When involved in a dispute with the Australian Taxation Office (ATO), it is always in a clients’ best interest to seek to either resolve or narrow and define the relevant issues in dispute as quickly and efficiently as possible. We will always advise a client to seek to engage with the ATO to resolve a tax dispute, when possible.
This is the first in a six-part series of articles on different aspects of, and strategies that can be employed in, a tax dispute with the ATO.
Even if a taxpayer is successful, tax disputes can be costly, time consuming, and stressful. For taxpayers and their professional advisors, there are increasing opportunities for early engagement with the ATO to resolve or avoid such disputes.
The ATO has several mechanisms for early engagement with individuals, small businesses, and privately owned and wealthy groups, including:
1. Pre-lodgement reviews
The ATO may engage early to offer pre-lodgement compliance agreements for large commercial deals and restructure events giving practical certainty in relation to the tax outcomes arising from those events whilst they are being planned and prior to lodgement. Pre-lodgement agreements may also be viable for taxpayers with complicated personal and business structures who find themselves subject to regular reviews or audits by the ATO.
Whilst the ATO may approach taxpayers, taxpayers may request deferral of their interaction with the ATO to a more suitable time prior to lodgement.
The benefit of a pre-lodgement agreement is the certainty it provides to taxpayers and assurance given by the ATO that they will not undertake a review or audit if the transaction/restructure is carried out as agreed.
2. Oral rulings
This is a form of legally binding advice given by the ATO to individual taxpayers. It provides the ATO’s opinion on how a provision of the tax laws will apply to the individual in light of their specific circumstances.
Oral rulings are not available for either indirect tax or excise matters, business matters, complex matters, or matters the ATO are considering or have considered for the taxpayer.
The benefit of an oral ruling is the certainty it provides on the ATO’s opinion as to the operation of a specific provision of the tax laws.
3. Complex Issue Resolution requests
Similar in many respects to an oral ruling however provided by the ATO in writing.
Complex Issue Resolution (CIR) requests can give taxpayers and their advisers guidance on the ATO’s opinion as to the application of provisions of the tax laws on the facts of the taxpayer.
Different to other early engagement options, taxpayer details are usually not provided to the ATO as part of a CIR request. This is because what is usually sought is advice on the technical application of a particular tax law not a taxpayer specific fact scenario.
Whilst CIR requests are usually considered by the ATO quickly, this can depend upon the nature and complexity of the CIR request and area within the ATO considering the request.
4. Comfort letters
Increasingly used by the ATO to provide some degree of certainty to taxpayers. Comfort letters let taxpayers know the ATO believes the non-compliance risk is low and they are unlikely to expend resources in any investigation or review of the subject matter of the letter.
Whilst not legally binding, a letter of comfort is an administrative sign of the ATO’s position and should provide protection against shortfall interest and penalties. It is not unusual for comfort letters to provide conditions which failure to abide may result in the letter being withdrawn.
Comfort letters are advantageous in situations where time is critical and the ATO will not be able to make a formally binding and enforceable decision in the time frame or the ATO does not want to displace a widespread practice in relation to a specific tax treatment although they are minded to find in favour of a particular taxpayer.
5. Voluntary disclosures
Voluntary disclosures allow a taxpayer to correct their tax affairs, such as where they did not disclose income or claimed a deduction in error.
Taxpayers making a voluntary disclosure can generally expect a reduction in the administrative penalties and interest that may have applied if they had come to the attention of the ATO as a result of a formal review or audit activity.
Voluntary disclosures can be used as part of a wider strategy to limit a taxpayer’s exposure to penalties and interest on either other matters or other income years not subject to a formal review or audit.
6. Private rulings
This is a binding ruling by the ATO setting out how a provision of the tax laws applies to a taxpayer in their specific circumstances. Although the ATO aims to provide private rulings within 28 calendar days of the receipt of all necessary information, this period can be longer for complex issues.
A private ruling while binding on the ATO if it applies to a taxpayer and the taxpayer relies upon it, only applies to the scheme or circumstances that it describes. Edited versions of private rulings published by the ATO cannot be relied upon by other taxpayers.
The ATO may decline to give a private ruling in certain circumstances, including where the ATO considers the correctness of the ruling depends on the making of certain assumptions of future facts and the ATO chooses not to make these assumptions.
A taxpayer may object under Part IVC of the Taxation Administrative Act 1953 either against an unfavourable private ruling itself or where an assessment has been issued based on the view in the private ruling, against that assessment or amended assessment.
From our experience, early engagement with the ATO at the commencement (or before) a review or audit or when contact is made by the ATO with the taxpayer or their representative will deliver a more positive outcome for the taxpayer then if a reactive or defensive approach is taken.
This may still be the case regardless of the merits of a client’s case simply because early engagement will allay the potential costs of a lengthy review, audit, or objection process by bringing matters to a head earlier then would be the case.
In the second part of this series, we will look at voluntary disclosures and how they may be employed to reduce administrative penalties, depending on when they are made.
At Sladen Legal, one of the areas our tax team specialises is in the early engagement with the ATO to resolve tax disputes. Please contact us if you have any further questions.