Tax Disputes – Rule Number # 1
Onus/Burden of Proof – section 14ZZK & 14ZZO Taxation Administration Act 1953 – Rigoli v Commissioner of Taxation [2015] FCA 803;
Section 170 Income Tax Assessment Act 1936 - Bai v Commissioner of Taxation [2015] FCA 973.
Introduction
We know that tax laws are extremely complicated, but many dealings with tax authorities are about the facts, not some complex tax interpretation question that needs High Court clarification. Unlike ordinary legal disputes, the Tax Commissioner does not have to prove his case – a notice of assessment is prima facie evidence that an assessment has been properly made.
Section 14ZZK of the Taxation Administration Act 1953 shifts the onus of proving their case to the taxpayer who “… has the burden of proving … that the assessment is excessive or otherwise incorrect and what the assessment should have been”
As the cases noted below show, Tribunals and Courts consistently reinforce that taxpayers must show what the “true” assessment should have been in order to win a case against the Tax Commissioner.
Taxpayers must provide evidence which satisfactorily establishes their actual or true taxable incomes. There is no “off the rack” formula for how a taxpayer can prove what their “true” income is. It may be as simple as producing documents showing that a particular deposit represents the proceeds of the tax free sale of the family home (for example) or as complicated as reconstructing business records covering a number of years. As with most dealings with the Tax Commissioner credibility may be a factor in determining whether taxpayer submissions are likely to be accepted.
Taxpayers (and their advisers) who simply focus on the Commissioner’s failings and are unwilling or unable to produce evidence showing that the Commissioner’s assessments are excessive will not be doing themselves any favours.
Rule Number #1
Rule Number #1 for assisting clients in their dealings with the Commissioner is to remember that the taxpayer has the onus of proving on the balance of probabilities what their correct taxable income (and tax payable) is. Poking holes in the ATO numbers will not be enough.
Rigoli v Commissioner of Taxation [2015] FCA 803
The Full Federal Court decision in Rigoli (handed down on 15 March 2016) confirms the difficult task taxpayers (and their professional advisers) face in satisfying the burden of proof in disputes with the Tax Commissioner.
This decision was the second time the Full Federal Court had considered the matter. Mr Rigoli’s disputes with the Tax Commissioner seem to have involved prosecution for tax fraud, default assessments for significant sums and two hearings before the AAT, a single judge of the Federal Court and the Full Federal Court.
For our purposes, the key question was whether Mr Rigoli had established his true taxable income.
The Commissioner’s default assessments were supported by a report from an accounting expert setting out, as best he could, the financial position of a partnership during the relevant years.
Mr Rigoli’s position seems to have been that because of an absence of proper record keeping and accounting he could not precisely establish his taxable income for the relevant years. He asked the Tribunal (and the Federal Court) to accept that the Commissioner’s income figures did establish his assessable income, and that a deduction for depreciation should be allowed for an amount agreed with the Commissioner.
On the face of it the taxpayer’s position seems reasonable. While it appears his records were a mess, Mr Rigoli would have used depreciable plant in deriving income and he engaged an expert to arrive at an estimate of what that depreciation would have been. Mr Rigoli submitted that if the Commissioner’s expert determined that his income was $X in the relevant years then the correct taxable income would be determined by taking off deductible expenses, such as depreciation.
Rigoli Decision
Unfortunately for Mr Rigoli, the Full Federal Court took a different view. Leaving aside all of the other legal complexities that come with twice litigating tax issues through each of the AAT, the Federal Court and the Full Federal Court, the most recent decision in Rigoli was that:
Bai v Commissioner of Taxation [2015] FCA 973 & [2015] FCA 1083
These decisions deal with the onus of proof where the Commissioner claims an unlimited amendment period because he is of the opinion there has been fraud and evasion. There are other decisions relating to the same business entities which also address important onus of proof issues including Zhang v Commissioner of Taxation [2016] AATA 117 and Chang v Commissioner of Taxation [2013] AATA 611.
The Bai decision sets out the Tribunal’s brief summary of the law relating to the taxpayer’s burden of proof at paragraph 16, and then considers whether the tribunal applied the correct onus of proof test. The issue in this case is whether the taxpayer is required to show that there has been no fraud or evasion on the balance of probabilities or beyond a reasonable doubt.
