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This article was originally posted on CCH iKnow.
Your client has just received an amended assessment after an extended audit process. The client is unhappy with the outcome and additional tax payable. In addition, the ATO has imposed shortfall panellise of 50% on the shortfall of tax.
This article will work through the issues in your client objecting to such an adverse decision, including to shortfall penalties.
Not all ATO decision are subject to objection rights, so you will first need to work out:
[NOTE: Subject to some limitations, taxpayers can generally also object to private rulings with which they are "dissatisfied", which is a discussion for another time.}
To be accepted as a valid objection (under the Tax Administration Act 1953 ('TAA') s14ZU) that objection needs to:
The objection form for taxpayers and the objection form for tax professionals are available on the ATO's website.
Currently, lawyers have to lodge objections with the ATO via fax channels - which many lawyers and their professional associations have recommended changing to bring the ATO more fulling into the digital age.
In our experience, we recommend preparing a seperate submission/letter to the ATO to allow for the grounds of objection to be more clearly stated (see discussion on grounds below).
Importantly, grounds needs to have sufficient details as to why your clients is "dissatisfied". It is not enough to say things like "tax should not be imposed on me", "it's not fair", "I'm unhappy with the decision" or "I can't play". Instead, the grounds need to be specific enough to outline a set of propositions aimed at trying to convince the Commissioner to change the original decision.
In our experience, grounds tend to fall into the following categories:
Where an audit/review (or especially an asset betterment) has resulted in an assessment with substantial tax effects, the taxpayer has the onus of proving that assessment is wrong and relevant transactions have been mischaracterised. There is an inevitable tension between the taxpayer's version of events and the Commissioner's position in such cases - normally manifesting in requests for evidence - often focused on "independent" evidence or "corroboration".
Despite a reported tendency for some objection team members to think otherwise, FC of T v Cassaniti 2018 ATC; [2018] FCAFC 212, per Steward J (With home Greenwood and Logan JJ agreed) sets out some important points in a tax litigation context that may be even more applicable to objection decision-making:
88. Contending that evidence was 'insufficient' ... may suggest that a taxpayer bears a special burden of proof. However, other than the necessity to scrutinise evidence given by the taxpayer him or herself with care, no such special burden exists. This is a case in which the taxpayer seeks declarations. The following propositions, derived from the judgement of Just J in Allied Pastoral, apply equally to a tax appeal made to this Court pursuant to s14ZZ of the TAA as well as to other forms of revenue proceedings, such as here, the seeking of declarations against Commissioner:
(1) first, where the onus is on the taxpayer (whether pursuant to s14ZZO of the TAA or otherwise) the degree or standard of proof required is that which ordinarily applies in civil proceedings. The direction given to a jury in civil cases aptly describes that onus by reference to a pair of scales and to the arguments of each party being placed at each end. As Hunt J said in Allied Pastoral:
... if the plaintiff succeeds... in weighing down those scales ever so slightly in his favour then he has discharged the burden he carries...
(2) secondly, for that purpose it is not obligatory for a taxpayer, in order to discharge his burden of proof, to call all material witnesses and to produce all material documents which support her or his or its position;
(3) fourthly, there is no requirement that evidence can only be accepted as admissible and probative if it is corroborated;
(4) fifthly, the tribunal of fact is free to accept the evidence of the taxpayer alone if it finds the taxpayer to be truthful;
(5) finally, it would usually be prudent to corroborate the evidence of a taxpayer. It is also prudent to adduce contemporaneous objective evidence. But prudence should not be confused with the requirements of the law.
Overall, taxpayers would be wise to provide supporting evidence and to see what "independent" sources of evidence they can access. However, taxpayers can still provide their own evidence and that of their advisors in support of their grounds of objection.
Penalties - grounds addressing conduct, discretions to remit and potential "safe harbour"
Within the grounds of objection, you should consider including grounds against any penalties (see TAA sch 1 s284-75(1)) imposed on your client against which they can object. The starting point for such objections should be to try to rebut the Commissioner's assessment of the taxpayer's conduct (sometimes called "level of culpability") by showing that the conduct was either not blameworthy or was at least less "culpable" than originally assessed by the Commissioner.
Further TAA sch 1 s298-20 gives the Commissioner the power to remit such penalties. Usually, this requires the objecting taxpayer to address both the assessment of liability ("culpability") for their relevant conduct and alternatively to request that the Commissioner exercise the discretion to remit any remaining penalties (after considering "culpability" arguments).
In PS LA 2012/5 - Penalties for false and misleading statements that result in shortfall amounts, the Commissioner outlines the circumstances where it would be warranted to remit administrative penalties. Paragraph 16F of PS LA 2012/5 states:
Relevant matters to consider in making a remission decision include:
...
