Tag Archives: preserving rights

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

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

Assessments in line with settlement

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

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

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

Right conferred by statute overrides the terms to settle?

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

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

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

Waiver did impact the statutory right to object

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

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

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

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

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

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

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

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

Trouble objecting to a tax assessment again

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

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

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

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

Objection – a one off chance

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

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

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

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

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

Withdrawal

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

It’s clearly best objecting with rigour first time.

Objections and aged tax assessments

Challenging conclusive tax assessments

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

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

Aged tax assessment

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

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

Amendment of an aged assessment following an objection

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

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

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

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

The vital difference

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

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

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

ATO in house facilitation – alternative dispute resolution with them?

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

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

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

ATO in house facilitation video

Getting serious about dispute resolution with in house facilitation

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

Honing the facts and issues in a dispute and saving costs

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

Contrast with position paper exchange

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

IHF – an open-ended offering

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

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

Timing of engagement

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

Perils lodging a really late objection against a tax assessment

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

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

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

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

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

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

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

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

Extension of time when outside limit on time to object

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

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

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

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

Big dollars involved in really late objections

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

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

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

Long delay explainable and no prejudice

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

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

It was only because:

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

that the AAT found in the favour of the company.

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.

Pleading grounds in a tax objection

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

Restriction on grounds that can be argued in a tax case

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

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

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

Lawyer-prepared pleading can be worthwhile

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

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

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

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

Yes.

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

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

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

60 days or four years from the assessment?

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

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

60 day time limit common for state tax assessment types

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

Extended time limits applying after an original income tax assessment

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

Is an objection needed in a risk review or audit?

No.

Frequently taxpayers know about prospective assessments because a review or audit is underway and the taxpayer may have opportunity to respond to the hypothesis or position of the commissioner before an assessment issues.

Although the response may cover similar positions the response is not an objection and differs from an objection.

Characteristics of a response to an tax audit or review

That response differs from an objection in the following respects:

the response does not relate to an assessment because an assessment is yet to issue;
the response is not required to preserve the rights of the taxpayer to challenge the assessment when it does issue;
the response will not set out the grounds and the case of the taxpayer for the purpose of challenging an assessment once it issues (which is a committed position of the commissioner rather than a hypothesis or lesser position); and
the response is to the commissioner only which the commissioner will presumably take into account in whether to issue an assessment and how the assessment is issued.

Objection follows the assessment

So if a risk review or audit results in an assessment with which the taxpayer does not agree, the taxpayer will need to object.