Pressure on the ATO to boost revenue and win more court cases has increased risks for taxpayers but also opened up opportunities to resolve outstanding cases.
There is always pressure on the ATO to maximise revenue. Right now this pressure is sky high thanks to the Government promising to return the budget to surplus in 2013 and its substantial reliance on tax receipts to do so. A string of recent costly court losses has added to the pressure.
Inevitably pressure on the ATO cascades down to taxpayers. For years, the ATO has been ratcheting up its scrutiny of taxpayers by pushing them to disclose their biggest tax risks in real time. Pressure comes in the form of compliance products designed to convince taxpayers of the merits of proactive, real time engagement with the ATO.
For example, annual compliance arrangements (ACAs) are promoted by the ATO as a way for taxpayers to reduce their risk profiles and provide certainty on tax positions. However, it comes at a cost. Taxpayers have to identify issues and transactions for the ATO plus engage with it about their views on tax positions, sometimes in advance of finalising those views. And ultimately there is no guarantee the ATO will agree with those positions. So the ACA does not insulate the taxpayer from a fight.
Additional pressure has been layered on in the form of the ATO's risk differentiation framework, pre-lodgement compliance reviews and the reportable tax positions regime.
Under the risk differentiation framework, "higher risk" or "Quadrant 1" taxpayers attract greater scrutiny and are subjected to a compliance regime designed to ensure they behave in a manner which conforms to the ATO view of compliant taxpayer behaviour. This includes pre-lodgement compliance reviews in the period leading up to and including lodgement of the tax return for the year.
The reportable tax positions regime, currently under trial, will see taxpayers report in the annual tax return any contestable, material tax risks not previously disclosed.
Add to this pressure the uncertainty surrounding the application and proposed reform of the general anti-avoidance rule, Part IVA, and you've got a tax environment that is less than ideal (at least for taxpayers!).
However, where there is risk there is also opportunity. Today, taxpayers are well placed to resolve some tax audits, inquiries or disputes with the ATO on favourable terms.
The opportunity arises due to the ATO being confronted with an environment where there are more taxpayer disclosures but also more pressure on the ATO to resolve tax disputes earlier and at less cost to the community.
Some of the pressure follows investigations by the Inspector General of Tax into the conduct of tax audits and the ATO's use of early and alternative dispute resolution (EDR/ADR). While current tax legislation doesn't obligate the ATO to participate in EDR and ADR, other policies and laws do. See, for instance, the Model Litigant Policy in the Attorney-General's Legal Services Directions 2005 and the requirement in the Civil Dispute Resolution Act 2011 and the new Federal Court Rules to take "genuine steps" to attempt to settle a matter before issuing proceedings. In addition, the Federal Court has introduced tax list directions designed to streamline tax litigation processes.
For the ATO, it will be important in the immediate term to concentrate its efforts on resolving disputes early and improving its litigation record. It won't be an easy task. Like all government agencies, the ATO is under pressure to cut costs.
Fewer ATO resources mean taxpayers can expect that, at least in the short term, the ATO will focus on matters where it is confident of winning, the stakes are high or there is an important principle to test. If a taxpayer's case falls within one of these categories, then it is all hands to the wheel in defending its position with only a small prospect of achieving an early resolution. If a taxpayer's case doesn't fall into one of these categories however, then there is a significant prospect it can be resolved now and on favourable terms.
Resolving cases early ought to be a win/win outcome for the ATO and taxpayers alike. From an ATO perspective, a lack of resources, surfeit of cases and focus on chalking up wins and avoiding costly losses should mean that clearing any cases where the ATO's prospects of success are not high is a desirable outcome.
The ATO may not necessarily see it that way at the outset. Its starting position may be that there is no incentive for it to fast track any matters not high on its case list. This approach would see such cases deferred for another day when the environment may be more conducive to the ATO contesting taxpayer positions. In that case, it is for taxpayers to explain the benefits of action and press for a resolution.
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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