Foundations of Taxation Law 2021 - (PART O TAX Administration) PDF

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PART O

Copyright © 2021. Oxford University Press Australia and New Zealand. All rights reserved.

TAX ADMINISTRATION

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

Copyright © 2021. Oxford University Press Australia and New Zealand. All rights reserved. Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

CHAPTER43

Copyright © 2021. Oxford University Press Australia and New Zealand. All rights reserved.

Income Tax Returns, Assessments, Rulings, Appeals and Audits Introduction Income tax returns Assessments Taxation rulings Objections, reviews and appeals Challenges outside the appeal process Tax litigation Audit powers ATO approach to tax compliance Study questions References and further reading

¶43.1 ¶43.2 ¶43.3 ¶43.4 ¶43.5 ¶43.6 ¶43.7 ¶43.8 ¶43.9 ¶43.10 ¶43.11

[¶43.1] Introduction This chapter focuses on some important aspects of income tax administration. It commences with an examination of the obligation on taxpayers to lodge income tax returns [¶43.2] followed by a discussion of the assessment process [¶43.3] and the taxation ruling system [¶43.4]. The chapter examines the special rules for objecting to assessments and private rulings under pt IVC TAA [¶43.5]. It also discusses the limited avenues for challenging assessments outside these rules [¶43.6] and various other aspects of tax litigation [¶43.7]. The nature of the Commissioner’s audit and investigatory powers [¶43.8] and his attitude to tax compliance [¶43.9] are also considered at the end of the chapter.

[¶43.2] Income tax returns Income tax returns are used for reporting purposes and are a central feature of the income tax system. As a general rule, taxpayers are assessed on the basis of the information contained in their returns [¶43.3].

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.2

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Requirement tolodge returns Taxpayers must lodge income tax returns if required to do so by the Commissioner (s161 ITAA36). Each year, the Commissioner issues legislative instruments specifying the categories of taxpayers that should lodge returns. In general, most taxpayers are required to lodge tax returns. However, an exception applies to resident individuals with taxable income below the tax-free threshold of $18,200. These persons must, nevertheless, still lodge returns in certain cases, such as where they carry on a business or are under 18 and have more than $416 of eligible taxable income. The Commissioner also has power to require taxpayers to lodge: •

‘further returns’ (eg where he is not satisfied with the original return) (s 162), and

•

‘special returns’ (eg where a taxpayer is planning to leave Australia before the end of the income year) (s 163).

Administrative penalties apply where taxpayers fail to lodge their income returns on time (div 286 in sch 1 TAA) [¶46.2].

Forms

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The ATO produces different return forms for different kinds of entities. There are separate forms for: • individuals (‘Form I’) •

companies (‘Form C’)

•

trusts (‘Form T’)

•

partnerships (‘Form P’), and

•

superannuation funds (‘Form F’).

Depending on the taxpayer’s particular circumstances, the taxpayer may also be required to complete additional schedules detailing specific information. For example, there are schedules relating to: • business and professional items •

employment termination payments

•

superannuation lump sum payments, and

•

capital gains tax.

Lodgment ofreturns Over the last few years, individuals have been required to lodge their income tax returns by 31 October following the end of the income year (30 June). To assist individuals in lodging their returns, the ATO publishes a guide entitled Individual Tax Return Instructions (which replaces the former TaxPack guide). Taxpayers can also now lodge returns electronically using ‘myTax’ via the ‘myGov’ website, which is the single point for government online services [¶2.5]. The myTax product contains a useful ‘pre-filling’ service to assist taxpayers complete their returns. The pre-filling service populates a taxpayer’s return with information that the ATO already possesses about them, obtained f rom organisations

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Foundations of Taxation Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.2

Law

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such as employers, banks, companies and government agencies. According to the ATO website, 3.8million people used myTax to complete their returns in 2018. Special arrangements apply where taxpayers use tax agents to lodge their returns. Tax agents must lodge returns in accordance with their specific ‘lodgment programs’. Lodgment programs are designed to allow tax agents to spread their workload over the year. Most tax agents use the ATO’s electronic lodgment system to lodge their clients’ returns. However, before using this system for a client, a tax agent must obtain a written authority from the client to do so. Taxpayers are required to sign their returns and declare that the information provided is ‘true and correct’. Areturn lodged electronically must contain the taxpayer’s electronic signature. Where the return is lodged electronically by a tax agent, it must contain the electronic signature of the tax agent. Information contained in a taxpayer’s return may be audited by the ATO [¶43.8]. Significant penalties apply where information has been misstated in the return [¶46.2].