Bai Decision
The conclusion of the Court was that by requiring the taxpayer to “exclude the possibility” of fraud or evasion the Tribunal had effectively applied “the criminal onus of proof beyond reasonable doubt” which is the wrong test and the matter should be reconsidered by the AAT.
These cases, and a long line of other decisions including PNGR and Anor v Commissioner of Taxation [2013] AATA 942 and Mulherin v FC of T 2013 ATC 20-1423, clearly show that the burden of proof imposed on taxpayers is a significant hurdle to establishing that less tax is owed than the Commissioner is claiming. It is not enough to merely point to errors in the Commissioner’s calculations and taxpayers must satisfy the Tribunal or Court of their correct tax liability on the balance of probabilities.
How taxpayers go about doing this will of course depend on their own particular circumstances, including whether they are faced with default assessments, as well as the process the Commissioner has used to arrive at any additional tax that is claimed (for example, asset betterment).
Where risks are recognized early enough in the audit process, it may be possible (and preferable) to satisfy tax auditors of the source of funds (for example) before any default or amended assessments are issued.
Tax Disputes - Rule Number #1
To the extent that issues in dispute cannot be resolved at the audit stage, taxpayers and their professional advisers must remember Tax Dispute - Rule Number # 1:
It is not enough to show the Commissioner’s figures are wrong - taxpayers must produce persuasive evidence to establish, on the balance of probabilities, that their taxable income and tax payable is less than the amount claimed by the Commissioner.
Damian O'Connor
Solicitor & Principal, Chartered Tax Adviser
tax + law
E: [email protected]
M: 0407195317
Disclaimer: This material is a general commentary on complex legal and commercial issues. It cannot be relied on as professional advice or otherwise.
© Copyright D O’Connor 2016
Onus/Burden of Proof – section 14ZZK & 14ZZO Taxation Administration Act 1953 – Rigoli v Commissioner of Taxation [2015] FCA 803;
Section 170 Income Tax Assessment Act 1936 - Bai v Commissioner of Taxation [2015] FCA 973.
Introduction
We know that tax laws are extremely complicated, but many dealings with tax authorities are about the facts, not some complex tax interpretation question that needs High Court clarification. Unlike ordinary legal disputes, the Tax Commissioner does not have to prove his case – a notice of assessment is prima facie evidence that an assessment has been properly made.
Section 14ZZK of the Taxation Administration Act 1953 shifts the onus of proving their case to the taxpayer who “… has the burden of proving … that the assessment is excessive or otherwise incorrect and what the assessment should have been”
As the cases noted below show, Tribunals and Courts consistently reinforce that taxpayers must show what the “true” assessment should have been in order to win a case against the Tax Commissioner.
Taxpayers must provide evidence which satisfactorily establishes their actual or true taxable incomes. There is no “off the rack” formula for how a taxpayer can prove what their “true” income is. It may be as simple as producing documents showing that a particular deposit represents the proceeds of the tax free sale of the family home (for example) or as complicated as reconstructing business records covering a number of years. As with most dealings with the Tax Commissioner credibility may be a factor in determining whether taxpayer submissions are likely to be accepted.
Taxpayers (and their advisers) who simply focus on the Commissioner’s failings and are unwilling or unable to produce evidence showing that the Commissioner’s assessments are excessive will not be doing themselves any favours.
Rule Number #1
Rule Number #1 for assisting clients in their dealings with the Commissioner is to remember that the taxpayer has the onus of proving on the balance of probabilities what their correct taxable income (and tax payable) is. Poking holes in the ATO numbers will not be enough.
Rigoli v Commissioner of Taxation [2015] FCA 803
The Full Federal Court decision in Rigoli (handed down on 15 March 2016) confirms the difficult task taxpayers (and their professional advisers) face in satisfying the burden of proof in disputes with the Tax Commissioner.
This decision was the second time the Full Federal Court had considered the matter. Mr Rigoli’s disputes with the Tax Commissioner seem to have involved prosecution for tax fraud, default assessments for significant sums and two hearings before the AAT, a single judge of the Federal Court and the Full Federal Court.
For our purposes, the key question was whether Mr Rigoli had established his true taxable income.