- that the penalty regime also aims to promote consistent and equitable treatment by reference to specified rates of penalty. This objective would be compromised if the penalties imposed at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course, and
- that the amount of the penalty rate alone is not a valid reason for remission, in the absence of specific reasons why it would be unjust in the taxpayer's particular circumstances
Additionally, paragraph 17K of PS LA 2012/5 states:
... an unjust result may also occur in certain situations where the entity has made a genuine attempt to comply (they have taken reasonable case), but because of the actions of their tax agent the entity is liable to a penalty and safe harbour does not apply (for example, because the agent was reckless in their application of the law)
Another feature of such penalties is the "safe harbour" protection available (under TAA sch 1 s284-75(6)) to taxpayers whose "culpability" has been found to demonstrate a "lack of reasonable care" (not recklessness or intentional disregard) AND the proximate cause of that conduct was the action/s of the taxpayer's registered tax agent. As a result, objections in such circumstances should expressly address the "safe harbour" protection as a ground and provide evidence that supports the taxpayer's version of the relevant events. Tax agents generally "own up" to contributing to the tax problem arising however if they do not, this can lead to a conflict of interest between the taxpayer's interests (not being penalised) and their registered tax agent (their conduct being referred to the Tax Practitioners' Board). Sometimes independent advice is the best option to manage such conflicts.
The Commissioner is required to make a decision on a valid objection under TAA s14ZY. However, many objections can take an extremely long time to be decided.
However, the taxpayer may request, via a TAA s14ZYA notice, that the Commissioner decide the objection within 60 days. This is available where 60 days have passed since:
Where the Commissioner does not make a decision after receiving a s14ZYA notice, the decision is deemed to have been made to disallow the objection. This tactical decision for taxpayers is most likely made where they wish to speed up moving to the litigation phase to tr to resolve the dispute more quickly.
In the Full Federal Court decision in FC of T v McGrouther & Anor 2015 ATC; [2015] FCAFC 34, in a joint judgement, Pagone and Davies JJ confirmed the right of a taxpayer to withdraw a s14ZYA notice to the Commissioner, at [25]:
The power conferred upon a taxpayer by s 14ZYA(2) to give the Commissioner a notice is purely permissive and entirely at the discretion of the taxpayer. The power is conferred upon the taxpayer purely for the taxpayer’s benefit in any individual case and may be exercised or not at will. A notice given under s 14ZYA(2) is not a notice that in 60 days’ time the Commissioner will be deemed to have disallowed an objection decision, but rather is a notice ‘requiring the Commissioner to make an objection decision’. The primary purpose of s 14ZYA, and the primary object of a notice being given, is to progress the Commissioner’s decision-making function. That is a benefit which exists only for the taxpayer able to give a notice. As a matter of construction, moreover, there is nothing within the terms of s 14ZYA that would prevent a taxpayer from subsequently withdrawing a notice, given at the taxpayer’s election, thereby waiving or abandoning the right to a deemed objection decision on the taxpayer’s objection, as the deeming provision in s 14ZYA(3) only operates where a taxpayer elects to give a notice requiring the Commissioner to make a decision on the taxpayer’s objection.
If your client receives an adverse decision, they may choose to take further steps to have the decision reviewed and/or appealed.
The Administrative Appeals Tribunal (AAT) stands in the shoes of the Commissioner and can exercise the Commissioner’s discretions, with the AAT being the master of its own procedure and not subject to the more stringent rules of evidence applying to courts. Further, the AAT is a “no-cost” jurisdiction and the fees to seek a review are quite low. As a result, the AAT is an especially cost effective venue for tax decisions to be reviewed, and is therefore quite appealing to individual and small/medium enterprises and private groups.
The Federal Court of Australia (FCA) rarely exercises the Commissioner’s discretion and most frequently hears a first instance appeal turning on a question of law or a mixed question of fact and law, with proceedings subject to the strict rules of evidence. Decisions of the AAT may be appealed to the FCA. It is worth emphasising that the FCA is a costs jurisdiction and those costs can get quite high for both parties (risking a costs order being made to pay the other party’s costs). For reasons of costs and the procedural simplicity, even the largest of taxpayers will sometimes go to the AAT as the first step in their litigation process.
Overall, this part of the process is one that can be trying for taxpayers and where they will benefit from professional assistance to help them to navigate. Again, that is a discussion for another day.
Bruce Collins, Founder and Principal Solicitor at Tax Controversy Partners Pty Ltd will be running a webinar “How to Object to Tax Assessments – Tricks, Technicalities and Tactics” with CCH Learning on Thursday, 26 May at 10:30 am. Please join the discussion by registering here.
Firstly, it is important that you consider your position as early as possible after receiving an adverse decision.
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 in preparing an objection and can 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.