of the payouts is not tax avoidance by the wealthy. Inevitably ruling, objection and appeal costs of disputing that the payouts are not assessable income are likely to be way in excess of $3,000.

These kinds of cases appear often enough in published Administrative Appeals Tribunal reports, and there are plenty below the visible tip of that iceberg to show that they still remain a frequent and expensive kind of tax dispute for injury victims. To deprive injury victims of tax deductibility for costs of their tax dispute to target other less deserving taxpayers is tough indeed on taxpayers affected. It is of no consolation to an ordinary taxpayer who can’t claim most of their seriously high tax professional costs that he or she is one of a number of less than 90,000 taxpayers who incur more than $3,000 in tax professional costs each income year.

Australia’s tax system abounds in these kinds of structural challenges. Whether or not an activity of a taxpayer amounts to “an adventure in the nature of trade” and consequently an enterprise carried on by a taxpayer attracting a GST obligation, is another good example of a tax uncertainty a taxpayer who is not a millionaire may find costly to solve in their case and may not solve without taking valuable professional assistance.

The cap binary and alternatives to better target the cap

So if $3,000 might not be enough of a cap to ensure fair operation of the cap, why impose a binary limitation with such a confidence in the announcement that its impact will be on millionaires?

The small business capital gains tax measures themselves show that the demarcation between “small” and bigger business is not necessarily easily achieved as shown by the unwieldy $6 million net asset test. A demarcation between ordinary and “millionaire” taxpayers to qualify for exemption under the cap may be similarly difficult. But might it be possible to devise a targeted cap which looks at the character of the professional tax costs of a taxpayer of managing their personal tax affairs so that the cap operates more equitably?

For instance could costs of professional tax work just directed at establishing the position of a taxpayer under certain tax laws on non-contrived circumstances be exempted from the cap? Most capital gains tax rules could be within that exemption. If the professional work addressed specific anti-avoidance measures, the general anti-avoidance provisions or exploitative tax planning the professional work could be “tainted” by that consideration and so fall outside of the exemption. One difficulty is that some sort of “chinese wall” solution may be needed so privileged thus confidential tax advice could be considered to verify whether the costs of the professional tax law assistance is exempt from a targeted cap on costs of managing tax affairs.

It may be possible to conveniently go through all of the (many) tax laws and classify those where issues and disputes arising from them are benign, in an avoidance context, as exempt from the cap. Often wealthy taxpayers and their advisers have little interaction with these laws and so exempting them would not give wealthy taxpayers any advantage. That would better achieve the aim of the Fairer Tax System plan.

Getting tax advice to take the 50% recklessness penalty out of play

Self-assessment

Under Australia’s self-assessment system taxes including, notably, income tax and the goods and services tax, are based on returns by each taxpayer where responsibility is on the taxpayer to ensure statements and representations made to the Australian Taxation Office (ATO) reflected in those returns are true and correct.

Penalties when returns are not true and correct

When a taxpayer departs from true and correct disclosure to the ATO, penalties, including base penalties, for false and misleading statements to the ATO, unarguable tax positions and tax schemes are imposed by Division 284 of Schedule 1 of the Taxation Administration Act (C’th) 1953.

To understand the base penalty regime in Division 284 it is helpful to consider simplified categories of a taxpayer’s disclosures relevant to their return viz:

those items that are straight forward where the taxpayer understands how the item should be returned and its impact on the taxpayer’s tax liability, and
those items which are more complex or difficult where the taxpayer does not fully understand how the item should be returned and its impact on the taxpayer’s tax liability.

It is expected, or at least hoped, that matters in the first category will greatly outnumber matters in the second category. Still an item in the second category may involve a large liability and there may be a need for the taxpayer to resolve the complexity or difficulty, by taking tax advice or perhaps by obtaining a binding private ruling from the Commissioner of Taxation about that item to ensure the item is correctly returned.

As a general proposition it can be said that, unless other mitigating factors apply, failure to correctly return an item in the first category attracts the 75% “intentional disregard” base penalty and that failure to correctly return an item in the second category attracts the 50% “recklessness” base penalty based on the reasoning below:

Deceptively understating assessable income or overstating allowable deductions etc.

If a taxpayer omits an item in the first category from an income tax return which understates true and correct taxable income then the highest base penalty of 75% for intentional disregard of a taxation law under the table in section 284-90 can be imposed. This isn’t the only liability that follows from a tax review, audit or investigation of a tax return. In addition to section 284-90 base penalties, the taxpayer will be held separately liable for the tax on the taxable income that should have been returned, medicare levy, and, to reflect the time value of taxes outstanding to the ATO, the shortfall interest charge and the general interest charge, etc when an amended assessment is raised to amend the original assessment which was not true and correct.

Base penalties, including the 75% intentional disregard base penalty, are imposed on a case by case basis. Thus the ATO will infer from the way the return was completed and surrounding facts whether there was intentional disregard of taxation law justifying imposition of a 75% intentional disregard base penalty. Similar considerations as arise as to whether there was fraud or evasion (which impacts on when an amended assessment can be raised) including whether the conduct giving rise to the omission of assessable income or the overstatement of allowable deductions or offsets etc. was deceptive or calculated, or whether the conduct could be explained as some sort of mistake, which attracts a lesser penalty, are relevant.

50% “recklessness” base penalty applied in PSI cases

The recent personal services income (PSI) cases of Douglass v. Commissioner of Taxation [2018] AATA 3729 (3 October 2018) and Fortunatow v. Commissioner of Taxation [2018] AATA 4621 (14 December 2018) illustrate how the 50% “recklessness” base penalty under the table in section 284-90, one rung down from the highest 75% intentional disregard base penalty, can be applied to a taxpayer who fails to correctly apply taxation law to matters in the second category.

Both cases involved the application of the personal services income measures in Part 2-42 of Income Tax Assessment Act (ITAA) 1997 to the income of professionals (an engineer and a business analyst respectively) which was alienated from the respective individual professionals by arrangements using related companies reducing their overall income tax liabilities.

Complex or difficult?

The personal services income measures in Part 2-42 are relatively complex involving multi-tiered considerations of various tests even though the Commissioner of Taxation expressed this view in the objection decision in Douglass (from para 110 of the AAT decision):

The attribution rule of the PSI is not an overly complex area of the relevant law. There was readily available information on the operation of the PSI rules set out on the ATO website. It was also explained in the Partnership tax return instruction and in the Personal Services income schedule instruction that accompanied the tax return guide for company, partnerships and trusts. You did not make further enquiries to check the correct tax treatment of your PSI.

In both cases, the taxpayers primarily relied on the “results test” in section 87-18 of the Income Tax Assessment Act 1997 to establish that, in each case, a personal service business was being carried on so that alienated income for the personal services of the individuals would not be attributed to the individuals under Part 2-42. On the facts of each case, each AAT found that the individual was not engaged to produce a result in accord with section 87-18 and so could not satisfy the “results test”.

Recklessness

Also, in both cases, the AAT was critical of the way in which each taxpayer tried to ascertain their respective liabilities under the personal services income measures. In Douglass the taxpayer did not take a cogent advice on how the PSI measures can apply. In Fortunatow the taxpayer had received an advice on asset protection considerations from a tax lawyer which inferred that PSI advice should be taken. But that PSI tax advice was not taken by the taxpayer in Fortunatow.

In each case the AAT referred to BRK (Bris) Pty Ltd v Commissioner of Taxation (2001) ATC 4111 where Cooper J. at p.4129 considered “recklessness”:

Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk, that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and that a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood, the proscribed conduct is more than mere negligence and must amount to gross carelessness.

It was unhelpful to the case of the taxpayer in Fortunatow that the taxpayer had been made aware by his tax advice that the PSI measures had potential application to him and that there was a real risk that he was not correctly complying with tax laws. The tax advice he received went no further than saying that income would not be attributed under the PSI measures if there was a personal services business but the taxpayer could not show that he had been advised that he had been carrying on a personal services business.

Obligation on the taxpayer to be correct

These AAT decisions leave little doubt that the responsibility on a taxpayer to correctly address and resolve complex or difficult tax questions in completing their tax returns is serious and far reaching. Ordinarily this means that a taxpayer will need a cogent tax advice or will need to take other steps to demonstrate that the taxpayer has adequately addressed each question to mitigate the “real risk” that the taxpayer’s position on a complex question in a tax return is incorrect to avoid “recklessness”.

Interaction with other base penalties and where taking cogent tax advice is desirable

This removes the opportunity to shirk a complex question or issue in a tax return and to rely on the difficulty or character of the question or issue to assert that some lesser base penalty, such as the 25% base penalties under Division 284 either for failure:

to take reasonable care; or
to take a reasonably arguable position;

is applicable.

Base penalties under Division 284 of Schedule 1 of the Taxation Administration Act (C’th) 1953 apply on the basis that the highest base penalty applies to the exclusion of the other applicable base penalties.

Complex PSI cases demonstrate how self-assessment works

The above personal service income cases provide good case studies of how base penalties under Division 284 are likely to apply in cases where a category 2 complex issue arises and a taxpayer fails to adequately address the issue in their return to the ATO.

Although the ATO cannot apply a 75% intentional disregard base penalty where the taxpayer was without intent to disregard taxation law which was or may have been too complex for the taxpayer to appreciate; the 50% recklessness base penalty, on the next rung down, can nevertheless be applied because of the taxpayer’s failure to deal with that complexity. Complexity is dealt with by taking cogent tax advice from a professional tax adviser for example. It can be seen that the 50% recklessness base penalty is thus integral to taxpayers taking responsibility for true and correct disclosure to the ATO under the self-assessment system.

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.

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.