Taxpayers have been successful in a string of recent tax
cases. Is it possible to distil from these cases a winning recipe
for taxpayers?
Litigation is inherently unpredictable and tax litigation is
no exception. Whilst there is no magical formula for winning a tax
case, three ingredients hold the key for taxpayer success.
Preparing to go head to head with the Commissioner of Taxation
in litigation can seem overwhelming. However, it doesn't need
to be. Taxpayers who focus their attention on the three main
ingredients of tax litigation - facts, evidence and advocacy - put
themselves in the best position to succeed.
The first ingredient, the facts, is where most tax disputes are
won or lost. At a very early stage, the taxpayer and its legal team
must understand all the facts critical to the case, and the
inferences to be drawn from those facts.
This includes recognising the facts that support the
taxpayer's case as well as those that may assist the
Commissioner's contentions. There will be times when the facts
are so unhelpful that proceeding to litigation is not an
appropriate course of action.
The second ingredient is the evidence that proves the facts the
taxpayer is asserting and (hopefully) disproves the
Commissioner's case. In preparing for litigation, the taxpayer
should take the time to map out the evidence. This always saves
time and money down the track and is best done using an evidence
matrix.
The evidence matrix should identify the evidence that supports
each element of the taxpayer's case or refutes the
Commissioner's case. This method gives a clear view of any gaps
in evidence and allows a proper assessment of the taxpayer's
prospects of success.
Evidence can be grouped into two categories – the
affidavit and oral evidence of witnesses and the taxpayer's
business records. The most compelling witness evidence will almost
always come from the key decision-makers in the transaction or
arrangement that is the subject of the dispute. For corporate
taxpayers, this is usually the directors and senior management
responsible for the transaction or arrangement. These "key
players" are able to provide the Court with insight into the
context and state of mind of the taxpayer which is rarely possible
through reading documents.
The business records of the taxpayer help to corroborate the
witnesses' evidence and paint a clear picture for the Court.
Documents also assist in refreshing witness memories of events that
may have taken place some time ago. In cases where potential
witnesses are unable or unwilling to give evidence, documentary
evidence becomes critical.
Despite best efforts, rarely does the evidence give you perfect
coverage of the facts. The challenge is to identify any gaps or
weaknesses as early as possible and tackle them head-on. For
instance, a taxpayer must be prepared to explain to the Court why a
key person or document is not available. A Court can easily draw
adverse inferences if a potential witness is not called to give
evidence and the taxpayer doesn't satisfactorily explain why
the witness is unavailable.
The final ingredient in tax litigation is advocacy.
Having invested so much time in understanding the facts and
gathering evidence, it is imperative the taxpayer's case is
presented in the most compelling way possible.
A skilled Counsel will engage with the Court to highlight the
critical facts and inferences to be drawn from those facts and how
those facts and inferences support the taxpayer's case. The
advocate will also monitor the Court's mood and adjust the
taxpayer's strategy if necessary.
Written submissions are also integral to case presentation. They
must explain how the findings of fact the Court has made in the
course of the trial support the taxpayer's arguments and do not
support or positively contradict the arguments of the
Commissioner.
Well-written submissions will frame the taxpayer's case
succinctly, in a way that allows the Court to understand the nub of
the issue quickly and why the position the taxpayer is advocating
is correct. Written submissions take on greater significance the
longer the delay between the hearing and the Court delivering its
judgment as the force of the oral submissions naturally diminishes
with time.
Taxpayers need to focus on three key ingredients in tax
litigation - facts, evidence and advocacy. While risk is inherent
in any litigation, focusing on these ingredients will give a
taxpayer the best possible chance of serving up a winning case.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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