This is the first in a series of articles on strategies that can be employed in a tax dispute with the ATO.
Tax disputes can be costly, time consuming, and stressful, even if the taxpayer is ultimately successful. When approached by the Australian Taxation Office (ATO), we will always advise clients to engage with the ATO to either resolve or narrow the issues in dispute as quickly as possible.
The ATO has several mechanisms for early engagement, including:
1. Pre-lodgement reviews
The ATO may engage early to provide pre-lodgement compliance agreements for commercial deals and restructures.
These give practical certainty of tax outcomes from those events during planning and prior to lodgement and may be viable for taxpayers with complicated personal and business structures who find themselves subject to regular reviews or audits by the ATO.
2. Oral rulings
An oral ruling is legally binding advice given by the ATO to individual taxpayers on how a provision of the tax laws will apply to the individual in their specific circumstances. Oral rulings are not available for indirect tax or excise matters, business matters, complex matters, or matters the ATO are considering in relation to the taxpayer.
The benefit of an oral ruling is the certainty it provides on the ATO’s approach to the operation of a specific provision of the tax laws.
3. Complex Issue Resolution requests
A Complex Issue Resolution (CIR) is similar to an oral ruling which is provided by the ATO in writing. A CIR gives guidance on the ATO’s opinion as to the application of provisions of the tax laws on a set of specific facts.
Taxpayer details are usually not provided to the ATO as part of a CIR request, because it is a view on the technical application of a particular tax law being sought, not a taxpayer specific fact scenario.
CIR requests can be provided quickly by the ATO depending on the nature and complexity of the issue.
4. Comfort letters
Comfort letters are Increasingly used by the ATO to provide certainty to taxpayers by stating that, in relation to a proposed set of facts, non-compliance risk is low and the ATO is unlikely to expend resources in any investigation or review of the subject matter of the letter.
Although not legally binding, a comfort letter should provide protection against shortfall interest and penalties.
Comfort letters are advantageous in situations where time is critical and the ATO will not be able to make a formally binding and enforceable decision in the time frame. The ATO may also prefer a comfort letter if it does not want to displace a widespread practice in relation to a specific tax treatment, despite finding contrary to that practice for a specific taxpayer.
5. Voluntary disclosures
Voluntary disclosures allow a taxpayer to correct their tax affairs, often in return for a reduction in the administrative penalties and interest that may have applied if they had come to the attention of the ATO as a result of a formal review or audit activity.
Voluntary disclosures are often part of a strategy to limit a taxpayer’s exposure to penalties and interest.
6. Private rulings
A private ruling is a binding ruling by the ATO setting out how the tax laws applies to a particular taxpayer. The ATO aims to provide private rulings within 28 calendar days of the receipt of all necessary information, however we often find this period is longer for complex issues.
A private ruling is binding on the ATO in relation to the scheme or circumstances that it describes. Edited versions of private rulings published by the ATO cannot be relied upon by other taxpayers.
The ATO may decline to give a private ruling and a taxpayer may object to an unfavourable private ruling itself or a consequent assessment based on that ruling.
From our experience, early engagement with the ATO at the commencement (or before) a review or audit will deliver a preferable outcome for the taxpayer, regardless of the merits of a client’s case. If nothing else, early engagement usually mitigates the potential costs of a lengthy review, audit, or objection process by bringing matters to a head earlier then would be the case.
In the second part of this series, we will look at voluntary disclosures and how they may be employed to reduce administrative penalties, depending on when they are made.
At Harwood Andrews, our tax team specialises is in the early engagement with the ATO to resolve tax disputes. If you have any further questions, please contact: