In an era where the Australian Taxation Office (ATO) wields data and analytics as formidable tools for both administration and law enforcement, taxpayers find themselves increasingly under the watchful eye of compliance activities. Tax disputes have become more prevalent. Contrary to common belief, challenging an assessment isn’t as straightforward as proving the Commissioner wrong; it involves a nuanced understanding of the burden of proof, particularly in the context of default assessments.
ATO’s Data Arsenal
The ATO’s data collection spans various government agencies and organizations. Utilizing data matching programs, such as the lifestyle asset data matching initiative, the ATO identifies taxpayer risks, compliance obligations, and selects cases for review. This program, for instance, flags discrepancies in accumulated assets and reported income, unveiling instances like non-declared profits on sold assets, personal use of assets acquired through businesses, and erroneous claims for GST credits.
Moreover, the ATO taps into data from AUSTRAC and other government agencies to uncover unreported financial transactions, international money transfers, and potential tax fraud or evasion.
Default Assessments: When Can the ATO Issue Them?
Under section 167 of the Income Tax Assessment Act 1936 (ITAA 1936), the ATO can issue default assessments if dissatisfied with the information provided in a return or if they believe a taxpayer, who hasn’t filed a return, has derived income. These assessments can also be raised for taxpayers with overdue lodgment obligations.
Unraveling the Burden of Proof
Contrary to a common misconception, challenging an assessment involves more than pointing out errors in the ATO’s process. A taxpayer bears the burden of proving that the assessment is excessive or incorrect. This requires unequivocally establishing their actual taxable income and demonstrating that the tax levied surpasses the actual liability.
In the realm of default assessments, where the ATO forms judgments on taxable income, the burden of proof rests on the taxpayer. This burden is only discharged when the taxpayer satisfactorily explains the sources of unexplained wealth, especially in cases where methods like the asset betterment calculation are employed.
Real Cases of Tax Disputes, Real Burdens
In a recent case involving Robert and Aniello Cammarano, regular gamblers at Crown Casino Melbourne, default assessments were issued based on discrepancies between reported income and extensive gambling activities. The taxpayers failed to establish their actual incomes, resulting in the ATO increasing their combined taxable income by over $3.7 million.
Ms. Le and Mr. Trieu faced default assessments based on an asset betterment approach, assuming all payments were unexplained income. The taxpayers initially failed to prove the assessments were excessive, but a rehearing
was granted upon appeal, highlighting the importance of providing evidence for non-income sources.
The ATO issued default assessments to Mr. and Mrs. Ross based on the asset betterment methodology. The taxpayers, unable to satisfactorily explain their taxable incomes, faced increased taxable income by almost $1.3 million.
ATO Scrutiny: Are Your Clients Prepared?
The takeaway from these cases is clear: default assessments are not exclusive to high-profile taxpayers. Navigating these assessments requires a robust defense backed by evidence. As the ATO intensifies its use of data and analytics, practitioners and clients must anticipate potential ATO risk reviews and be equipped to prove their tax positions, including the sources of alleged ‘unexplained wealth.’
This article serves as a general overview and cannot substitute professional advice for specific instances. EndureGo Tax Pty Ltd and associated individuals disclaim any liability related to its use.