During an audit, the Commissioner of Taxation (Commissioner) will typically request information from a taxpayer. The Commissioner can do that both formally and informally.
If ATO officers request documents orally (either by telephone or in person) then, depending on the nature of the request, it is prudent to ask for written confirmation of the request. This reduces misunderstandings between the taxpayer and the ATO as to the nature and scope of the information sought.
In addition to informal requests, the ATO has the power to access, examine and copy a taxpayer's documents and to require taxpayers or other persons to provide information, evidence or documents.
These powers enable the Commissioner:
The access powers under sections 263 and 264 enable the Commissioner to conduct wide-ranging, 'full and free', 'roving enquiries' and to 'fish' for information concerning the income or assessment of a taxpayer. The only statutory constraint is that the powers may be exercised only to enable the Commissioner to administer the tax law.
Additional powers allow the Commissioner to seek information or documents which may be outside Australia. Access powers are also available under double tax treaties and under the criminal laws. In addition to section 264A, Australia's double tax treaties may also provide for the access of information located overseas.
If a taxpayer or other person does not provide information or documents that the Commissioner has requested, then the taxpayer is not able to use them when disputing an assessment of income tax.
A taxpayer's audit strategy should involve considering voluntary disclosure to the Commissioner of any tax shortfall of which the taxpayer is aware. A voluntary disclosure will reduce the amount of administrative penalties imposed. The amount of the reduction depends on the time at which the disclosure is made. If the disclosure is made:
The Commissioner will treat a disclosure as being made voluntarily if it is made without having been prompted by the ATO.
Accordingly, a taxpayer served with one of these notices should comply with the notice, unless one of the following applies:
The common law privilege against self-incrimination does not prevent the Commissioner from accessing documents or information.
It is an offence to not comply with a section 263 or a section 264 notice.
If the ATO seeks access to information under section 263, then the taxpayer should always request that ATO officers produce valid authorisation (usually known as a wallet authority).
If the ATO officer does not produce their authorisation they can still enter the premises and search etc. However, an officer who does not produce a wallet authority could be asked to leave and does not have to be shown documents or given information. Also, there may be other bases on which the officer is entitled to remain on the premises (e.g. as a common law invitee) until the invitation is revoked.
If a taxpayer claims privilege and the ATO disputes that claim then ATO officers can still search under section 263 until the claim for privilege has been resolved. The ATO's Access and Information Gathering Manual (chapter 6) sets out the Commissioner's preferred process for securing privileged documents and resolving claims of privilege. In that light, a taxpayer should be able to agree with ATO officers on a process for dealing with privilege claims in accordance with the manual.
ATO officers cannot simply seize all the taxpayer's documents; rather, officers are required to make a reasonable effort to distinguish between relevant and irrelevant documents.
There are three main lines of argument which can be used to challenge the validity of a section 263 or 264 notice:
If a taxpayer is contemplating challenging a section 263 or 264 notice, then the taxpayer should promptly contact the ATO with its concerns.
If the audit process and the conduct of ATO officers do not conform with the Taxpayer's Charter, then the taxpayer is able to make a formal complaint to the Ombudsman Special Advisor (Taxation). In addition, the Inspector General of Taxation may also review systematic problems with processes.
The taxpayer's business operations should be able to continue despite the conduct of the audit. This is because when ATO officers are exercising an access power, they must allow the taxpayer or its staff to access the taxpayer's premises and records - unless the access results in the officer being unable to effectively exercise his or her statutory power.
Tax audits can be time consuming. Accordingly, to minimise disruption, but while ensuring compliance with its obligations, a taxpayer should:
The taxpayer is required to provide reasonable facilities and assistance for access where a section 263 notice is served.
However, the assistance is only in relation to access. This would mean that a taxpayer and its personnel are not obliged to answer questions about the taxpayer's general tax affairs.
The precise scope of this obligation seems to require the taxpayer to:
It is an offence to breach these obligations.
A tax audit can be stressful for both the taxpayer and advisor. As it is common for audits to take a long time, taxpayers should devise appropriate strategies to minimise the disruption and financial impact of a tax audit. The best defence against a tax audit is preparation - both before and during the audit process, see the previous ClearLaw about preparing for an audit.
For more information:
Andrew is a lawyer in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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