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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).

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.

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.

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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.