Damian O’Connor, Managing Principal at Tax + Law, discusses the number one rule in tax disputes to avoid getting it wrong. He will be presenting at the upcoming Dealing with Tax Authorities seminar, where he will go in depth about handling director penalties for SME clients.
We know that tax laws are extremely complicated. Dealings with tax authorities can often depend on the evidence or other legal issues such as the effectiveness of trustee resolutions, rather than complex tax legislation questions.
Unlike ordinary legal disputes, when an appeal is lodged against an objection decision the Tax Commissioner does not have to prove his objection decision was correct.
Section 14ZZK of the Taxation Administration Act 1953 shifts the onus of proving their case to the taxpayer who “… has the burden of proving … that the assessment is excessive or otherwise incorrect and what the assessment should have been”
Tribunals and Courts consistently reinforce that taxpayers (on appeal) must show what the “true” assessment should have been in order to win a case against the Tax Commissioner.
Rigoli v Commissioner of Taxation [2015] FCA 803
This Full Federal Court decision confirms the difficult task taxpayers (and their professional advisers) face in satisfying the burden of proof in disputes with the Tax Commissioner.
For our purposes, the key question was whether Mr Rigoli had established his true taxable income.
The Commissioner’s default assessments were supported by a report from an accounting expert setting out, as best he could, the financial position of a partnership during the relevant years.
Mr Rigoli’s position seems to have been that because of an absence of proper record keeping and accounting he could not precisely establish his taxable income for the relevant years. He asked the Tribunal (and the Federal Court) to accept that the Commissioner’s income figures did establish his correct assessable income, and that a deduction for depreciation should be allowed for an amount agreed with the Commissioner.
On the face of it the taxpayer’s position seems reasonable. Even though his records were a mess, he would have used depreciable plant in deriving income, and he had relied on an expert to come up with a depreciation estimate. Mr Rigoli submitted that if the Commissioner had determined that his income was $X then his correct taxable income would be $X minus $Y deductible expenses, such as depreciation.
Unfortunately for Mr Rigoli, the Full Federal Court took a different view, and held that:
- The onus is on the taxpayer (Mr Rigoli) to establish his “true” or “correct” taxable income;
- The expert accounting report obtained by the Commissioner was for the purposes of providing a reasonable basis for making default assessments under section 167 ITAA 1936;
- The expert report was merely a best effort (by the Commissioner) at determining the correct financial position, and it “did not establish Mr Rigoli’s taxable income”; and
- Because the expert report did not establish Mr Rigoli’s actual income, Mr Rigoli could not rely on the report to establish that his correct taxable income was the amount shown in the expert report LESS a deduction for depreciation.
That seems like a pretty tough outcome. The taxpayer was trying to establish a reasonable estimate of his income, however he failed to produce the right sort of evidence to satisfy the tribunal and court.
Rule #1
The ATO knows that taxpayers have the onus of proof. The Commissioner may concede nothing and put taxpayers to the test on every possible issue.
This can come as quite the surprise to advisors who thought they had narrowed the issues in dispute, provided sufficient evidence or convinced the ATO of a particular interpretation of the legislation.
Rule #1 tells us that pointing out errors in the Commissioner’s processes, calculations, legal position or logic will hardly ever be enough. Taxpayers must satisfy the Tribunal or Court of their correct tax liability on the balance of probabilities.
In our experience, if risks are recognized early enough, it may be possible (and preferable) to satisfy tax officers of the source of funds, the deductibility of expenses or the correct interpretation of the law BEFORE any negative “vibe” gets too much momentum, amended assessments are issued, objections disallowed or appeals are filed.
Damian O’Connor (Managing Principal) has a wealth of experience in tax, commercial law and family legal issues in Melbourne and Brisbane, as a lawyer and a tax partner with national law firms.
Damian provides practical technical advice on complex tax issues, commercial and family wealth structuring advice and legal documentation. He has decades of experience in managing high risk, high stress interactions with revenue authorities.
He has been recommended as a leading Tax Lawyer in Doyle’s Guide, and contributes to the continued development of tax expertise through his involvement with the Tax Institute and presentations for Television Education Network, Legalwise, Law Central, the Law Institute of Victoria, the Queensland Law Society and other professional bodies, professional associations and universities. Damian is a contributing author on tax issues for the Australian Master Family Law Guide, and has been published in international tax journals. He is a Chartered Tax Adviser and holds a Arts Degree (Chinese language major) and an honours degree in Law. Connect with Damian via email or LinkedIn
