Article by Daniel Arnephy CA

In the face of an amended assessment from the Commissioner of Taxation, the taxpayer is 'guilty until proven innocent', to put it bluntly. This is not due to the Commissioner's belligerence, but rather how the tax laws are written. Therefore, it is crucial that all taxpayers maintain sufficient evidence of their revenue and expenses each year to support the information provided in their annual income tax return.

Several recent cases in front of the Administrative Appeals Tribunal (AAT) have highlighted the importance of keeping good records. If called upon, taxpayers must be able to substantiate claims made in their original lodgement, or alternatively to disprove an assertion by the Commissioner that omitted amounts are income, or amounts included are not expenses.

A recent AAT decision where the taxpayer was attempting to disprove that the ATO's assessment was excessive highlighted that:

  • The Tax Administration Act places the onus of proof that the assessment is excessive with the taxpayer.
  • 'Excessive' means that the amount assessed exceeds what it should be. It is up to the taxpayer to establish their claim.
  • It is insufficient to show that the Commissioner made an error or that the assessment may be wrong. Taxpayers must go further to show what the correct position should be, or to show that they have been assessed to a liability that the Assessment Acts do not impose.
  • There is no onus on the Commissioner to support an assessment with evidence. If the Commissioner fails to prove an assertion regarding the taxpayer's assessable income, this does not mean that the taxpayer has discharged their burden of proof to show the assessment is excessive.

Furthermore, any 'self-serving evidence' will be approached with a high level of critique, analysis and caution. Self-serving evidence is that of witnesses who have an interest in the evidence being accepted, such as sworn statements by the taxpayer and their associates. Self-serving evidence needs to be corroborated by external factual and objective evidence.

Keeping records consistent with the requirements of the Income Tax Assessment Acts should be part of any sound business or investment operation and not done hastily at the end of a financial year. It's crucial to keep reliable and simultaneous records of both business transactions and investments as part of the normal course of operations. It's also important to be aware of record keeping requirements above and beyond what may be considered sufficient for internal purposes, such as for motor vehicle deductions, travel deductions, CGT related transactions and transfer pricing.

Article by Daniel Arnephy CA, Accru Melbourne Chartered Accountants and Business Advisers.

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.