Tax & ATO News Australia

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Consultation paper September 2016: Proposed changes to penalties for small business and individuals.

The ATO has recently released a consultation paper titled ‘Proposed changes to penalties for small business and individuals.’ More information on the proposed changes can be found on the ATO website.
 

Essentially, under the proposed changes, the ATO will provide ‘one chance’ before applying a penalty in the following circumstances:

  • For certain small businesses and individual clients, the ATO will not apply penalties for false or misleading statements for failure to take reasonable care for errors made in income tax returns and activity statements, and
  • the ATO will not apply failure to lodge on time penalties for late lodgement of income tax returns and activity statements


The ATO is of the opinion that it is open to the Commissioner to exercise his general powers of administration to give effect to these changes, and therefore a law change is not required.

 

The following parameters would apply to this proposal:

  • The one chance policy would be available to small businesses (with turnovers under $2 million) and individuals, subject to some criteria, with eligible taxpayers being informed at the time that the ‘one chance’ opportunity is provided.
  • This policy would not extend to taxpayers who demonstrate reckless or dishonest behaviour, or those who disengage or cease communicating with the ATO during an audit or review
  • Those who receive their one chance will be given a clear explanation of their error, and what they need to do to get things right in the future.
  • After the one chance has been provided, failure to lodge on time penalties would automatically apply if lodgement was not received by the due date.


The ATO claims that this policy is designed to benefit the taxpayer, as the taxpayer will save time and money by, for example, avoiding the need to research penalty information, lodge objections, and of course, release from the penalties that would otherwise be imposed.

 

However, those with a more cynical eye, or those who have more experience in dealing with the ATO, will likely have a different idea about the ATO’s motives, as well as the possible effects of the proposed changes.
 

Firstly, it is possible that these new rules may encourage overzealous auditors to circumvent the one chance policy by pursuing taxpayers for the 50% penalty rate for reckless or dishonest behaviour where they would not have previously.
 

There are also areas of uncertainty which have not yet been addressed by the ATO. Say, for example, that a taxpayer has not lodged their returns for the 2012, 2013, and 2014 financial years. In light of an audit, would the one chance rule apply to all three years, or just to the first year, with penalties then being automatically assessed for the following years?
 

The ATO’s intentions surrounding future penalties after one chance has been given are also cause for concern, particularly in light of the ATO’s statement that,

‘After the one chance opportunity has been provided, failure to lodge on time would automatically apply if lodgement was not received by the due date.’

Whilst according to the legislation penalties do indeed automatically apply, the current opportunity to contact the ATO to explain the reasons for delay seeking an exercise of the Commissioner’s discretion to remit the penalty seems to be closed to a taxpayer who has been given ‘one chance’.
 

A taxpayer with good grounds to be treated leniently would have to pursue more formal legal avenues, which would likely mean greater costs and more time, a result that is antithetical to the ATO’s supposed intentions.
 

While these proposed changes may appear good natured and well-intentioned at first glance, it remains to be seen whether the likely results of the changes will result in a net positive for the taxpayers of Australia.
 

Posted in: Tax & ATO News Australia at 10 October 16

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

The Simple Solution to Solve the Budget

I have had an epiphany.

I can solve the budget shortfall for the Federal Government by showing the Treasurer how to raise unlimited revenue. My plan is simple. The legislation is already in place and the Courts and the AAT have shown us that it is possible.

We are going to tax dead people.

I am not talking about an estate tax, or death duty. That would be politically unpopular.

No, what I am proposing is that the ATO issue default assessments under s167 of the ITAA 36 to every single person who has died in Australia since 1936. How can the Government do this, you wonder? That’s the beautiful part of my plan – all the ATO has to do is to make a determination under s170 that every deceased tax payer avoided tax due to fraud or evasion. Then the ATO can go as far back as it likes and raise new assessments.

The Courts have said time and again in cases like Rigoli and Futuris that the ATO does not even need to try very hard to come up with a figure. They just need to have a bit of an educated guess and then it’s up to the taxpayer to prove that this figure is wrong.

So each deceased taxpayer can get a tax assessment for, say, $10m. Section 177 means that’s proof they owe the tax. And the proof of tax evasion? Well, the ATO doesn’t need to prove that either. That’s up to the taxpayer too. If a figleaf of justification was required (and it’s not, according to the Courts) the ATO will say what it always does in such cases – any taxpayer who owed such a large amount of money must have known they had more tax to pay. Ergo they deliberately understated their taxable income, ergo tax evasion.

