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
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
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
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
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.
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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