This article was written by Dioni Perera and Alex McKinlay.
Finding yourself on the receiving end of an Australian Taxation Office (ATO) audit or request for information can be confronting. With the ATO often requesting information and documents relating to matters from several years ago, taxpayers should take such matters seriously from the outset. This puts you in the best position to positively engage with the ATO and respond accurately and promptly.
Tax disputes can be complex beasts - not only do taxpayers have to consider the application of tax laws, but they also have to steer through various formal and informal processes.
In a dispute with the ATO, taxpayers may, at its simplest, be subject to tax assessments which recognise alleged assessable income or deny deductions claimed or, at its most complex, be assessed under deemed dividends rules or the controlled foreign company provisions. Often, the ATO puts its case using several alternative positions, coupled with allegations of fraud or evasion.
In addition, taxpayers may also be required to deal with informal requests for information from the ATO, discussions with the ATO and the ATO exercising its formal powers to compel access to premises, information, documents or interviews.
If assessments are issued, taxpayers would need to consider whether to prepare tax objections and, ultimately, commence proceedings in the Federal Court of Australia or the Administrative Appeals Tribunal. There are of course many intermediary steps which may occur before Court proceedings, such as negotiating with the ATO to settle the dispute or engaging in alternative dispute resolution processes like mediations or early neutral evaluations. In our experience, it is often beneficial to seek a negotiated settlement to disputes rather than commence formal litigation, though sometimes litigation cannot be avoided.
We answer some of the most frequently asked questions by individuals and small and medium-sized enterprises (SMEs) facing the prospect of an ATO audit or review. Click on a question below to jump straight to its corresponding answer.
1. The ATO has started a tax audit or review in relation to my affairs. What happens now?
A tax audit or review generally involves the ATO reviewing your tax affairs to confirm that you have complied with your taxation obligations.
ATO investigations will often commence with either a review or an audit. A review will be undertaken by the ATO if they believe that there is a risk that you are not complying with your taxation obligations. If the ATO considers there is material risk that you are not complying, they may decide to move to a formal tax audit.
Normally, the ATO will give you written notice that they will be conducting a review or audit. If you receive a notification letter, you should review your relevant tax records. You should also consult with your tax agent and your legal representative. In limited circumstances, where the ATO believes they need urgent access to documents, information or goods, they can commence a review or audit without notice. An example of this is where the ATO has reason to believe that such items are at risk of being destroyed or altered.
In our experience, the ATO will usually make informal requests for information or seek to arrange an informal interview in the first instance. If unsatisfied with the outcome of this informal approach, they will then use their formal powers of compulsion to demand documents or a formal interview. If you are required to attend a formal interview, attendance is compulsory (generally with your legal representative) and you must answer the ATO's questions truthfully.
At the end of a review or audit, the ATO may conclude that you are complying with your taxation obligations. Alternatively, the ATO may amend or raise an assessment under which you are liable to pay tax. If this is the case, they may also charge you interest and penalties. The penalty rate will depend on the reason for the discrepancy.
The ATO also has the power to prosecute you for serious tax-related offences, such as making a false or misleading statement on a tax return or keeping incorrect or false records with an intention to deceive or mislead a tax officer.
2. The ATO has issued me a section 353 notice. What is this?
The ATO has formal information gathering powers which it can exercise by issuing a section 353 notice. There are two formal powers to which such a notice can relate:
- formal information gathering powers; and
- formal access powers.
The ATO can issue a formal notice requiring you to provide information, to attend and give evidence or to produce any books, documents or other papers in your custody and under your control. The ATO may issue a notice in relation to your own tax affairs, but you can also receive notices if the ATO believes you may be able to assist them with their enquiries about another party.
In our experience, the ATO will generally only use their formal access powers if they cannot obtain the documents or information they want under a cooperative approach.
The ATO's access powers authorise them to enter and remain on land, premises or place, and entitle them to access and make copies of any documents or books, as well as inspect goods and other property.
There are few defences to a section 353 notice. The ATO's notice and access powers are not constrained by claims of confidentiality or privilege against self-incrimination. However, the powers are limited by legal professional privilege. This means that communications between you, your legal practitioner and some third parties are protected from compulsory disclosure to the ATO if they are made for the dominant purpose of obtaining legal advice.
3. The ATO has formed the view that I have been engaged in fraud or evasion. What does this mean?
The ATO has the power to amend an income tax assessment at any time if they are of the opinion that there has been a tax shortfall due to fraud or evasion. This is in contrast to the usual time limits set for amending your assessments which are between two to four years from the day the ATO gives you the notice of assessment.
For the ATO to form the view that you have been engaged in fraud, they must be of the opinion that you made a false statement to them about your tax liability, resulting in a shortfall of tax. You must have made the statement knowing it to be false, without believing its truth, or recklessly and being careless or indifferent as to whether it was true or false.
The threshold for evasion is lower. For the ATO to form the view that you have engaged in evasion, they must believe that you have engaged in behaviour that involves some blameworthy act or omission resulting in an avoidance or shortfall of tax. In contrast to fraud, the intention of a taxpayer is not a key element of evasion; even if you did not intend to engage in evasion, your relevant acts or omissions may still be blameworthy when judged objectively. Omitting income from a tax return and not providing a proper explanation, as well as failure to keep appropriate business records due to carelessness and indifference, have both been held to amount to evasion. You may rebut a finding of evasion by adducing evidence which demonstrates that you acted honestly and reasonably.