Cheating non-taxpaying bastards. We’d lock them up if they weren’t already dead. On the otherhand, fortunately for the Government, being dead makes it hard for the taxpayer to prove their case. If there is a material witness to a question of fact, Jones v Dunkel says you have to produce them to give that evidence or risk an adverse factual finding. And no-one is more material to a question of tax evasion by a taxpayer than the taxpayer him or herself.

The plan is foolproof. Naturally it’s extremely unlikely any money will be collected from estates that have already been distributed and finalised, but quite alot of people will probably cough up a couple of million each to save the cost and expense of having to fight a losing battle against the ATO, with their unlimited litigation budgets.

This was right in front of our eyes the whole time. The Courts and the AAT have already sanctioned it, as recently as last week. Check out this if you don’t believe me.

Well, that’s that problem solved. I’m off to the middle east next to solve that little pickle by introducing effective Workplace Health and Safety Laws.
  

Posted in: Tax & ATO News Australia at 09 July 15

Recent Federal Court Decision on ATO Objection Review Process

Federal Court decides an ATO objection review need not re-consider decisions made by an auditor

Yesterday, Justice Collier in the Qld registry of the Federal Court handed down a decision in Hii v Commissioner of Taxation [2015] FCA 375.

This case adds another chapter in the now considerable body of law on the application of s39B of the Judiciary Act to tax cases, following the High Court’s decision in Commissioner of Taxation v Futuris Corp Ltd (2008) CLR 146. Justice Collier essentially agreed with a line of Federal Court authorities that Futuris limits the grounds for challenging an assessment under s39B to either conscious maladministration (also referred to as bad faith), or assessments that are tentative or provisional.

While the parts of the judgment that relate to s39B are long and largely uncontroversial (if disappointing), the judgment also contains one conclusion that I think will surprise alot of people: when an ATO officer reviews during an objection the decision of an auditor, the ATO officer need not decide the issue again. While an alternative conclusion would not have changed the outcome for the taxpayer in this case because of the conclusion in relation to s39B, this point does raise question marks about the role of an ATO officer when determining objections.

Facts

Very briefly, the facts of this case involve large assessments over a number of tax years against a taxpayer who claimed to be a non-resident. The ATO during an audit concluded the taxpayer was a resident of Australia for a variety of reasons.

Furthermore because the assessments would otherwise have been outside the four year period normally allowed for the ATO to make amendments, the audit officer had to decide that there had been an avoidance of tax due to evasion in order to make the amendments. The auditor did so, and based this decision primarily on the fact that the taxpayer had put as his residential address on his tax return a foreign business address.

The taxpayer objected, including in relation to the evasion decision. An ATO officer then determined the objection, reducing some of the tax payable, but critically on the question of evasion, the ATO objections officer did not form his own conclusion at all. Instead the objections officer simply confirmed that the original auditor had the appropriate level of authority to make that decision, and then adopted the auditor’s decision.

Proceedings before Justice Collier in the Federal Court

The proceedings and arguments were complex and defy quick summary. Much of the case involved a consideration of whether the cases of review under s39B were closed to the two categories mentioned Futuris and referred to above. Once her Honour determined that they were, this essentially determined the outcome of this case in favour of the ATO.

Justice Collier then went on to determine the question of whether the ATO objections officer needed to form his own opinion on the question of evasion and concluded he did not. The relevant passage is at paragraph [108] of the judgment:

In reviewing the amended assessments in light of a taxpayer’s objection in order to determine if it was correct or should be allowed in whole or in part, it is not necessary for the Commissioner to redetermine, ab initio, all issues relevant to that decision. I accept the submission of the Commissioner that, in deciding the correctness of the original decision, it would be contrary to the concept of a “review” if every decision and consideration previously made by the Commissioner in relation to a taxpayer’s assessable income in any particular year was required to be discarded and made afresh. This absurdity is highlighted in the circumstance where an assessment is affirmed by the Commissioner, either wholly or in part. Certainly, the ITAA 36 does not specify that this procedure must be followed.

With the utmost respect, her Honour is completely correct in that the tax legislation is silent on what an ATO objections officer must do when reviewing an objection. This unfortunately creates a great deal of doubt and uncertainty.

Personally, I do not think it is satisfactory for an ATO officer when hearing a taxpayer’s objection to simply adopt the decision of the auditor, without any critical thought or review. What is the purpose of an objection process if the officers deciding the objection can simply rubber stamp the decisions of the auditor? The whole process has the potential then to be a complete waste of time and money. Further, I doubt anyone is arguing that the objection officer (or indeed the AAT on appeal) has to effectively re-audit a taxpayer. The taxpayer would be aggrieved, however, if the ATO objection officer or the AAT did not redetermine issues that were raised in the taxpayer’s objection – such as whether there was tax evasion, as in this case.

The House of Representative report into the ATO’s conduct of taxation disputes which I have previously commented on was scathing about examples where the objection officer simply rubber stamped the auditor’s decision. Recommendations were made about separating the audit function from the objection process, including housing the objection and appeals function in a separate appeals division of the ATO under a new second commissioner.

In order to give proper legislative effect to this functional change, and in light of the decision in Hii it is critical that parliament spell out clearly that the role of an ATO officer when deciding an objection is to redetermine afresh those issues that are raised in the taxpayer’s objection.

  

Posted in: Tax & ATO News Australia at 28 April 15

Reinventing the ATO

The Commissioner of Taxation, Mr Chris Jordan, announced today at the Tax Institute National Convention, that he wishes to reinvent the ATO. Before you roll your eyes and pass this off as a publicity gimmick, take a look at what he has said.

In his words:

"We’re looking to reinvent the ATO, to transform how we go about our cure business, and make the ATO a contemporary and service-oriented organization – to be a leading agency, relevant and response to the expectations of the community and the government.”

Although this sounds like fairly bland, bureaucrat-ese, I have been given the opportunity of some insider perspective through my interactions with the ATO at recent round-table consultations, which has led me to believe that there is a genuine attempt to change the culture, at least at the higher levels of the ATO. Whether (and when) this filters to the level of ATO officers that most commonly deals with my SME and affluent family group clients remains to be seen.

 

The Commissioner, however, must be applauded for these mooted changes, and if it comes off, text books about organizational cultural change will be written on this for years to come.

 

"Everybody has accepted by now that change is unavoidable. But that still implies that change is like death and taxes — it should be postponed as long as possible and no change would be vastly preferable. But in a period of upheaval, such as the one we are living in, change is the norm."
— Peter Drucker, Management Challenges for the 21st Century 

 

In the meantime, however, the most we can safely say is that there has at least been a recognition that the culture at the moment is perceived as:

• Hierarchical
• Siloed
• Bureaucratic
• Risk adverse

Sound familiar? Anyone who has had any interaction with the ATO over the last fifteen years will be nodding in agreement. That the ATO has recognized this is, by itself, a fantastic step in the right direction.

One practical issue that the ATO seems to be firmly embracing is the need for a better settlement process. In the past the ATO has allowed positions to become entrenched resulting in costly and stressful litigation. As our experience shows, the ATO has often got it wrong in the past and we have taken them to court on behalf of our clients on many occasions to prove it.

 

While beating the ATO in court is satisfying at one level, I personally prefer getting practical and worthwhile outcomes for my clients through early settlement. Fortunately the ATO now appears to be recognizing the value in this and has embraced early settlement – at least in principle. I have been involved in many recent settlements with the ATO (one recent one went until 11.00pm at night) and have achieved fantastic results for my clients, without the need to go to Court. Perhaps the ATO is capable of the change it so obviously needs within its cultural mindset, only time will tell but I certainly hope this proposed change in the ATO is genuine and that we can look forward to a lot more early settlements.
 

Posted in: Tax & ATO News Australia at 20 March 15

ATO’s Changes Out Of The Ashes Of The Phoenix

 By now, most of us have heard the term Phoenix Company, described by Nick Sherry1, as being “Similar to the mythical creature from which it takes its name, phoenix activity in its basic form involves the winding up of a company and the subsequent continuation of that business in a new ‘risen’ company.”

 

The great difficulty I have with terms like “phoenix” is that while they fit neatly into politicians’ soundbites and press releases, their real life application is much harder for the ATO to adequately define. This in turn means that taxpayers are left in the terrifying position of not knowing whom the laws are targeting.

 

In a 2012 report by PwC in conjunction with the Fair Work Ombudsman (Phoenix Activity Report), Phoenix activity was finally defined as; “the deliberate and systematic liquidation of a corporate trading entity which occurs with the fraudulent or illegal intention to: 

• avoid tax and other liabilities, such as employee entitlements
• continue the operation and profit taking of the business through another trading entity.”

There is no doubt, that the worst of these activities often leave a lasting legacy with unpaid wages, super, outstanding invoices to suppliers and other debts. The cost of which has been estimated at almost $2 billion by the ATO.