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[¶43.3] Assessments Underpinning the Australian income tax system is the ‘assessment ’ process. Since 1986, a ‘self-assessment regime’ has operated in Australia. Before this time, taxpayers were required to make full disclosure of all relevant material in their income tax returns. This was cumbersome and required ATO officers to spend a long time scrutinising returns. Under the self-assessment regime, the ATO generally accepts statements made by taxpayers in their returns and issues assessments based on such information. Assessments are not issued to companies and superannuation entities, as these taxpayers are subject to a ‘full self-assessment regime’ under which they assess themselves. The Commissioner has wide audit powers that enable him to check that the information provided by taxpayers in their returns is correct [¶43.8]. Where he believes that a taxpayer has been wrongly assessed, he has the power to amend the taxpayer’s assessment subject to certain limitations.

Importance ofassessments Assessments effectively ‘crystallise’ a taxpayer’s tax liability for a particular tax period and are important because: •

the Commissioner can generally only recover tax from a taxpayer after a valid notice of assessment has been served on the taxpayer and a prescribed period of time has elapsed after the making of the assessment [¶8.3], and

•

there are limited time periods within which assessments may be amended and limited time periods within which taxpayers can object to assessments [¶43.5].

43

Nature ofan assessment An ‘assessment’ is defined in s 6(1)(a) ITAA36 as: the ascertainment of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable).

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Foundations of Taxation Law Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.3

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The words in parentheses in this definition were inserted to overcome arguments raised in cases such as FC of T v Ryan 2000 ATC 4079 and DFC of T v Sheehan 86 ATC 4718 that the former definition of assessment did not apply to a document that indicated no tax was payable. The current definition makes it clear that a notice specifying that no tax is payable is just as much an assessment as a notice specifying a positive tax liability. The assessment process is only complete once the assessment is served on the taxpayer under s 174 ITAA36 (Batagol v FC of T (1963) 109 CLR 243). The Commissioner may serve the assessment on the taxpayer by leaving a copy at his or her preferred address for service, posting a copy to that address, or delivering an electronic copy to the taxpayer’s preferred electronic address. The nature of an assessment was described in R v DFC of T; ex parte Hooper (1926) 37 CLR 368, by Issacs J (at 373)in the following terms:

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An ‘assessment’ is not a piece of paper; it is an official act or operation; it is the Commissioner’s ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount, he sends by post a notification thereof called ‘a notice of assessment’. … But neither the paper sent nor the notification it gives is the ‘assessment’. That is and remains the act or operation of the Commissioner.

It is clear f rom these words that the essence of an assessment is that it is an administrative process under which the Commissioner has reached a final conclusion regarding a taxpayer’s tax position (which, under the new definition of assessment, may be either a positive tax liability or a nil tax liability). An assessment must therefore be ‘definitive’ as opposed to ‘provisional’ (FC of T v S Hoffnung Company Ltd (1928) 42 CLR 39). It must also be made ‘bona fide’ for the purposes of the Act (DFC of T v Richard Walter Pty Ltd 95 ATC 4067). The Commissioner cannot therefore ‘pluck a figure out of the air’ to assess a taxpayer (Briggs v DFC of T 85 ATC 4569). He can, nevertheless, base an assessment on a reasoned estimate and he often makes ‘asset betterment’ assessments on this basis (L’Estrange v FC of T 78 ATC 4744). Just because the facts of a particular case are uncertain does not invalidate abona fideattempt made by the Commissioner to assess a taxpayer. However, where a purported assessment is made on the basis of facts known to the Commissioner to be untrue, this is not a bone fide exercise of the power of assessment (Darrell Lea Chocolate Shops Pty Ltd v FC of T 97 ATC 4040). Alternative assessments in respect of the same taxpayer for a particular income year are invalid since they do not fix any definitive liability and are merely tentative. This is illustrated in FC of T v Stokes 97 ATC 4001, where three different notices of assessments were served on a taxpayer at the same time relating to the identical year of income. The Full Federal Court found that the notices reflected three alternative positions and it could not therefore be said that the taxpayer’s liability for the year had been precisely determined. The Commissioner can, nevertheless, issue assessments against more than one taxpayer in relation to the same income for the same income year (Richardson v FC of T (1932) 48 CLR 192, DFC of T v Richard Walter Pty Ltd 95 ATC 4067). However, to prevent any abuse, the Commissioner would be barred from recovering against one of the

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Foundations of Taxation Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.3

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Income Tax Returns, Assessments, Rulings, Appeals and Audits

1177

taxpayers when another taxpayer’s assessment ‘remained on foot’ (see Dixon J (at 207)in Richardson and Brennan J (at 4083)in Richard Walter). There is no requirement on the Commissioner to make inquiries f rom the taxpayer or their agent prior to issuing an assessment, and a failure to do so does not vitiate an assessment (McCleary v FC of T 97 ATC 4266).

