This is the second 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.
Voluntary disclosures can be a great way to resolve a potential tax dispute and can reduce administrative penalties to zero depending upon when the disclosure is made and the size of the tax shortfall.
Why make a voluntary disclosure?
Where and when to make a voluntary disclosure is usually a strategic decision for a client influenced by the risk profile and management approach adopted. We often provide advice on the likelihood of the ATO detecting an issue, which is a key question to answer when considering when to make a voluntary disclosure.
A voluntary disclosure will not necessarily result in a review or audit, however it will result in the ATO carefully reviewing the disclosure itself. A voluntary disclosure may also be an effective way to proactively engage with the ATO in relation to tax risks without the limitations of other forms of engagement such as making a private ruling application.
Where a disclosure is made before an audit begins in respect of an income year and the tax shortfall is less than $1,000, penalties may reduce to zero.
Where a disclosure is made before an audit begins in respect of an income year and the tax shortfall is more than $1,000, penalties may reduce by 80%. Where a disclosure is made after an audit begins, penalties may reduce by 20% (if the disclosure reduces the ATO time and resources in the tax audit).
A disclosure will not be a voluntary one if the ATO is already aware of the relevant information. Nevertheless, where the ATO has started a review, it may still be possible to make a voluntary disclosure and take advantage of the 80% reduction.
Making a voluntary disclosure
When considering a voluntary disclosure, you should review whether there are other matters the ATO may raise. The ATO names which entities are under audit so, for example, associated entities not named could (where proper and advisable) consider making voluntary disclosures before an audit is extended to those entities.
A carefully drafted and considered voluntary disclosure can ensure a taxpayer is proactive in resolving outstanding tax issues and allows the taxpayer to take full advantage of the discounted of penalties that may otherwise be imposed.
Our tax team specialises is the making of voluntary disclosures to the ATO on behalf of our clients. Please contact us if you have any further questions or need our assistance.