 

The key words in the PwC definition are “deliberate”, “systematic” and “fraudulent”. Where directors have engaged in such behaviour to avoid paying employee entitlements, then the full force of the law should be used. But what of the company that through no fault of the directors is left in a position where debts have mounted and the company cannot continue to operate? Should the same strict rules apply?

 

The great difficulty in administering tax law through emotive sound bites, is that it has the potential to lead ATO officers to think that acting tough should replace acting fairly. It is all too easy for an ATO officer to conclude that because a company has been liquidated, that the elements of fraud and deliberation must automatically be present. The cost and stress to taxpayers who are innocent of such charges is immeasurable.

 

The Federal Government has recently announced that it will establish two taskforces run jointly by the ATO and other governmental organisations (see below for full list of involvement), one of which will confront phoenix activity. Whilst this strategy by the ATO shows very clearly that it is willing to be very tough on the worst and most blatant offenders, I can’t help but also be concerned at the effect this may have on the vast majority of taxpayers who try to do the right thing. Don’t get me wrong, I encourage a tough approach by the ATO for those that deliberately flout the law, if at the same time, there is a more reasonable approach for the taxpayers who try to do the right thing, and inadvertently get something wrong. Worse yet is the potential for the nightmare scenario for taxpayers of being accused by the ATO of something that is just completely false.


I have seen too much time, energy and money wasted in the past, when the ATO directs its resources at the wrong people (as confirmed in the Inspector General of Taxation’s very recent report. It is not an exaggeration to say that the ATO has wrongfully destroyed people’s lives and businesses with misdirected efforts or at worst ill-intentioned or uninformed objectives.


So yes, by all means, I heartedly applaud the ATO for going after the crooks, but let the rest of the SME community get on with business without unfair and wrongful interference. I would like very much to see this become law, in a way that is balanced and fair.


Fortunately, the ATO is making changes and we, here at SMH, have had great results with recent settlements for taxpayers. The concern, again identified by the IGT, is that these changes depend on the commissioner of the day being a benevolent dictator.

 

1.   former Minister for Superannuation and Corporate Law

*The Trusts Taskforce is made up of the ATO, Australian Federal Police (AFP), Australian Crime Commission (ACC), Commonwealth Director of Public Prosecutions, Australian Securities and Investments Commission (ASIC), Australian Government Solicitor (AGS), Attorney-General's Department (AGD), AUSTRAC, Australian Competition and Consumer Commission, Australian Business Register (ABR) and Australian Prudential Regulation Authority.
The Phoenix Taskforce is made up of the ATO, ASIC, AFP, ACC, ABR, the Fair Work Ombudsman, Fair Work Building and Construction, the Department of Environment, the Department of Employment, the Department of Immigration and Border Protection and the NSW and Victorian Offices of State Revenue.
 

Posted in: Tax & ATO News Australia at 16 March 15

A lesson on evidence for the taxpayer

In a fight against the ATO, you are guilty until you prove yourself innocent. You not only need to demonstrate that the assessment made by the ATO is wrong, but also what the correct assessment should be. A fight against the ATO can be lost, even if the ATO is wrong. Getting the right evidence is critical. A recent AAT decision was found in favour of the ATO because:
 
It is undoubtedly the case that the [ATO’s] assessments are not correct but the [taxpayer] has not shown the taxable income on which tax ought to have been levied.  It follows that he has not shown that the assessments are excessive.
 
This case was inherently complex with links and ties to an offshore bank in Liechtenstein, In October 2006, an employee of the bank handed over three compact discs to the ATO with details of 20 Australians holding $110 million in the bank. Among one of those Australians was 70 year old retiree, Dr Harold Murray. In June 2008, the ATO used this information to amend assessments of Dr Murray’s income right back from 1999 to 2007 which led to an alarming tax bill of $36 million for Dr Murray.
 
Dr Murray disputed the assessments on a number of grounds. However, he ultimately lost because he not only failed to produce any documents in support of his contentions, but also failed to appear in the AAT to give evidence. He said that he was concerned about receiving a Departure Prohibition Order like Paul Hogan if he returned to Australia to give evidence.
 
This case reinforces the importance of presenting the evidence correctly in a fight against the ATO. I have successfully run a number of AAT cases against the ATO and can help you gather and prepare the evidence to put you in good stead in your fight against the ATO.

Posted in: Tax & ATO News Australia at 12 September 12

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Tax & ATO News Australia

Author: David Hughes

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