Tag Archives: Costs

The odd way disputes over PAYG deducted from salary are resolved

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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:

  1. 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;
  2. Australian Business Numbers, fuel schemes, fuel tax credits, the ATO’s superannuation administration; and
  3. 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.

$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:

  1. $3,000 cap on deductions for managing their tax affairs for individuals.
  2. Public reporting of country-by-country reports.
  3. Whistleblower protection and rewards.
  4. Mandatory shareholder reporting of tax haven exposure.
  5. Public reporting of Australian Transaction Reports and Analysis Centre (AUSTRAC) data.
  6. Government tenderers must disclose their country of tax domicile.
  7. Develop guidelines for tax haven investment by superannuation funds.
  8. Publicly accessible registry of the beneficial ownership of Australian listed companies.
  9. 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 a deduction for tax objection and income tax advice costs

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

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

Legal professional privilege

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

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

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

Getting ready to object – the analysis

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

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

Example – amended assessments received by a resident individual

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

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

Amendments by the Commissioner are disputed

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

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

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

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

What an analysis might look like

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

ObjectionAnalysis

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

The analysis reveals if the taxpayer has a case

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

 

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.

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.

AATfedCrt

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.

Is an objection needed to amend a tax assessment?

A tax assessment by the Australian Taxation Office is of full effect and taken to be right even if it may be wrong. The onus is on the taxpayer to show that a tax assessment is wrong.

Assertive correction of an assessment by objection

An objection is the serious and assertive way to challenge or dispute a tax assessment. Under the income tax law, for instance, an assessment is taken to be correct and conclusive except where the taxpayer takes steps to challenge the assessment under Part IVC of the Taxation Administration Act (C’th) 1953. A tax objection is the way by which a taxpayer takes or commences that challenge.

Other methods of challenge such as seeking an amendment of an assessment, including informally, from the commissioner or seeking judicial review carry major risks and disadvantages:

Unassertive requests for an amendment

A request to a commissioner of taxation to amend an assessment, including a request for alternative dispute resolution, has almost no legal standing but it is very common. If a commissioner grants a request to amend an assessment then there is no problem. If not, can a taxpayer complain about the request or the manner in which the request was denied? The starting point is that the taxpayer had a right to make an objection but, because the taxpayer didn’t use that right, the taxpayer has no standing to demand an alteration to an assessment from the commissioner.

Unusual forms of challenge

The Australian Constitution gives citizens rights to challenge actions by Commonwealth officers. That said Australian courts have found that these constitutional rights and related laws do not extend to challenges to tax assessments, except under the most limited circumstances, as taxpayers are directed to challenge under Part IVC – they must “object”.

Judicial review and similar actions are expensive, especially when compared to the costs of preparing an objection, and the decided court cases usually show failure when they are used to challenge tax assessments with the consequence that the taxpayer is require to meet the court costs of the commissioner as well as the taxpayer’s own costs.

So it is an objection that counts

Assessments and objections are thus vital steps in Australia’s tax system that rank with the significance of tax returns.