The Commissioner’s default assessments were supported by a report from an accounting expert setting out, as best he could, the financial position of a partnership during the relevant years.
Mr Rigoli’s position seems to have been that because of an absence of proper record keeping and accounting he could not precisely establish his taxable income for the relevant years. He asked the Tribunal (and the Federal Court) to accept that the Commissioner’s income figures did establish his assessable income, and that a deduction for depreciation should be allowed for an amount agreed with the Commissioner.
On the face of it the taxpayer’s position seems reasonable. While it appears his records were a mess, Mr Rigoli would have used depreciable plant in deriving income and he engaged an expert to arrive at an estimate of what that depreciation would have been. Mr Rigoli submitted that if the Commissioner’s expert determined that his income was $X in the relevant years then the correct taxable income would be determined by taking off deductible expenses, such as depreciation.
Rigoli Decision
Unfortunately for Mr Rigoli, the Full Federal Court took a different view. Leaving aside all of the other legal complexities that come with twice litigating tax issues through each of the AAT, the Federal Court and the Full Federal Court, the most recent decision in Rigoli was that:
- The onus is on the taxpayer (Mr Rigoli) to establish his “true” or “correct” taxable income;
- The expert accounting report obtained by the Commissioner was for the purposes of providing a reasonable basis for making default assessments under section 167 ITAA 1936;
- the expert report was merely a best effort at determining the correct financial position of the relevant partnership and the taxpayer, and it “did not establish Mr Rigoli’s taxable income”; and
- Because the expert accounting report did not establish Mr Rigoli’s actual income in the years in question, Mr Rigoli could not rely on the report to establish that his correct taxable income was the amount shown in the expert report LESS a deduction for depreciation.
Bai v Commissioner of Taxation [2015] FCA 973 & [2015] FCA 1083
These decisions deal with the onus of proof where the Commissioner claims an unlimited amendment period because he is of the opinion there has been fraud and evasion. There are other decisions relating to the same business entities which also address important onus of proof issues including Zhang v Commissioner of Taxation [2016] AATA 117 and Chang v Commissioner of Taxation [2013] AATA 611.
The Bai decision sets out the Tribunal’s brief summary of the law relating to the taxpayer’s burden of proof at paragraph 16, and then considers whether the tribunal applied the correct onus of proof test. The issue in this case is whether the taxpayer is required to show that there has been no fraud or evasion on the balance of probabilities or beyond a reasonable doubt.
Bai Decision
The conclusion of the Court was that by requiring the taxpayer to “exclude the possibility” of fraud or evasion the Tribunal had effectively applied “the criminal onus of proof beyond reasonable doubt” which is the wrong test and the matter should be reconsidered by the AAT.
These cases, and a long line of other decisions including PNGR and Anor v Commissioner of Taxation [2013] AATA 942 and Mulherin v FC of T 2013 ATC 20-1423, clearly show that the burden of proof imposed on taxpayers is a significant hurdle to establishing that less tax is owed than the Commissioner is claiming. It is not enough to merely point to errors in the Commissioner’s calculations and taxpayers must satisfy the Tribunal or Court of their correct tax liability on the balance of probabilities.
How taxpayers go about doing this will of course depend on their own particular circumstances, including whether they are faced with default assessments, as well as the process the Commissioner has used to arrive at any additional tax that is claimed (for example, asset betterment).
Where risks are recognized early enough in the audit process, it may be possible (and preferable) to satisfy tax auditors of the source of funds (for example) before any default or amended assessments are issued.
Tax Disputes - Rule Number #1
To the extent that issues in dispute cannot be resolved at the audit stage, taxpayers and their professional advisers must remember Tax Dispute - Rule Number # 1:
It is not enough to show the Commissioner’s figures are wrong - taxpayers must produce persuasive evidence to establish, on the balance of probabilities, that their taxable income and tax payable is less than the amount claimed by the Commissioner.
Damian O'Connor
Solicitor & Principal, Chartered Tax Adviser
tax + law
E: [email protected]
M: 0407195317
Disclaimer: This material is a general commentary on complex legal and commercial issues. It cannot be relied on as professional advice or otherwise.
© Copyright D O’Connor 2016
