The Commissioner of Taxation (Commissioner):
In 2005/2006, the ATO's compliance activities raised $6,244 million including tax, penalties and interest.
ATO compliance activities include telephone calls, letters to taxpayers as well as audits.
During an audit, the ATO:
Tax audits sometimes last months or even years.
A taxpayer involved in a tax audit faces the following risks:
All taxpayers need an appropriate audit strategy to minimise these risks. An audit strategy should cover actions for the taxpayer:
This article examines the pre-audit strategy. The March 2007 edition of ClearLaw will examine the strategies for dealing with audits.
All taxpayers should conduct their affairs in anticipation of an ATO audit. Accordingly, a taxpayer should:
The taxpayer's care needs to extend throughout documenting, executing and recording the transaction. If possible, the taxpayer should obtain ATO rulings (both private and public) if a particular transaction is in doubt.
An ATO ruling binds the Commissioner if the ruling applies to a taxpayer and the taxpayer relies on the ruling and acts in accordance with it. Significantly, a taxpayer's exposure to administrative penalties is reduced if a ruling applies. Generally, there are two types of rulings - public rulings and private rulings.
Public rulings - on how a provision would apply
The Commissioner's written public rulings are the Commissioner's opinion on how a relevant provision applies or would apply. They:
Private rulings - on a particular scheme
The Commissioner's written private rulings are the Commissioner's opinion on how a relevant provision applies or would apply to a particular scheme. They also bind the Commissioner and they bind the relevant taxpayer. A taxpayer or the taxpayer's agent may apply to the Commissioner for a private ruling.
The Commissioner may decline to make a private ruling if:
If the Commissioner declines to make a private ruling, he must supply written reasons for that decision. A taxpayer can apply to have that decision reviewed under the Administrative Decisions (Judicial Review) Act 1977 (Cth).
Taxpayers should implement an appropriate document retention policy and administrative filing system to enable them to retrieve records efficiently during an audit.
The tax laws impose a positive obligation on taxpayers to maintain records that document and explain all transactions and other acts engaged by the taxpayer that are relevant for the purposes of the taxation laws. Taxpayers should determine which documents are protected by "privilege", mark them as privileged and arrange for them to be kept separate from "non-privileged" documents. This enables the taxpayer to minimise the risk of privilege being inadvertently waived.
Which documents are privileged?
Generally, if a taxpayer has a document that is privileged, then it usually does not have to show that document to the ATO or to a court.
The types of privilege available to a taxpayer include legal professional privilege, accountants' privilege and corporate board document privilege.
Legal professional privilege
Legal professional privilege protects:
Although Legal professional privilege does not protect communications between a client and their accountant, the Commissioner has voluntarily respected the confidentiality of some documents prepared by external professional accountants.
The Commissioner distinguishes between 3 categories of documents:
Source documents. The Commissioner seeks access to source documents which are papers:
Restricted source documents. The Commissioner usually respects the confidentiality of restricted source documents which include:
Non-source documents. The Commissioner usually respects the confidentiality of restricted source documents which include advice papers provided after a transaction has been completed and included in a current audit file.
However, the Commissioner will seek access to restricted source documents and non-source documents in exceptional circumstances and after an internal approval process has been complied with. Generally, for the Commissioner to seek access to these documents:
The accountants' privilege is merely an administrative privilege with no legal basis. Accordingly, the Commissioner is not legally obliged to comply with the internal approval process. However, it is likely that a court would prevent the Commissioner from exercising his investigative powers unless there is an urgent basis to investigate - for example, if there are fears that the documents will be destroyed.
Corporate board document privilege
Corporate board documents are documents created by advisors (either a qualified in-house or independent advisor) for the sole purpose of providing advice to the board of directors on tax compliance risks. The Commissioner has stated that he will not seek access to corporate board documents except in exceptional circumstances. As this is an administrative privilege and not legally binding on the Commissioner, taxpayers should note that the issues in relation to non-compliance with the accountants' guidelines also apply here.
Taxpayers should create internal rules for handling documents and handling a tax audit. This ensures that taxpayers and their personnel are prepared for the audit process. Taxpayers and their staff should be familiar with the Taxpayer's Charter - www.ato.gov.au/content/charter.htm. It sets out:
The next edition of ClearLaw will go beyond strategies for preparing for an ATO Audit, to explore strategies for dealing with an ATO Audit.
For more information, please call Maddocks on 03 9288 0555 and ask for Anna Tang.
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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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.