Tax & ATO News Australia

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

Corporate tax avoidance – what does Apple’s tax bill have to do with us?

On the face of it, the clever, multi-jurisdictional structures of companies like Apple and Google seem a clear case of corporate tax avoidance, and the Federal Govt in Australia appears justified in trying to stamp it out. Many reports and newspaper articles loudly proclaim that companies like Apple are only paying in the order of $193m tax in Australia on $27b revenue.

But like all things in tax, politics and computer design, nothing is ever as simple as it seems.

Firstly, there are a lot of moving parts in Apple’s international structure, which it must be stressed is completely legal.

Apple and other multinationals have simply done exactly what countries like Ireland and Singapore wants it to do: that is, bring its business to those countries in exchange for low corporate tax rates. It seems more than a little sanctimonious to criticise Apple for doing precisely what a sovereign country has encouraged it to do.

Or should we criticise Ireland for offering lower tax rates to attract the business? That would be odd, seeing as Australia (and most other countries) do a version of the same thing.

If Australia were striving to develop a healthy economy and thriving/robust society after years of internal turmoil and struggle, wouldn’t we as Australians want to try and find ways to attract investment and innovation to our shores?

Secondly, the law of unintended consequences is definitely something to watch. The Government’s own Parliamentary Budget Office has warned that unilateral diverted profits tax (a so called “Google Tax”) could lead to other countries imposing higher taxes on Australian businesses abroad in retribution.

Commentators and politicians tend to constantly overlook a fundamental feature of international taxation – profits are taxed at the source of the good or service, not where it is consumed. To be fair, commentators are not alone in overlooking this – the ATO has forgotten this on occasion as well, as the High Court case of Crown Insurance Limited, which I ran, shows.

The Managing Director of Google Australia, Maile Carnegie, clearly explained the issue by reversing the argument at the Senate Hearings this week:

“If you look at someone like Rio Tinto, they have 35 per cent of their customer base in China, but less than 1 per cent of their tax in China ... Google has a similar structure.”

Thirdly, as the Commissioner of Taxation has recently commented, major multinationals like Google and Apple are in continual dialogue with the ATO about specific items of income and deductions and are almost continually audited. These are frequently questions on which reasonable minds can differ, but the big companies have ample resources to properly argue their case with appropriate evidence, obtained in real time. In the words of Apple’s Tony King, "All our costs of doing business are reported in our books, and we buy products from affiliate companies outside of Australia. Apple has been operating in Australia for more than 30 years, and we now employ over 2,000 people here."

Transfer pricing is a well established mechanism by which multi-national companies are correctly taxed on the profit sources in specific countries. While Australia’s transfer pricing taxation regime is far from perfect, it is at least a well know, internationally accepted model that works.

As any business owner will tell you, one of the main objectives in how they run their business is how to remain competitive in a rapidly changing world, specifically, how to maintain profitability. Is it fair to expect any less from organisations like Google and Apple just because of their sheer size?

Google’s rep Maile Carnegie puts it this way, "I guess my answer to that one is that fundamentally, Google does not structure itself based on tax, it structures itself based on being competitive. We are not opposed to paying tax. What we're opposed to is being uncompetitive. And just like Australia needs to compete with Singapore or Ireland or the US or the UK for various things, we need to compete with the people sitting at this table as well as Tencent in China, as well as Ali Baba, who is now incorporated in the US. So we structure ourself to be competitive.”

Would you expect business owners or managers to respond in any other way?

Let’s take a moment here to consider the possible consequences.

My great concern is that taxes cannot be targeted at specific entities. Taxes that are introduced with the justification of a specific set of circumstances, quite frequently end up targeting taxpayers with completely different profiles.

So if the Treasurer introduces new legislation as a populist measure to counter the tax structuring of Apple and Google, we should all be very concerned to ensure that it does not end up catching ordinary Australian SME companies trading overseas. As we have seen, the consequences of poorly designed and administered tax can be incredibly damaging for individual taxpayers. These consequences should not be risked simply to grab a good headline that will have no other positive effect.

Putting it a little plainly.

Bad laws make bad results for the wrong people. The simple truth is that the more technical and complicated laws that are created, the more lawyers and accountants get paid to find loopholes (which we will, because greater complexity always results in greater loopholes) and you end up with an expensive cumbersome unworkable system that big companies with expansive legal budgets will always successfully exploit. Which of course greatly increases the chances of accidentally catching a little fish – the SME taxpayer – who cannot afford Apple’s lawyers and never thought for one second that the Google Tax would apply to them.


And don’t get me started on the possibility of retaliatory trade practices, identified by the parliamentary budget office, that’s for another article. 

