Taxation reviews and audits

The Australian Taxation Office (ATO) has wide powers to investigate the financial affairs of taxpayers to ensure either voluntary compliance under the self-assessment regime or to coerce compliance.

The ATO has sophisticated data-matching processes that it uses to review tax returns and BAS. It obtains information from banks, government departments and industry. A focus of ATO audit activity continues to be private wealth, family groups, and small to medium enterprises.

A review occurs generally in situations where the ATO believes it may have identified a compliance risk. An audit is conducted generally when the ATO believes it has identified areas of concern that need closer examination, or if it believes it has identified actual non-compliance. Reviews may conclude quickly, whereas audits tend to be more time consuming.

Both reviews and audits typically begin with written notice from the ATO to the taxpayer specifying the issue of concern, and the information and documents that are to be provided. The obligation to respond within a nominated timeframe is real and enforceable, although extensions can be negotiated in the right circumstances.

Upon receiving notice of a review or audit, a taxpayer should:

  • Scrutinise the notice carefully;
  • diarise any deadlines;
  • commence gathering all relevant documents; and
  • obtain advice as to the correct approach.

The best outcomes are often achieved where there is close collaboration between the tax accountant and lawyer. Engaging DBL Solicitors at an early stage provides a buffer between the ATO and the taxpayer which tends to alleviate some of the tension which can be experienced in these circumstances.

While the ATO often receives bad publicity for its approach, reviews or audits may proceed more smoothly when the right evidence and legal submissions are provided. This is generally dependent on the state of the taxpayer’s documentation, so good record-keeping and presentation is critical to the outcome.

ATO officers have their own milestones to achieve, so providing documents and submissions on a staged basis rather than everything at the same time and in a rush may persuade the ATO not to use its more formal powers. Whilst no taxpayer wishes to engage in a lengthy audit process, care must be taken to avoid an erroneous response which may compromise a taxpayer’s position on any subsequent objection or litigation.

Any audit strategy should generally include:

  • an early assessment of risk;
  • the desired outcome and procedures to be adopted; and
  • a plan to extract the ATO’s view before it is crystallised in a position paper.

It is generally counterproductive to accuse the ATO of harassment. An adversarial approach with the ATO during a review or audit may result in an escalation of formality and costs to the taxpayer, with a corresponding reduction in the possibility of a favourable outcome.  However, depending upon the circumstances, a limited cooperative approach (exercising all legal rights to their full extent) may, at times, be appropriate.

An approach to a review or audit can be either minimalist or expansionist.  A minimalist approach (only providing documents and information directly relevant to the ATO’s queries) may be appropriate up to the point where an assessment of risk has been completed by advisers, and while the ATO is narrowing down what it is investigating.  A more expansionist approach (providing documents and submissions before they are requested) may then become necessary to influence the ATO and to facilitate a favourable outcome. The appropriate approach may only become apparent once the ATO’s attitude has been gleaned from multiple interactions.

Management of the review or audit process should also include consideration of voluntary disclosure with a view to seek remission of penalties and interest and explore settlement options.  For example, if the ATO commences an audit of certain entities for specific income years, there may be an opportunity to make voluntary disclosures and to take advantage of significant penalty discounts and grounds for remission of interest for out-of-scope issues or entities.

In any case, legal submissions supported by well presented evidence and relevant facts will always be more persuasive to the ATO. Further, the early assessment of risk during the review or audit process may assist a taxpayer to take a more informed position.

In our experience, the best way to approach a review or audit is:

  • respond in a timely manner to the ATO notice and further requests;
  • provide evidence and submissions in a systematic and organised fashion;
  • make voluntary disclosures where appropriate to reduce penalty and interest exposure and avoid a more lengthy audit;
  • refrain from making submissions that are unsubstantiated by the evidence or the law; and
  • do not engage in adversarial conduct unless absolutely necessary.

If you are subject to a review or audit, do not delay in contacting DBL Solicitors for a confidential discussion.

Ben Trost
Senior Litigation Solicitor