18. Tax Audits and Taxpayer Rights

Joshua Easton

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ATO is responsible to the government and the community for collecting the revenue and ensuring that everyone pays the correct amount of tax.

A tax enquiry or audit is an examination of your tax affairs by the
ATO to see if you have done what you are required to do under the tax laws, including whether you have declared all the assessable income you receive
and are entitled to the deductions and tax offsets you have claimed on your tax return. The
ATO assumes that you are trying to deal honestly with your tax.

ATO visits are just to provide assistance and information while others are routine checks of simple details you would normally have on hand, such
as your Australian Business Number or GST registration. If a tax officer visits you, they will let you know the purpose of the visit at the

The enquiries or audits conducted vary in their complexity. Sometimes they only involve a phone call or a letter asking you to provide further information
or verification of your claims. In some cases a tax officer may visit you. In some cases you may be asked to bring all your records for examination.

ATO sometimes decides to look more closely at tax returns making similar claims or from within the same industry and can request the records and
paperwork you used to complete your tax return.

It is also possible that your tax return has been audited without you knowing about it. The
ATO receives information from a number of sources as a matter or course. For example, banks are required to provide details of how much interest
each account held with them has earned. Using this information, it is a simple check to see whether or not taxpayers have declared that interest
in their return. The
ATO also cross-reference Centrelink payments with tax returns.

ATO will send you a letter if they detect that an amount is missing on your tax return. If you agree the amount should be on your return you don’t
need to do anything. The
ATO will issue you with a Notice of Assessment telling you how much you need to pay. This may include interest penalties. If you disagree
with the
ATO, the letter will tell you what to do.



If the
ATO undertakes checks of your tax affairs it doesn’t mean they think you are dishonest.

If you make an honest mistake, where allowed under the law, they will take this into account when considering any penalties that may be imposed.

In addition to honest mistakes, the law recognises that errors can be caused by a range of factors including carelessness, recklessness or intentional
disregard of the law.

If the
ATO discovers that a taxpayer has intentionally sought to avoid paying tax or has over-claimed payments, they take firmer action in considering
penalties and possible prosecution action.



An enquiry or audit usually involves examining your tax affairs to make sure that the information is accurate and to confirm your taxation liability
or entitlement.

ATO may also contact other parties such as banks, employers, customers and suppliers to obtain information.




ATO must conduct enquiries and audits in an impartial, fair, reasonable, and professional manner. Regardless of the type of enquiry or audit, the
following principles apply:

ATO will treat all taxpayers in accordance with the law and the principles outlined in the Taxpayers Charter.

The tax officer conducting the enquiry or audit will outline the audit process and, where appropriate, will endeavour to guide you through the process
– particularly if you are experiencing an audit for the first time or are not represented by a professional adviser.

Seek to minimise cost and inconvenience to you.




In most circumstances, the
ATO will notify you of their intention to make enquiries or conduct an audit of your tax affairs.

The notification will be in writing, normally be made to your address for service and may be preceded by a phone call.

This notification will tell you the name and telephone number of the tax officer conducting the enquiry or audit and explain the expected nature, scope
and duration of the enquiry or audit and indicate the information and records that will be required.

ATO will seek to complete the enquiry or audit in the shortest possible time, but the time it takes depends on several factors such as the type
of enquiry, the adequacy of your records, the availability of information, the complexity of the matter and the level of your co-operation.

ATO will advise you that you may have a representative present at the start or at any stage of the enquiry or audit. If you need to consult with
your representative, you will be given reasonable time and opportunity to do so. They will also tell you about your rights and obligations
in relation to the enquiry or audit.

There may be situations where the
ATO decides that urgent access action is appropriate and prior warning may not be given. For example, there may be a reasonable belief that the
existence or integrity of documents, information or goods is under threat. Urgent access requires the approval of a senior tax officer. In
these cases the
ATO will give you reasonable time and opportunity to consult your representative after the urgent access.




If you have been notified of an enquiry or audit, you should prepare for it by reviewing your relevant records, tax returns, and activity statements.
Any error should be immediately disclosed. If you do this, the level of penalty that may otherwise have been imposed may be reduced. If you notify
ATO of any error before they notify you of an audit, the level of penalty that may otherwise have been imposed will be reduced.




At the initial interview, the tax officer conducting the enquiry or audit will provide Tax Office identification and a telephone contact number when
first meeting with you. If you ask, they will tell you the name and telephone number of his manager, except in very limited circumstances.

