With tax revenue projected to fall short of previous projections by $115 billion, it is prudent to expect the Australian Taxation Office (ATO) to take a more aggressive stance. Are you prepared should the ATO decide to audit you or your business?
Prime Minister Kevin Rudd has told reporters:
''The truth is the global recession in general and the collapse in China's growth in particular has produced a $115 billion fall in Australian tax receipts to the Government... That means an impact directly on our budget, that means, therefore, of course, a temporary budget deficit.''
What does this mean for you?
Taxpayers can expect the ATO to act more aggressively to protect its dwindling revenue base. This may mean a larger number of tax audits and a greater willingness to proceed to tax litigation. Taxpayers should review their tax affairs so as to be prepared for an audit, and should voluntarily amend assessments that are found to be understated, so as to avoid or lessen the application of interest and penalties. Pre-emptive action limits the time for which interest may be charged, and the ATO is less likely to impose penalties where a taxpayer volunteers information, rather than waiting for the ATO to find it in an audit.
Audit powers
A tax audit involves a thorough examination by the ATO of a taxpayer's affairs. The courts have confirmed the ATO's right to conduct audits. Audits may begin by focusing on a particular industry and then targeting individuals or businesses who are found to have tax affairs outside the "norm". Tax audits can lead to tax litigation where disputes arise between the audited taxpayer and the ATO over the correctness of tax returns.
In carrying out audits, the ATO relies on powers given by section 263 of the Income Tax Assessment Act 1936, which allows ATO officers full access to all buildings and all documents required for the purposes of the taxation law. This extends to documents held by solicitors, accountants, banks and other advisers and to court documents. The ATO's access to documents is, however, restricted by the doctrine of legal professional privilege. Documents prepared by lawyers in contemplation of legal proceedings are generally subject to legal professional privilege and cannot be accessed by the ATO. Taxpayers need to understand what their rights and obligations are when the ATO commences an audit or investigation.
How long does the ATO have to challenge a tax return?
Individuals and small businesses can have their tax assessment amended by the ATO for up to 2 years from the date of the original notice of assessment. Other taxpayers are subject to a 4 year review period. If the ATO audit reveals that a taxpayer has underpaid tax, and an amended assessment is issued, the taxpayer can also be subject to interest and penalties. The level of penalties will depend on whether the ATO determines that the taxpayer has acted with reasonable care in submitting its tax return, with recklessness as to the application of the law to it, or with intentional disregard for the tax law. If fraud or tax evasion is involved, the ATO can amend a taxpayer's assessment at any time, and is not limited by the usual 2 or 4 year periods for amendment.
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.
