ATO scrutiny of large corporate taxpayers is at an all time high. At the same time, the Commissioner of Taxation continues to be one of Australia’s most prolific litigants. In this environment, the main risk for taxpayers is that they find themselves unprepared when the ATO comes knocking.
When faced with the prospect of ATO scrutiny of its tax positions, a taxpayer has two options.
First, it can do nothing and hope that the ATO scrutiny does not lead, ultimately, to financial exposure. This is a valid approach for those taxpayers that have no significant uncertain tax positions.
For those with contestable, material tax positions, the “do nothing” tactic is not a genuine option. For these taxpayers, the sensible approach is to identify tax positions that may be challenged and prepare a defence. This minimises the risk of an unacceptable outcome.
Identifying the tax positions that may be challenged is fairly straight forward. In broad terms, these include positions that may be arguable or are the subject of an accounting provision or where there is a significant mismatch between the tax and economic outcomes of a large business transaction.
Preparing a defence to a tax position that may be challenged is more involved. Success in defending tax positions taken hinges largely on three things: strategy, facts and the evidence that proves the facts.
The strategy sets the path the taxpayer will take during the ATO investigation. This includes plans covering how information will be gathered and how the investigation might be resolved, including the speed, timing and manner of resolution. Importantly, the strategy must also be flexible enough to deal with all possible contingencies that can arise along the way.
Facts are critical in any tax case but not all facts are of equal importance. At the top of the pyramid are the “foundation facts”. These are the facts on which the application of the law turns, and their presence or absence will invariably determine whether the taxpayer wins or loses.
The foundation facts are particularly important in Part IVA cases. These cases generally turn on whether it is possible to identify a person whose main purpose was directed at the taxpayer obtaining the tax benefit. The foundation facts that comprise and explain the scheme are key inputs into the determination of purpose.
Having evidence that proves the facts is also imperative. The burden of proof in taxation matters falls on the taxpayer. The Commissioner of Taxation is entitled to make an assessment based on his view of the facts and the law and is not required to prove that his assessment is correct. It is for the taxpayer to show, on the balance of probabilities, that the Commissioner’s assessment is excessive.
Obtaining evidence which proves the foundation facts of the taxpayer’s case is the key to convincing the ATO, or if need be a court, that the taxpayer’s position is correct.
Despite the risks, there is also opportunity in the current environment for taxpayers to resolve matters with the ATO on just and proper terms. The opportunity arises because of a peculiar set of circumstances. The success of ATO compliance programs has ensured there is no shortage of tax positions being put forward for ATO scrutiny. At the same time, the ATO is charged with maximising revenue, resolving cases earlier and at less cost and improving its litigation record. The only way it can succeed is to be astute in picking winners and, conversely, adept in letting go of those matters that it ought not properly to pursue.
For taxpayers it is more important than ever to understand which tax positions, if any, are likely to be challenged and to prepare a defence. This may include engaging proactively with the ATO to explain why any positions under investigation are not ones the ATO should pursue.
The current tax environment is ripe for win/win outcomes for taxpayers and the ATO in resolving new and outstanding cases. All that it should take is for taxpayers with the right case to push for a resolution and the ATO to be astute enough to agree.
This is the third article in a trilogy examining risks and opportunities for taxpayers in the current tax environment.
Links to the first two articles in the series are available at the top right hand corner of this webpage.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.