When in a dispute with the Australian Taxation Office (ATO), attention needs to be given on how to respond to, and engage with, the ATO during a review or audit.

This is the fifth in a seven-part series of articles on aspects of, and strategies that can be employed in, a tax dispute with the ATO.

The Australian Taxation Office (ATO) undertakes extensive review and audit (audit) activity to ensure either voluntary compliance by taxpayers under the self-assessment regime or to coerce compliance.

A focus of ATO audit activity continues to be private wealth, family groups, and small to medium enterprises.

Clients should be aware of how to manage and respond if they find themselves subject to an audit.

Why engage a tax lawyer during an ATO review/audit?

Thorough preparation during an audit for likely contingencies can be a significant factor in coming to a quicker resolution than may otherwise be the case. Ensuring the ATO conducts the audit in accordance with relevant legislative and administrative policy is crucial.

Given the increasing amount of ATO audit activity, a successful audit strategy is about managing a client’s position when (or if) selected for audit rather than avoiding the audit itself.

Involving a tax lawyer early in the process, even whilst the ATO may still only be reviewing a client’s affairs, often provides the best opportunity for a client to maintain a continuing and cooperative approach in dealing with the ATO whilst also being able to use the lawyer strategically.

The client, the tax agent, and the tax lawyer need to work together to bring about the best outcome for the client.

Engaging a tax lawyer can give an independent view whereas a taxpayer’s tax agent may have been involved in the taxpayer taking the position that led to the audit. Strategically it may be the tax agent initially acts for the taxpayer with the lawyer being engaged to help behind the scenes. Only when it is felt most beneficial to the taxpayer’s position does the lawyer communicate directly, and act on the taxpayer’s behalf, with the ATO in relation to a matter.

Management of an audit process should also be considered in the wider context of a taxpayer’s potential voluntary disclosure, remission of penalty, and settlement strategies. For example, if the ATO commences an audit relating to certain issues concerning named entities for specific income years there may still be opportunities to make voluntary disclosures outside the audit scope and to take advantage of the significant penalty discounts (up to 80%) and grounds for remission of interest that may then be available for those out-of-scope issues or entities.

Whilst no client wants to engage in a lengthy audit process, regardless of whether they may wish to come to a resolution as soon as possible, care must always be taken to ensure the client’s position is not compromised in the event the matter cannot be resolved and does move to either objection or litigation.

What are the building blocks of a successful audit strategy?

The building blocks of a successful audit strategy should include:

defining clear and achievable outcomes, time frames, and procedures;
aiming to objectively, efficiently, and effectively settle a matter with either no or minimal tax adjustment;
being proactive in presenting relevant facts, technical tax analysis, and policy considerations in a systematic manner to influence audit outcomes; and
extracting from the ATO as much information about, and influencing the formation of, the ATO view in relation to a matter before the ATO view has crystallised.

An uncooperative approach with the ATO during an audit may result in an escalation of formality, contentious information exchange, and costs to the taxpayer whilst reducing the possibility of settlement. However, depending upon the circumstances, a limited cooperative approach (exercising all legal rights to their full limits) may be appropriate depending upon the seriousness and nature of the contentions of the ATO.

The ATO has significant powers to compel a client to either provide information or answer questions relating to their taxation affairs, especially during audit. Information exchange with the ATO can be undertaken on either an expansionist or minimalist basis. A minimalist approach (only answering the questions and providing the information directly relevant to the ATO’s queries) may be appropriate until the ATO is clear what it is interested in investigating and an assessment of the risk profile of a client has been undertaken. A more expansionist approach can then be adopted to influence the ATO and to promote a resolution of the audit or settlement on terms most beneficial to the client. However, a decision on the best strategy should be considered on a case by case basis.

In any case, contentions based in a technical, administrative, and policy-based approach grounded in the evidence and supported by the relevant facts will always be more persuasive to the ATO.

Tips and good practice

Assessing potential tax risk management early during an ATO audit can greatly assist clients take a more organised, informed, and proactive position with the ATO.

Often it may not be possible to avoid an audit, but the process can always be managed optimally. Getting the best outcomes for a client requires a collaborative approach between the client, their accountant, their tax lawyer, and other advisers.

When engaging with the ATO during a audit:

be proactive in preparing for the audit;
consider making voluntary disclosures to reduce penalty and interest exposure;
prepare submissions and disclosures in a clear manner setting out to the ATO what course of action is needed and their power to give effect to a request;
respond in a timely fashion to requests for further information or documentation in a manner that proactively assists the client’s case;
do not make any disclosures or submissions not substantiated by evidence and documentation; and
do not be reactive, and ensure in every interaction with the ATO the policy and legal reasoning supporting the client’s position is made very clear.

In the sixth part of this series, we will consider how best to manage and resolve matters that have proceeded to objection.

At Sladen Legal, one of the areas our tax team specialises is in tax disputes including dealing with the resolution of ATO audits. Please contact us if you have any further questions or need our help.

Sam Campbell
Senior Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135
E: scampbell@sladen.com.au

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au