You will have the opportunity to volunteer information about any possible irregularity or omission in relation to your tax affairs. If you do this,
the penalty that may otherwise have been imposed may be reduced.


ATO will arrange any interviews or meetings at times and places that are mutually convenient, usually during normal business hours and will explain
the purpose of any interview or visit.

They also undertake to ask clear and unambiguous questions and provide you with all reasonable assistance and explanations to clarify their meaning. 


You may choose someone to act on your behalf or to attend interviews with you.The tax officer will inform you in advance when he will have a legal
adviser present to assist him during an interview. 


You will be given reasonable time to collect records, documents and papers for examination, and to gather information about any matter that arises,
unless the
ATO has reason to believe that the existence or integrity of the documents is at risk. You will receive a written receipt of any records that are
collected at an interview and the
ATO will return the records as soon as possible or as mutually agreed. 


ATO will answer any reasonable and relevant questions you ask relating to the enquiry or audit. You can take notes of any conversations or interviews
and if you ask, or where the
ATO consider it reasonable to do so, tape record interviews. A copy of the audio tape will be provided to you, free of charge, at the conclusion
of the interview. 


You can ask to be provided with a signed copy of the tax officer’s written record of interview. If the tax officer asks you to sign the record of interview,
he will explain the implications of doing this. 


ATO will respect your right to, and give you adequate opportunity to claim, legal professional privilege in relation to certain communications
between you and your barrister or solicitor. In certain circumstances, they will allow for some advice to remain in confidence between you
and your professional accounting adviser.


ATO must use discretion if and when they make any enquiries of third parties and do so without any implication of wrongdoing by you. They must
allow you the opportunity to give your views on any relevant issue, including any proposed adjustments and keep you informed of the progress
of the enquiry or audit. How often this happens will vary according to the type of enquiry or audit being conducted.



Under the tax laws, the Commissioner can require a person to provide information, to attend and give evidence, or to produce any books, documents or
other papers in the custody of or under the control of that person.

When you are required under the law to attend a formal interview, you are the person who must answer any questions asked in the interview.

You may still choose to have your representative or adviser present. In this situation, you will be given a reasonable opportunity to consult with
your representative or adviser who can only advise you as to the meaning of a question, not what answer you should give.

In very limited circumstances, you will not be allowed to have your representative or advisor present, such as when your representative or adviser
may have had a role in the transaction under review. In this situation, you will be given reasonable time to obtain alternative representation.

Should you be required under the law to attend a formal interview, the tax officer will provide you with an explanation, before the interview, that
the law obliges you to answer questions put to you during the interview.

If you bring an interpreter to a formal interview because you don’t speak English, you are allowed to answer through the interpreter.



ATO must clearly explain the basis of any adjustments made as a result of the enquiry or audit and inform you if any error has been detected which
has resulted in you paying too much tax or receiving less than your entitlement.

They will clearly explain the reasons for any penalty or interest and how this will be calculated, and give you the opportunity to explain any circumstances
which you believe could justify a reduction of any penalty or interest.

Within seven days of making a decision the
ATO will provide you with written notification of the outcome of the enquiry or audit. You will be advised of your review rights and the remedies
that may be available to you.

ATO will also draw to your attention any matters that will help you to understand and meet your taxation obligations in the future.

Settlement meetings are usually held for more involved or complex audits. If there is a settlement meeting the tax officer conducting the audit will
be accompanied by at least one other officer, except in very straightforward matters.

Settlement agreements should be reached without any inducements or duress and the
ATO undertakes to document the terms of any settlement agreement reached and provide you with a copy.




In conducting audits and making enquiries, the
ATO may determine that you have underpaid your tax or received more payment than you were entitled to.

Generally, the tax laws provide for penalties to be imposed where the requirements of the law have not been met. In both cases there are different
rates of penalty based on the type of behaviour or the degree of culpability involved.

The law also provides for prosecution action to be undertaken for a range of taxation related offences. These offences include making a false or misleading
statement in a tax return, making a false or misleading statement to a tax officer and keeping incorrect or false records with an intention to
deceive or mislead a tax officer.




As discussed earlier a tax audit is a systematic examination of a taxpayer’s affairs by the
ATO in order to establish whether a taxpayer has complied with the Tax Act.

ATO is constantly involved with a public relations and media program regarding its audit and compliance programmes in order to ensure higher levels
of community awareness and compliance.

Section 262 A of the Tax Act places the onus on the taxpayer to retain certain records to enable the income tax liability to be assessed and then verified
in the event of an audit.

