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We are all familiar with the process of taxpayers lodging tax returns and the Commissioner issuing an assessment which determines their tax liability. For income tax, this is done using the Commissioner’s general assessment power in s 166 of ITAA 1936 or via the deemed assessment power in s 166A for full self-assessment taxpayers.
However, the Commissioner also has the power to issue default and alternative assessments in his efforts to ensure that he ascertains a taxpayer’s taxable income and tax liability. These types of assessments are often disputed by the taxpayer and the burden in challenging them is on the taxpayer to prove that the assessment is excessive and by how much.
The decisions in FCT v Ross [2021] FCA 766 and Le & Anor v FCT 2021 ATC ¶20-785; [2021] FCA 303 provide some insights on challenging default assessment issues and Hyder & Ors v FC of T 2022 ATC ¶20-820; [2022] FCA 264 (on appeal) on the practical issues on collections for alternative assessments.
The decisions in FCT v Ross [2021] FCA 766 and Le & Anor v FCT 2021 ATC ¶20-785; [2021] FCA 303 provide some insights on challenging default assessment issues and Hyder & Ors v FC of T 2022 ATC ¶20-820; [2022] FCA 264 (on appeal) on the practical issues on collections for alternative assessments.
Section 167 of ITAA 1936 gives the Commissioner the power to issue a default assessment and Practice Statement PS LA 2007/24 (Making default assessments) provides guidance on how and when to use this power. The practice statement states that in issuing an assessment under s 167, the Commissioner must ensure that his decision is based on reasonable grounds and is supported by sufficient information.
In extreme cases, if the Commissioner does not make a genuine attempt to determine a taxpayer’s taxable income the taxpayer may seek review by the Federal Court under s 39B of the Judiciary Act 1903 (or cl 57(v) of the Constitution), but they must have the grounds to show that the making of such a default assessment was so fundamentally flawed that no assessment really resulted. Doing so requires a very high watermark of demonstrating “conscious maladministration”, following the High Court decision in FC of T v Futuris Corporation Ltd 2008 ATC ¶20-039; [2008] HCA 32.
Assuming that the assessment is valid, the taxpayer can object to the assessment under Part IVC of the TAA 1953 (as channelled by s 175A), but will need to discharge the burden of proving that the assessment was excessive. Generally, the Courts have taken the view that that is not merely sufficient for the taxpayer to demonstrate that the Commissioner is wrong, but also to provide evidence showing what their taxable income should be – (Full Federal Court in Gashi v FC of T 2012 ATC ¶20-325; [2012] FCA 638).
For example, in FCT v Ross, where the Commissioner had issued s 167 default assessments based on the asset betterment methodology to determine the taxpayer’s taxable income, the Federal Court held that the taxpayer must establish their actual taxable income and it was not sufficient for the taxpayers to show that the asset betterments statement was wrong by explaining some of the transactions or assets (at 69):
“ … However, it must be kept steadily in mind that the object of doing so is to discharge the burden of having the arbiter of fact accept that they have established the true amount of their taxable income. Merely demonstrating that some of the assets on which the Commissioner relied in estimating the taxpayer’s wealth were not owned by them, not as valuable as thought, or were obtained from non-assessable income does not assist the taxpayer in the absence of proof of their actual taxable income.”
Conversely, in Le & Anor v FCT, which also involved s 167 default assessments based on the asset betterment methodology, the Federal Court allowed the taxpayer’s appeal and remitted the matter to the AAT for a rehearing, holding that:
“The flow of funds into and out of bank accounts was in evidence, as was an explanation as to why outgoings from accounts were not income. The Commissioner’s submission that the asserted explanation was put at such a generalised level of abstraction that the AAT was justified in not engaging with it was to be rejected. The taxpayers gave precision in their tabulations as to the resultant excess in the amount of each assessment. A failure to consider that explanation was a failure to undertake the statutory review function.”
Alternative assessments
Whilst the Commissioner usually issues one assessment to a single taxpayer for most transactions, there are circumstances where he can issue multiple alternative assessments when good administration requires them. He must hold a view that each assessment is capable of being correct but may issue alternative assessments where there is uncertainty on the facts or operation of the law under any one of the assessment provisions.
Guidance on how and when the Commissioner will issue an alternative assessment is set out in Practice Statement PSLA 2006/7 Alternative Assessments. Such circumstances include:
When making an alternative assessment the Commissioner must still meet the requirements of a valid assessment - it cannot be “tentative or provisional” – see, for instance FJ Bloemen Pty Ltd v FC of T 81 ATC 4280; (1981) 147 CLR 360.
In DFC of T v Richard Walter Pty Ltd 95 ATC 4067; (1995) 183 CLR 168 the High Court held that the Commissioner has the power to issue alternative assessments to different taxpayers where the proper taxpayer may not be readily apparent and that a taxpayer’s assessment was not tentative merely because another taxpayer has been assessed to tax on the same item of income.
Similarly, in Whitby Land Company Pty Ltd (Trustee) v DFC of T 2017 ATC ¶20-605; [2017] FCA 28, the making of alternative assessments based on two postulates did not render the assessments impermissibly “tentative or provisional”. The Commissioner regarded the primary assessments as reflecting the correct assumption, while the alternative assessments performed a protective function in case that assumption was incorrect (and not for the purposes of double recovery).
The issue of potential attempts at double recovery arose in the recent case Hyder & Ors v FC of T 2022 ATC ¶20-820; [2022] FCA 264 (on appeal), where the Commissioner issued alternative assessments to a beneficiary of a trust and to the trustee – while another entity had already been assessed on the relevant income. Over a 14-month period the Commissioner sought payment from the beneficiary and the trustee for the full amount due under both assessments. The taxpayers sought orders under s 39B of the Judiciary Act 1903 prohibiting attempts to collect tax on the previously taxed income. Whilst the Commissioner changed his position - saying ATO “will not and cannot” recover against both taxpayers assessed on the same income, such that an injunction was unnecessary, the Court found that the Commissioner had acted oppressively. The appeal and cross-appeal will be interesting.
Challenging the validity of assessments and meeting the required burden of proof are not easy.
To join the discussion, register for the CCH Learning session with Bruce Collins from Tax Controversy Partners Pty Limited ‘ATO Tax assessments – case law and practical concerns’ that will be held on Thursday 25 August at 10.30am.