Kinds ofassessments The most common type of assessment that the Commissioner makes is known as an ‘ordinary assessment’. This assessment is based on information provided in a taxpayer’s return and any other information in the Commissioner’s possession (s 166 ITAA36). The Commissioner also has the power to make ‘default assessments’ (eg where a taxpayer fails to furnish a return) (s 167 ITAA36). In addition, he can make ‘special assessments’ relating to taxable income derived during part of an income year (s 168 ITAA36). In DFC of T v Jones & Anor 99 ATC 4373, the Full Federal Court held that this provision could be used to assess a taxpayer who had become bankrupt in respect of taxable income derived in that part of the income year ending with the bankruptcy and separately in respect of taxable income covering the period from the bankruptcy to the end of the income year.

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Full self-assessment taxpayers Companies as well as trustees of superannuation funds, ADFs, PSTs and public trading trusts are treated as ‘full self-assessment taxpayers’ (s 6(1) ITAA36). The Commissioner is deemed to have made an assessment of the taxable income or net income and tax payable by these entities on the day that they lodge their returns (s 166A(3) ITAA36). As a result, unlike individuals, these entities do not receive formal notices of assessment from the Commissioner. They are required to calculate their income tax liability and pay tax when they lodge their returns.

Amendment ofassessments The Commissioner has the power to amend an income tax assessment subject to prescribed time limits (s 170 ITAA36). In practice, the Commissioner amends assessments where he has discovered some irregularity following an audit. The Commissioner generally has two years after service of the notice of assessment to amend an individual’s assessment (this rule does not apply to individuals that carry on business unless they are an SBE [¶23.2]). The two-year period also generally applies to companies and trustees that are SBEs. Adefault four-year amendment period applies to most other taxpayers. Where fraud or evasion is involved, the Commissioner can amend an assessment at any time. The Commissioner can also amend an assessment at any time to give effect to a decision on an appeal or review or as a result of an objection made by the taxpayer.

Tax receipt The Commissioner is required to provide individual taxpayers with a tax receipt under div 70 in sch 1 TAA if their assessed income tax for a year exceeds $100. The tax receipt must include information about how the total tax paid is notionally used to finance different

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Foundations of Taxation Law Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.3

43

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categories of Commonwealth expenditure and is designed to provide greater transparency of how a taxpayer’s money is spent.

[¶43.4] Taxation rulings Australia’s tax system, like the tax systems of many other countries around the world, contains a ‘rulings system’ [¶2.3]. Under this system, the Commissioner has the power to issue ‘rulings’ that set out his interpretation of the operation of the tax laws. The rulings system complements the self-assessment regime as it informs taxpayers about the Commissioner’s views on particular matters that may affect them. Taxpayers often rely on the Commissioner’s rulings when contemplating potential transactions and completing their tax returns.

Copyright © 2021. Oxford University Press Australia and New Zealand. All rights reserved.

Binding rulings system Australia introduced a ‘binding rulings’ system in 1992. Rulings issued before this time were not binding. The binding rulings system was initially contained in pt IVAAA TAA. However, it has since been replaced by a new system contained in pt 5-5 in sch 1 TAA. To ensure the continued operation of former rulings, a ruling in force under the old rules is taken to have effect as if it was made under the new rules. The rulings system contains a set of common rules (div 357) which allow the Commissioner to make rulings on a range of taxes, including income tax, withholding tax, FBT and the ML (s 357-55). From 1 July 2010, the rulings system has been extended to also cover GST, LCT, WET and excise duty. Previously, the TAA contained separate rules dealing with ‘indirect tax rulings’. By harmonising indirect tax rulings with the general rulings system, there is consistent treatment across the tax laws. Section 357-5 states that the object of the rulings system is: to provide a way for you to find out the Commissioner’s view about how certain laws administered by the Commissioner apply to you so that the risks to you of uncertainty when you are self-assessing or working out your tax obligations or entitlements are reduced.

A ruling binds the Commissioner if the ruling applies to a person and that person relies on the ruling by acting (or omitting to act) in accordance with the ruling (s 357-60). As a consequence, a taxpayer that relies on a ruling is protected against any ‘tax shortfall’ (ie underpaid tax), penalties or interest that would otherwise be payable under the law. This protection operates even if the ruling subsequently turns out to be incorrect. Aruling is, however, only binding in relation to the specific schemes stated in the ruling (Bellinz Pty Ltd & Ors v FC of T 98 ATC 4634). Although there is no penalty for failing to follow a ruling, such a failure may be relevant to determine any penalties under the tax shortfall provisions in div 284 [¶46.2] (s 357-65). Special rules operate to resolve conflicts where rulings are inconsistent with each other (s 357-75). Binding rulings fall into three categories:

Barkoczy, Stephen. Foundations of Taxation Law 2021, Oxford University Press Australia and New Zealand, 2021. ProQuest Ebook Foundations of Taxation Central, http://ebookcentral.proquest.com/lib/csuau/detail.action?docID=6424463. Created from csuau on 2021-09-09 00:42:05.

¶43.4

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1179

•

Public rulings. These rulings are issued in writing and apply to the kinds of taxpayers and schemes identified in the rulings (see further TR 2006/10)...