The records must be in English or readily convertible to English. Adequate records can take many varying forms, but retention of records is essential.
As a guide, records must be kept for five years if you are lodging your income tax returns on time. Lack of adequate records makes taxpayers particularly
vulnerable to Asset Betterment Assessments.



Before dealing with sections 263 and 264 we would stress that when faced with a full audit it is essential to seek professional advice.

Under section 263 an authorised
ATO officer has full and free access to all buildings, places, books, documents for any of the purposes of the Act, and for that purpose to make
extracts from or copies of any such books, documents or papers.

The following matters should be considered if you receive a request for access under section 263.

  • The access must be “for the purposes of the Act” and the
    ATO officer must have proper authority.
  • Under section 263 the auditor is not given the right to ask questions or remove records as this section does not contain the word “audit” or “investigation”.
  • The
    ATO officer will normally provide an identification card and this should be checked to ensure it contains the necessary authorisation under
    section 263.
  • You may ask for a clear statement of purpose to establish that the request for access meets the requirement in section 263 that access is for the
    purposes of the Act. If this is not provided then correspond with the
    ATO, requesting a written statement, promising full co-operation upon receipt of a satisfactory reply.
  • Remember that the
    ATO has no right to use force, but that you are obliged to provide the auditor with reasonable facilities and assistance. This would include
    a desk, a chair and a power point for a scanner. The photocopier may be necessary because the
    ATO may not seize documents. The auditor does not have authority to borrow or take away any of your documents or records.
  • A taxpayer should take appropriate professional advice as to whether the auditor’s questions should be answered. Perceived exposures should be
    balanced with the fact that penalties may be reduced if an early disclosure is made in an audit.
  • It should be noted that a taxpayer is not under any obligation to answer questions and that it may be appropriate to request that written questions
    be submitted.
  • On occasion the auditor suggests that a tape recording of the conversation be kept. Again seek professional advice. You should keep file notes
    of all discussions.



Section 264 is the only other section in the Act that authorises the
ATO to conduct an Audit. This section enables the
ATO to ask questions, require answers and obtain documents and records. For such a request to be valid particular procedures must be followed
and certain limitations imposed by the Court.



The Commissioner’s arbitrary power to issue Asset Betterment Assessments demonstrates how important it is for taxpayers to retain adequate accounting
and financial records.

Essentially a default assessment is the Commissioner’s estimate of your taxable income in a given year, taking into account your accumulation of assets
and his estimate of your living expenses.

The default assessments may be issued where you have failed to lodge an income tax return or the Commissioner is not satisfied that the return lodged
is complete or accurate. Once the
ATO issues a default assessment the onus is on the taxpayer to prove why the amended assessment should be set aside.

Effectively, you may have to satisfy the
ATO how you have accumulated assets over a specified period of time and that this accumulation is consistent with the taxable income you have disclosed
in conjunction with your living expenses over the period.

In recent court cases the
ATO has been successful in amending assessments on this basis. Taxpayers have failed in their onus of proof largely due to a lack of financial
records and documentation to support their contentions.




Most taxpayers want to know what issues are of interest to the
ATO and the focus of their activity.

Risk assessment work in the property market has identified capital gains as a compliance issue for individual taxpayers. Taxpayers who disclosed rental
income in prior years, but no longer do so are being asked to explain the cessation of rental income, whether they have sold the property and if
so, whether there was a capital gain.

The ATOs focus will be on omitted or incorrectly calculated gains from rental properties, holiday homes and units, vacant land and residential property
purchased off the plan; Australian property owned by non-residents, shares and distributions of capital gains from managed funds.

ATO systematically matches data by increasingly working with state revenue offices and commercial providers to gather data on property sales to
understand the overall market. They also conduct risk assessments on sales of properties in high capital growth areas and properties sold off
a plan. They can examine the
ASX share registry and public data sources for information on share sales, and match data reported by managed funds with tax return information.




The ATOs automated system also allows matching of large volumes of internal and external data.

Sources of external date include:

  • Interest and dividend income
  • Government pensions, payments and allowances
  • Health insurance premiums paid
  • Salary and wages, allowances etc.

In recent years data matching has been, and will continue to be, performed on millions of taxpayers, resulting in hundreds of thousands being contacted
with “please explain” letters.

The ATO’s data matching capacities keep on improving and around 780 million transactions a year are audited. Below are some recent initiatives.

