Taxpayers use a number of strategies when trying to avoid penalties. ROBERT RICHARDS looks at some of the options, and gives his recommendations as to the best tactics.
By Robert Richards
Taxpayers use a number of strategies when trying to avoid penalties. There are options, and we look at the best tactics.
Sometimes taxpayers know that if they make a claim for a deduction, or omit returning an item as assessable income, then they may become embroiled in a dispute with the taxman, because the way in which they have interpreted a tax law may not be accepted by the tax office.
Even if the taxpayer accepts the fact that they might be unsuccessful in making such a claim, they don’t want to be penalised as a result.
When they ask what the best course of action would be, the normal response is to suggest seeking a private tax ruling, or lodging a return based on the tax office practice and then object against that assessment, whether deemed or otherwise, which results from the lodgement of that return, or to take a reasonably arguable position.
As time goes by I am becoming less enamoured with the ruling process. The tax office seems to have adopted a “go slow” policy in dealing with difficult ruling requests in the hope that delay will just cause the taxpayers to go away.
Besides which, the tax office appears not to be able to overcome its natural suspicion and negative instincts, and so it seems to me that whenever a matter is complex, the taxpayer should act on advice and not have a transaction destroyed because of tax office delay and suspicion.
As a consequence I recommend that businesses take either the “lodge tax returns and then object” or the “reasonably arguable position” approach.
Some taxpayers believe that another option is simply to provide the tax office with the material facts and leave it to the tax office to make the assessment. However, the decision in Cachia v Federal Commissioner of Taxation (Administrative Appeals Tribunal, 3 July 2008) shows that this approach would not avoid penalties.
There Justice Downes said: “That [approach] is based on a misunderstanding of the true position under the current partial system of self-assessment. It is for the individual taxpayer to make full disclosure, but on the basis that the facts disclosed are to be the grounds for the assessment made by the commissioner, subject to any later amendment by the [commissioner]. [The commissioner] is entitled to accept the taxpayer’s statement in the return inter alia in relation to deductions to which the taxpayer claims to be entitled.”
As a consequence, he held that Cachia had claimed a deduction and could not avoid a penalty simply by disclosing facts to the tax office and leaving it to the tax office to make an assessment.
Robert Richards CPA is a solicitor specialising in tax matters. This article first appeared in CPA Australia’s magazine, INTHEBLACK.