Whether or not a taxpayer has cooperated during a tax audit can influence the ATO's decision as to whether to make a finding of fraud or evasion.
4. I have been issued assessments. What happens now?
You can lodge a formal objection to contest an assessment that is raised or amended by the ATO. A team at the ATO, different to the one that performed the audit or review, will consider your objection. They may request further information and/or contact you or your representative to discuss the objection. Once the ATO has made a decision on your objection, they will send you an objection decision which includes the reasons for their decision. If your objection is successful, the ATO will amend their original decision and refund any money they owe you. If your objection is unsuccessful, you can commence an appeal to the Administrative Appeals Tribunal or the Federal Court of Australia.Of course, it is possible and indeed recommended that taxpayers continue to discuss the dispute with the ATO with a view to resolving the dispute through a negotiated settlement
5. The ATO is suing me in Court for the unpaid tax in the amended assessment. What should I do?
The ATO is entitled to commence recovery action in Court where tax, interest and/or penalties remain unpaid and no payment arrangement has been entered into. The ATO may elect to commence such action if you are uncooperative, are unable to pay and do not approach the ATO about entering into a payment plan, repeatedly default on agreed plans, have engaged in ongoing tax avoidance, or appear to be engaging in 'phoenix activities'.
Even if you are disputing the debt, the ATO generally requires you to pay all tax debts on time. The due date for payment is usually 21 days after the assessment has been raised or you have been notified. You will be charged a general interest charge (GIC) for late payment at penalty rates if you do not pay your tax debt by the due date.
The ATO regularly obtains judgment on unpaid tax debts. If this occurs, they will be able to seize your assets to recover the unpaid tax debts and freeze your assets. However, there are also important instances where a Court has agreed to stay the ATO's recovery proceedings pending finalisation of the underlying tax dispute.
If you are unable to pay a tax debt, you should engage with the ATO about available options. You may be eligible to enter into a payment plan, such as a 50/50 arrangement.
6. The ATO wants to freeze my assets. What happens now?
The ATO can ask the Court to make orders preventing you from dealing with your assets if you have an unpaid tax liability. Such orders are known as freezing orders or Mareva injunctions, and they operate to restrain you from removing your assets from Australia or otherwise disposing of or dealing with your assets, pending further orders by the Court. Freezing orders may be obtained by the ATO where they can prove there is a risk of non-recovery of a tax debt. In order to successfully apply for freezing orders, the ATO must first establish a claim against you. A claim is usually satisfied where the ATO has issued a notice of assessment which crystallises a debt. The fact that you may object to the assessment will not prevent the ATO from applying for a freezing order.
In our experience, the ATO will often make the application ex parte (i.e. they will make the application without giving you notice), if they believe that notice may prompt the feared dissipation or dealings with assets. If you are not given notice of the application, the order is first made on an interim or provisional basis. After the interim order has been served on you, you can challenge it.
You can also apply to the Court to vary a freezing order. The Court will usually allow the order to be varied so as to exclude dealings with your assets for legitimate purposes, in particular, for the payment of ordinary living expenses and reasonable legal fees.
7. The ATO has issued garnishee notices to my creditors. What can I do?
The ATO has the power to issue a garnishee notice under section 260-5 of Schedule 1 to the Taxation Administration Act (1953) (Cth). A garnishee notice is a notice given to a third party that owes money to you, or may owe money to you in the future, requiring that third party to pay the money to the ATO, in order to reduce your tax debt. The ATO will usually send a copy of the garnishee notice to you, as well as to the third party.
If you are an individual, the ATO may issue a garnishee notice to your employer or contractor, bank or financial institution where you have an account and/or people who owe money to you. If you are a business, the ATO may issue a garnishee notice to your financial institution, trade debtors and/or suppliers of merchant card facilities.
8. The ATO has issued me a Departure Prohibition Order. What are my rights?
The ATO has the power to stop you from leaving Australia (regardless of whether you intend to return or not) until such time as your tax debt is paid in full, by issuing you a Departure Prohibition Order. The ATO has the power to issue DPOs to both Australian nationals and foreign nationals who are liable to pay Australian tax. All that is required for the ATO's power to attach is that the person be in Australia when the notice is served on them. Once a DPO has been validly served, if you try to leave Australia, you will be stopped at the airport.
If you wish to leave the country temporarily, you may apply to the ATO for a Departure Authorisation Certificate. The ATO may issue a certificate if they are satisfied that you will return within an appropriate period. If they are not satisfied of this, they may still issue a certificate if you can provide them with appropriate security.
9. What does contesting an assessment in the Tribunal or in Court involve?
If you have objected to an assessment and an adverse objection decision has been issued by the ATO, you can lodge an appeal to the Administrative Appeals Tribunal or the Federal Court of Australia. In contesting the matter, you are limited to the grounds stated in the objection to which the decision relates, unless the AAT or FCA orders otherwise. You have the burden of proving to the Court or Tribunal that an assessment is excessive or incorrect, as well as proving the correct amount of the assessment.
Once the Tribunal or the Court has handed down its decision on the case, the unsuccessful party can appeal the decision to the higher appellate Court. If you do not lodge an appeal against the decision of the AAT or FCA within the appeal period, the decision of the Court or Tribunal is final.
As you have the onus of proof, the taxpayer bears the burden of filing evidence to show that the assessment is excessive. Both parties also have to prepare for the litigation, which includes attending Court conferences and directions hearings and preparing both written and oral submissions. The Court process can be lengthy and complex in itself. Both parties ordinarily engage solicitors and barristers to conduct the litigation.