Asset Betterment Assessments

The ATO and other revenue agencies have a broad power to calculate tax assessments on the basis of ‘other information’, rather than just relying on documents lodged by taxpayers. These are commonly called ‘default assessments’ and for the ATO often focus on ‘unexplained wealth’.

Such ‘other information’ includes the results of ‘indirect audit methodologies’, which means when they are not auditing specific information about particular transactions but are instead looking at broader issues about the taxpayer’s economic performance.

One of the methods we see most frequently used is called an ‘asset betterment’ which compares a taxpayer’s reported taxable transactions vs changes in their assets & liabilities over time. The methodology then requires subtracting non-assessable or exempt transactions before treating the net increase in asset value as being assumed taxable transactions.

Amongst others, this methodology is explained in the 2006 OECD paper Strengthening Tax Audit Capabilities: Innovative Approaches to Improve the Efficiency and Effectiveness of Indirect Income Measurement Methods.

Most of the time, officers of revenue agencies like the ATO make their best efforts to apply these sorts of indirect audit methodologies to determine the tax liabilities of particular taxpayers.

However, from our experience, there are various errors that can arise in the execution of an indirect audit methodology like an asset betterment, such as:

•  Incorrect starting point for comparison of assets (a mistake in the baseline year)
• Not properly identifying exempt or non-assessable receipts
•  Incorrectly characterising expenditure as private or domestic
• Not accepting taxpayer evidence explanations for transactions
• Double-counting transactions between associated entities
• Inappropriate use of statistical information not representative of the particular taxpayer’s circumstances

Where possible, it is preferable for a taxpayer to try to work with the audit officer to identify potential hot-spot issues like these and to see what evidence can be provided to address the ATO’s concerns.

The earlier in the indirect audit process this can be done, the better the chance of influencing the ATO’s thinking before they form an adverse conclusion – which can sometimes be hard to shift after that point.

Unfortunately, these types of audits can also be done ‘covertly’, so this can lead to the adverse default assessment being issued to the taxpayer without any prior warning.

Onus of proof

When a taxpayer challenges a tax assessment – including for a default assessment, they have the burden of proving that the value of that assessment is ‘excessive’ and, if so, to what degree.

In other words, it is NOT enough to prove that the ATO made a procedural error in reaching their figure or that a specific item was mistakenly included.

Instead, it is necessary for the taxpayer to prove, by adducing sufficiently convincing evidence, what alternative figure that should be used in substitution to the one proposed by the rATO.

The reported tax litigation cases are littered with many examples of where the taxpayer has failed to adduce that evidence in a form that is sufficiently persuasive.

These cases often fail because the taxpayer:

•  is unrepresented and thus does not appreciate the onus of proof and tries to deal with it in the wrong way (such as attacking the audit process, rather than providing a substitute figure)
• does not provide contemporaneous (and preferably verifiable) records to support their explanations of financial transactions or changes in their asset position
• relies mostly on unsupported assertions (large undocumented loans borrowed in cash from someone not available as a corroborating witness, for example)
•  provides explanations that are simply not very convincing (regular gambling winnings to explain cash receipts, for instance)

How can Tax Controversy Partners help you?

Firstly, it is important that you consider your position as early as possible if you are facing an asset betterment audit, especially in addressing your onus of proving any default assessment is excessive.

Obtaining legal advice is important, as experienced tax lawyers we can guide you through the stressful process and inform you of your obligations.

At Tax Controversy Partners, our experienced lawyers can represent your best interests during an ATO asset betterment audit and help you to minimise administrative penalties that may be imposed. 

Please contact us to help using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.