Tax Disputes: Part 2 – Voluntary disclosures

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 second in a six-part series of articles on different aspects of, and strategies that can be employed in, a tax dispute with the ATO.

Voluntary disclosures can be an effective way to resolve tax matters.  A voluntary disclosure may reduce administrative penalties by 20% or 80% (or to zero) depending upon when the disclosure is made and the size of the penalty.

Why make a voluntary disclosure?

Where and when to make a voluntary disclosure depends upon the particular risk profile and risk management strategy adopted by the client.  The more likely the ATO may detect an issue, the greater the incentive to make a voluntary disclosure. 

Whilst a voluntary disclosure will not result in a review or audit, it will result in the Australian Taxation Office (ATO) scrutinising at least one aspect of the taxpayer’s affairs (the disclosure).  The flipside is a voluntary disclosure is a means to proactively open settlement negotiations or communication with the ATO to manage tax risk which do not have the restrictions or limitations of other forms of engagement such as making a private ruling application.

Where a voluntary disclosure is made before an audit begins in respect of an income year and the tax shortfall is less than $1,000, penalties may reduce to zero.  Where a voluntary disclosure is made before an audit begins in respect of an income year and the tax shortfall is more than $1,000, penalties may reduce by 80%.  Where the disclosure is made after an audit begins, penalties may reduce by 20% (if the disclosure reduces the ATO time and resources in the tax audit). 

Making a voluntary disclosure

The definition of ‘audit’ in the tax laws is broad and includes substantiation reviews and deduction verification enquiries. 

A disclosure will not be a voluntary disclosure where the ATO was already aware of the relevant information.  Nevertheless, where the ATO is conducting a review of a taxpayer, it may still be possible to make a voluntary disclosure and to take advantage of the 80% reduction in the penalty. 

When preparing a voluntary disclosure, a taxpayer should consider whether there are any other matters timing issues the ATO may raise.  The ATO names which entities are under audit so associated entities not named should (where it is both proper and advisable) consider making voluntary disclosures before an audit of those other entities begin.

A voluntary disclosure should:

  • be clear, and easily understood and accompanied by supporting documentation;

  • be made after all relevant matters have been considered and the intention in making the disclosure is well defined;

  • prepared and lodged with clear instructions and proper authorisation by the taxpayer;

  • consider the consequences of the disclosure in relation to the tax position or affairs of third parties; and

  • consider the relevant periods for which the ATO can amend assessments.

Generally, the ATO has either 2 (in the case of individual taxpayers with simple tax affairs) or 4 years (in the case of trusts and companies) from the date the taxpayer received its original notice of assessment to issue an amended assessment. 

Where there has been fraud or evasion, the ATO has an unlimited review period to issue an amended assessment.  The intentional omission of income without credible explanation can amount to evasion. A voluntary disclosure can help the ATO in not making a finding of evasion.    

Where a taxpayer has not lodged a return for an income year, the review period does not begin until the taxpayer lodges the outstanding return.  In circumstances involving a failure to make lodgements, we have had success in making a voluntary disclosure to reduce or resolving the tax exposure of our clients in the relevant income year.

Tips and good practice

A carefully drafted and considered voluntary disclosure can ensure a taxpayer is proactive in resolving outstanding tax issues and allows the taxpayer to take full advantage of the discounted of penalties that may otherwise be imposed.

In the third part of this series, we will look at resolving tax disputes with the ATO by way of settlement including what approach should be taken with the ATO in endeavouring to negotiate the best outcome for clients.

At Sladen Legal, one of the areas our tax team specialises is the making of voluntary disclosures to the ATO on behalf of our clients. Please contact us if you have any further questions or need our assistance.

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176

Kelvin Yuen
T +61 3 9611 0177

Sam Campbell
Associate | Business Law
M +61 423 515 454 | T +61 3 9611 0135