Tax & ATO News Australia

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Taxpayer Alerts

 I have blogged before about the change in the ATOs audit and dispute resolution approaches.

While some of this is great (for example, the ATO’s desire to resolve more disputes without going to court), one area that is increasingly concerning me is how the ATO uses Taxpayer Alerts in the audit process.

The ATO says that ..

We issue taxpayer alerts to warn you of our concerns about new or emerging higher risk tax or superannuation arrangements or issues that we have under risk assessment. Our aim is to share our concerns early to help you make informed decisions about your tax affairs.

This is a great concept: getting ahead of the curve and preventing a taxpayer from diving into an aggressive tax avoidance scheme is precisely the sort of pro-active and effective use of scarce resources that taxpayers want to see.

But the reality is that the ATO increasingly is using Taxpayer Alerts as an aggressive audit tool, rather than pro-active engagement.

I have seen a number of recent cases where the ATO has changed its position from established tax rulings and departed from established court judgments and created a new high water mark in a Taxpayer Alert. The ATO then uses this new high water mark as the benchmark to determine whether the taxpayer should be audited, and if so, if an assessment should issue.

This is particularly of a concern where the Taxpayer Alert identifies something that was done years in the past.

I support the use of Taxpayer Alerts when looking at amnesties for those people who may have already engaged in aggressive tax avoidance.

It bothers me greatly when auditors point to a taxpayer alert (particularly one that stretches the application of tax law beyond what is the ATO’s existing position) as justification for commencing an aggressive audit against a taxpayer. When that happens the taxpayer is bewildered, feels victimised and cannot understand why their accountant said that the arrangement was legitimate.

If you have received an audit or notification with reference to a taxpayer alert, please contact me. I am keen to pursue this issue further so that the use of taxpayer alerts is confined to worthwhile, proactive tax administration, not aggressive and ultimately pointless audits.

Posted in: Tax & ATO News Australia at 26 July 16

ATO Settlements, Part of the restructure?

 As mentioned in a previous article the Commissioner of Taxation announced major changes to the ATO which include a new focus on early resolution of disputes through settlement as an alternative to stressful litigation.

I have recently been involved in a number of significant settlements with the ATO – all of which achieved great outcomes for my clients and reduced their tax bills enormously. Further, the outcomes have avoided the need for us to take the ATO to court which would have been stressful and time consuming for my clients, even if we won.

I enjoy settling my clients’ tax disputes with the ATO without litigation, as it provides far greater certainty, less cost and is an overall better process.

But one issue that definitely needs to be addressed as part of this new process is the interaction between debt recovery and taxation disputes.

Most people do not realize that the ATO treats the resolution of taxation disputes in a completely different department from debt collection and that the processes are entirely unrelated.

The ATO has not yet worked out that to a taxpayer, knowing whether they can afford the repayment of tax debts is of far more importance to the total amount of the debt. Taxpayers, or at least those who are not fabulously wealthy, need time to pay large debts, and without the imposition of high interest rates.

Taxpayers will have no choice but to fight the assessment of unfair tax if the immediate payment of even a reduced tax bill will cripple them financially anyway.

It is critical to the success of the settlement process that the ATO negotiator be authorized to settle the payment terms of any compromise tax position. This is just common sense and hopefully the ATO will see it. 

Posted in: Tax & ATO News Australia at 24 March 15

ATO not allowed to amend an assessment outside the two year period

For most individuals, the ATO has two years to amend an assessment after the individual has received the notice of assessment. Recently in Elliott, the AAT held that the ATO was not entitled to amend the taxpayer’s assessment outside of the two year period.

 

The taxpayer was employed as a pilot by a wholly owned subsidiary of Cathay Pacific. The taxpayer was in receipt of foreign earnings which he treated in his 2006 and 2007 returns as exempt. However, in Overseas Aircrew Basing Ltd, the Federal Court held that such income was not exempt and on this basis, the ATO tried to amend the taxpayer’s assessment outside the two year period.
 
The ATO argued that it was entitled to amend outside the two year period because the two year rule is qualified by the Income Tax Regulations 1936 (Cth). In particular, the ATO tried to rely on Regulation 20 Item 5 of the regulations which provides that the taxpayer has not identified income from one or more foreign transactions for the purposes of, or in the course of, the assessment. The ATO contended that the taxpayer had not 'identified' the relevant income because he had not 'identified' the income under the correct label in his returns.
 
The Tribunal found that, in the context of Regulation 20, the applicant only needed to identify in his returns an amount of income from a foreign transaction, as he had, and that he did not have to go the further step and make a correct assessment about whether that income was exempt or assessable.
 
I am pleased by the outcome of this decision as it prevents the ATO from pushing the boundaries on these time limits. It is also interesting that the ATO supports this decision. On 5 October 2012, the ATO released a Decision Impact Statement stating that, “[it] accepts that the Tribunal's view of the interpretation of Item 5 of Regulation 20, and its application of that view to the facts in this case, were properly open to it”.

Posted in: Tax & ATO News Australia at 08 May 13

ATO's power to amend assessments is subject to certain time limits BUT they can (and do) extend

The Australian tax system operates as a self-assessment system. This means that when you lodge your tax return, the ATO accepts the information in the return at face-value and issues you with an assessment notice based on that information. However, this does not mean that the assessment is final as the ATO can conduct an audit and amend your assessment. Fortunately, the ATO’s power to amend assessments is subject to certain time limits.

 

For most individuals, the ATO has two years to amend an assessment after the taxpayer has received the notice of assessment. The two year period also applies to companies, trusts and partnerships which carry on a small business entity. A small business entity is a business with an aggregate turnover of less than $2million in a financial year.
 
However, if an individual, company, trust or partnership carries on a business that is not a small business entity, then the period extends to four years.
 
It is important to note that the ATO has the power to amend an assessment at any time if the Commissioner of Taxation is of the opinion that there has been fraud or evasion. The problem with this rule is that it is subjective as it is based on the Commissioner of Taxation’s opinion.
 
One of my clients is faced with a situation where the ATO has amended his assessment nine years after the notice of assessment was issued based on the fact that the Commissioner of Taxation is of the opinion that there was evasion. The onus of proof rests with my client. Therefore, my client has to prove that there was no evasion.
 
Generally, it is not necessary to keep records indefinitely, but as the ATO has the power to allege tax evasion and assess you retrospectively, you should strongly consider keeping records, at least in electronic form, for longer periods than are legally required.
 

Posted in: Tax & ATO News Australia at 15 April 13

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Tax & ATO News Australia

Author: David Hughes

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