Posted in: Tax & ATO News Australia at 10 April 15

TAXPAYERS STRIKE BACK

Federal Government slams the ATO approach to tax disputes.

The Federal Government yesterday published a bi-partisan report into the ATO’s conduct of tax disputes. I gave evidence to the House of Representatives committee on this issue last year, much of which was extensively quoted in the report. The report is damning of the ATO’s conduct in tax disputes. Unsurprisingly, I whole heartedly agree, and also I agree with the recommendations.

As any of you who have followed my rantings (sorry, my blog) over the years will know I have been banging on about this forever, for those of you who haven’t, strap yourselves in, it’s a pretty wild ride!

Currently Australia has a reverse onus of proof in tax matters. The ATO just has to say “we think you owe $1m in tax” and then the taxpayer has the job to prove that’s wrong. Actually, it’s even harder than that, it’s also the taxpayers’ job to prove what the right income is, not just that the ATO was wrong. So taxpayers are guilty until they prove themselves innocent. Yes, you read that right, we live in a country where you are guilty until proven innocent (at least as far as tax disputes go). Surely I am not alone in feeling incensed by this disregard of one of our most fundamental principles of law.

This has all kind of ramifications, when you consider the cost of litigation to prove yourself in court, which significantly favours the ATO (who have huge litigation budgets, and full time staff to do nothing else, who aren’t likely to be personally ruined by the outcome). But the cost is not just monetary, the time and stress of this process takes its toll too.

In the words of Bert van Manen MP* “The committee received evidence that taxpayers suffer enormous emotional stress. Disputes can contribute to marriages breaking-up,”

Add into this the fact that the ATO can, and does, commence debt recovery proceedings to take people’s property, bankrupt them, stop them travelling overseas and seize their bank accounts as soon as the assessment is raised, and before the matter is proved in court. Many of my clients have had problems with this, which I’ve blogged about over the years.

Worse still are allegations of evasion.

This is all about how long the ATO has to review your assessment. Generally, the ATO has four years (for SME type taxpayers) to amend an assessment – once you are outside that four year period, you are safe. But the ATO has an out – if they say that there has been fraud or evasion (ie deliberate action by the taxpayer to understate their taxable income), then the ATO can amend at any time going back well beyond four years.

The problem with this is that the onus is still on the taxpayer to prove their position – now how do you prove that you did not deliberately understate your tax? And bear in mind that you only have to keep records for five years, what happens when the ATO wants to go back ten years? How do you prove your position then?

Example;

The ATO says,“you received this $100k into your bank account in 2001 we’re going to call that your income and because you deliberately failed to disclose it in your tax return, we will assess you and now you owe us (with plus penalties and interest), $300k””

You reply, “But it was given to me by my grandmother just before she died”

They say, “Prove it”.

If you can’t prove it – because there’s no paperwork – then you are in serious trouble.

The issue as I put it to the Committee is that,

“there are still too many ATO officers whom I would describe as zealots and who seem to approach their duties as auditors or objection officers or debt collectors as though all self-employed people or business owners are tax cheats and should not be believed.
…In too many cases that I see, an ATO auditor will form a very early conclusion about the bona fides of a taxpayer. After that view is formed, no amount of evidence or legal submissions can convince some auditors that amended assessments should not issue to increase the amount of tax payable.”

Not surprisingly some of the claims made by others during the inquiry were that ATO auditors exhibited ‘digging-in’ or intransigence, becoming emotionally invested, not being prepared to accept that a taxpayer could be right on a matter of fact and bringing up trivial issues late in an audit after the taxpayer rebuts the initial ATO position.

The issue that doesn’t get spoken about enough is the toll this takes on a person’s mental and emotional health, there was evidence given during the inquiry that was quite frankly heart-breaking.

“Mr Pilgrim, a retired builder, stated that the dispute had a substantial negative effect on both his marriage and his business:
We went from 2007 through to 2010. The whole of our life was put on hold. My business suffered because I did not know from one day to the next whether I was going to be in business–I didn’t know if the ATO was going to send me bankrupt. It cost me my business and also my marriage, that part of it… I spent months backwards and forwards with the ATO, disputing the facts with my figures. That is why they reduced it back to that amount of money.

Ms Judy Sullivan from PricewaterhouseCoopers (PwC) advised that taxpayers have committed suicide at the conclusion of a tax dispute:

I am sure you will be hearing from a number of taxpayers about the emotional toll of these sorts of things. I have had clients in the past who have committed suicide after coming out the other end of an audit for a very serious allegation that was in fact settled. There is stress on families because of the length of time and things like that. You see a lot of marriage break-ups and emotional stress from these sorts of allegations.”

In response to this evidence, Commissioner Chris Jordan stated, ‘We do know that delays in dispute resolution have real, physical and sometimes paralysing impacts for business and individuals.’ And Second Commissioner Andrew Mills had this to say, ‘For those who have been adversely affected by our poor handling of their disputes, I would like to extend my sincere apologies.

It’s a great start, and I do appreciate the recent improvement in the ATO’s handling of tax disputes but it has to translate to all ATO employees. There are still far too many recalcitrants from the old school of zealotry, and until these zealots are forced to embrace the new ATO approach, lives will still be destroyed.

Legislative change is needed. With the release of the Tax Disputes Report, finally, the government recognises this need. Amongst its 20 recommendations, one of the proposed changes is a recommendation to reverse the burden of proof position, so the responsibility is on the ATO, forcing it to prove that you committed tax evasion – that is, that you deliberately did something to reduce your income.

“Recommendation 7
The Committee recommends that the Government introduce legislation to place the burden of proof on the Australian Taxation Office in relation to allegations of fraud and evasion after a certain period has elapsed. The change should be harmonised with the record keeping requirements. These periods could be extended, subject to concerns of regulatory costs on business and individuals.”
This is a massive step in the right direction as it will make the ATO actually look for real evidence of wrong-doing, rather than just make the assessment and leave it to the taxpayer to prove.

In the report you will be able to read the evidence I gave during the inquiry, stating my belief that “under current laws and systems, it is too easy for the ATO’s powers to be misapplied”. This is obviously something that I feel very strongly about, and I will be pursuing this over the coming months, and I hope you will bear with me as I rant about it in future articles.

I sincerely hope that these recommendations are quickly adopted by parliament and legislation is quickly introduced and passed.


*Committee Chair of The House of Representatives Standing Committee on Tax and Revenue

Posted in: Tax & ATO News Australia at 27 March 15

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

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

Inquiry into disputes between taxpayers and the ATO

In October, I presented evidence to the House of Representives for the Standing Committee on Tax and Revenue's Inquiry into Tax Disputes. 

 

Information on the inquiry can be found here and the transcript of evidence here

 

Terms of Reference for the Inquiry:

To inquire into and report on:
Disputes between taxpayers and the Australian Taxation Office (ATO), with particular regard to:

  • collecting revenues due
  • fair treatment and respect of taxpayers
  • efficiency, effectiveness and transparency, from the perspective of both taxpayers and the ATO, and
  • how the ATO supports the outcomes of efficiency, effectiveness and transparency through the use and publication of performance information.

 

The Committee is to examine these issues through the following themes:

  •  small business
  • large business
  • high wealth individuals
  • individuals generally
  • the legal framework for disputes, including:
  • the model litigant rules
    • real time compliance initiatives, including annual compliance arrangements, pre-lodgement compliance reviews, and the reportable tax position schedule, and
    • alternative dispute resolution, and
  • the governance framework for disputes, including:
    • the arrangements for and appropriate level of separation between the compliance, investigation, objection and litigation functions, and
    • comparisons with tax administration bodies overseas.

 

Posted in: Tax & ATO News Australia at 14 November 14

Project Don't Do It

The ATO has encouraged and continues to encourage taxpayers to participate in Project DO IT.

 

In short, the ATO has assured Australians that as long as they’re not already under audit, if they come forward voluntarily and disclose foreign assets or interests held in the last four years not already declared, that the ATO will process corresponding amendments applying only a minimal penalty, and will not undertake any further inquiry into the discloser’s affairs, particularly in relation to financial years outside of the 4 year period.

 

Is anyone honestly surprised that that was just a lie?

 

The ATO is actually very reluctant to process disclosures and honour those assurances where it feels that that would prevent the ATO from raising tax liabilities greater than the result of the disclosures.

 

The excuses so far are:

  1. the disclosing entity is associated with an entity under audit, and although the discloser is outside the scope of that audit, the ATO would have got to that taxpayer eventually;
  2. the ATO can still assess outside of the usual time frame even though a disclosure has been made because there’s no evidence that what occurred in the earlier years is the same as what occurred in the disclosure years;
  3. there is insufficient evidence to support the amendments that need to be made based on the disclosure; and
  4. the ATO has to have another meeting to discuss.

Australians have been misled into thinking that Project DO IT affords amnesty to cooperating taxpayers. The ATO is just making up how it should work as it goes along.

 

Perhaps the idea was really just a clever little initiative to generate a little extra revenue in addition to what the ATO believes it would have come up with itself through audits? In that scenario those assurances do seem safe to make and easy to honour.

 

What the ATO didn’t come to terms with was being faced with missing out on raising assessments it desperately would like to raise.

 

Anyone wishing to participate in Project DO IT should consider seriously what they’ll have to put up with once getting involved. This may well lead one to decide: DON’T DO IT.

 

For more information click here

Posted in: Tax & ATO News Australia at 07 November 14

Buyer (and Seller) Beware: Proposed Non-final Withholding Tax on Foreign Residents’ Disposed Property

 The Australian Treasury has now released a Discussion Paper on its proposal to impose a 10% non-final withholding tax on foreign residents when they dispose of ‘taxable Australian property’ (available here). This will apply to almost all property held by the foreign resident (either directly or indirectly), with the exception of residential property worth less than $2.5 million. If the proposal goes ahead, the tax will be operative from 1 July 2016.

 

Importantly, as a withholding tax, the proposal will require the purchaser to withhold the 10% tax and remit it to the ATO, and there will be penalties for failing to do so. This aspect of the proposal has already been subjected to substantial criticism. However, there are a number of sensible reasons for requiring the purchaser to collect the tax. In today’s political climate of an under-resourced and overworked Tax Office, outsourcing collection duties to the purchaser will save time and money for the ATO. Additionally, the purchaser will often be in a much better position to collect the tax than the ATO, especially from foreign residents who don’t have an Australian tax file number or are based in jurisdictions with which the ATO does not have cross-collection agreements.

 

The problem, however, is that purchasers are required to determine whether or not the seller is a foreign resident, and working out whether or not a person is a resident of Australia can be quite tricky. Residency depends on the particular circumstances of the individual, and is often a matter of degree and interpretation rather than a clear-cut answer. The purchaser could quite conceivably reach a different conclusion about the seller’s residency than the ATO, and may face penalties for doing so. This will be especially difficult in the case of residential properties held by the foreign investor worth more than $2.5 million (for which tax will be payable), as ownership of the residential property may reasonably lead to a conclusion that the seller is an Australian resident (because they own a house in Australia), and that the tax will not be payable.

 

The Discussion Paper considers a ‘Payee Declaration of Residency’ as a protection for purchasers, where the seller would declare that they are an Australian resident and no tax is payable. In cases where the seller’s residency is debatable, it would be reasonable for the purchaser to insist on such a declaration. However, given that Australian residents are taxed on their worldwide income, foreign investors may be reluctant to sign the declaration. Further, and more worryingly, foreign investors may unwittingly expose themselves to tax liabilities in Australia by making a declaration without understanding the wider implications that declaring themselves to be an Australian resident may have.

 

If the proposal succeeds, purchasers and sellers alike should therefore seek specialist tax advice as to the residency of the seller and its tax implications.
 

Posted in: Tax & ATO News Australia at 07 November 14

Professional Practices - the pitfalls of practice

I recently presented a paper to The Tax Institute on The Pitfalls of Practice as a Taxation Professional. 

To read the entire paper please click here


Overview
The practice of taxation of advice is demanding, even in the absence of disputes with the Commissioner of Taxation. Those practitioners who have had a long running tax fight will attest to the additional stress and anxiety such a fight causes – both for the practitioner and his or her client. There is probably nothing worse in the professional life of a tax practitioner than losing a fight with the Commissioner in relation to a client’s affairs and then facing a negligence claim from the client. Actually, there is one thing worse: discovering the practice’s professional indemnity insurer will not indemnify against the claim.


The issue of taxation structuring advice has come into sharp focus for many practitioners in recent times as a result of the Commissioner’s position in Taxpayer Alert TA 2013/3. Providing advice on structuring professional practices through discretionary trusts is core business for many tax practitioners. The Commissioner has told us in very clear terms that such structures will be under close review in the 2013/4 and following years:


The ATO will apply compliance resources to consider the possible application of Part IVA of the ITAA 1936 to arrangements of the type covered by this alert in relation to tax benefits arising in the 2013/14 income year and later income years (1).


It is not a question of whether an arrangement will come under review; it is a question of whether the arrangement will involve one of your clients.


In light of this, it is timely to examine some of the potential pitfalls of advising in this area. This paper will not look closely at the arrangements discussed in TA 2013/3, as that is the subject of other excellent papers today. Nor will this paper examine the technical operation of Part IVA. Instead this paper will look at the practical obligations on tax practitioners, including:

  • When practitioners should give Part IVA advice.
  • What are the key considerations when giving Part IVA advice?
  • What to do following an adverse audit decision.
  • When all else fails, can you trust your professional indemnity insurance policy?

 

 (1) TA 2013/3, page 7

Posted in: Tax & ATO News Australia at 03 October 14

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Author: David Hughes

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