Online Selling Data Matching Program


The ATO is requesting and collecting the user identification name and number, name, address, telephone numbers, date of birth, email address, registration
date, number of monthly sales, value of monthly sales, the IP address and bank account details of approximately 11,000 sellers who have sales of $20,000
and greater, in the current year through various online selling websites.

Contractor payments 2016-17, 2017-18 and 2018-19 financial years data matching program protocol

The ATO routinely collects data on payments made to contractors by businesses as part of our employer obligations compliance activities.

Contractors can be either individuals, partnerships or other types of entities. Contractors earn income by providing services to other businesses and are
generally paid upon production of an invoice by the contractor.

The data collected from businesses is used to identify contractors that may not be meeting their taxation through:

  • not registering correctly with the ATO
  • non-lodgement of returns
  • failing to report payments received
  • not paying amounts of tax due to the ATO.

The data is also analysed to detect trends and compliance issues enabling the ATO to develop and deliver educational products and tailored services. This
is an ongoing data matching program and has been conducted for more than five years.


There is no doubt that these initiatives are becoming more sophisticated and widespread.

The message is simple and clear – disclose all assessable income.

During 2016–17, the ATO cross-referenced information reported in tax returns against over 850 million transactions provided by third parties to identify
omitted income and gains, or incorrectly-claimed offsets or entitlements to exemption from surcharges.

The ATO also contacted nearly 300,000 taxpayers who had apparent discrepancies in the information they reported in their tax returns.

The majority of taxpayers who made errors on their return and had to repay money didn’t wait for all pre-fill information to be available. Nine out of
ten returns were adjusted as a result of our enquiries.

Traditionally the ATO has focused on areas such as omitted interest and employment income. However with better quality data now available from more sources,
they continue to expand data matching capability to encompass a greater range of areas, such as:

  • capital gains tax from the disposal of shares and property
  • employment related foreign source income
  • contractor income from payments made by government agencies.



The ATO has started using auditors from other compliance areas to check on employers providing benefits that may be liable to FBT.

Employers outside the FBT system are being targeted. Where compliance work (an audit) is being undertaken primarily on other taxes, ATO staff have been
told to look at FBT issues where information held by the ATO indicates an FBT risk.

The most common example is the employer that has motor vehicles registered in the business name, but no FBT return has been lodged or any employee contributions

The ATO is providing additional FBT training to compliance staff in these areas. In 2016-17 the ATO has a particular focus on luxury vehicles.



When will extra ATO scrutiny occur?

Many taxpayers seem to ignore the obvious fact that the
ATO scrutiny will be strongest whenever big money is made, and this is normally when the temptation to avoid tax is strongest. The
ATO use the term “wealth crystallisation points” which include:

The sale of family businesses whereby sale prices are understated to cheat on capital gains tax.

Family companies making big loans to shareholders. In these cases dividends are sometimes disguised as loans to avoid tax.

Illegal tax evasion schemes entered into to avoid a large “one-off” profit – an extremely profitable transaction may be scrutinised.

Successful public listings of private companies.

Avoid shady tax schemes


Given the increasing sophistication of the ATOs data matching and detection processes, getting involved in tax evasion schemes is asking for trouble. The
ATO also works closely with enforcement agencies such as the Australian Federal Police and the Australian Crime Commission and consequently the chances
of being caught are now much greater.


Maximise legal tax breaks


Due to tax reform, tax can be minimised in legal and straightforward ways. For example:

Maximise superannuation deductions – note the tax-free payouts after reaching age 60

Negatively gear shares and property

Maximise gains on family homes which are exempt from CGT

Ownership of assets in discretionary trusts means distributions are paid to the lowest taxed beneficiaries.




This is yet to be confirmed but it is unclear as to whether the ATO will continue to publish an annual “Compliance in Focus” document. However, the below
matters indicate where some ATO attention may be in 2017-18.

Occupations Targeted For Special Attention This Year


  • Trades persons and labourers in the building and construction industry – for example plumbers, electricians, carpenters, tilers and concreters.
  • Construction supervisors
  • Construction project managers
  • All sales and marketing managers
  • Special attention related to the vehicles used by the construction industry – 1 ton utilities and above.

In the past taxpayers claimed 100% of the expenses related to those vehicles, especially if the taxpayer had the use of another vehicle for all the private
travelling done by the taxpayer. The ATO assumed that the private portion relating to the utility would have been minimal and normally allowed the

The ATO is now questioning the reason for the claim and how the percentage of work use was determined.

Log books for cars

Log books will be checked by the ATO to ensure the details have been recorded correctly

Self Education Expenses


Provided the course leads to an increase in the current skills of the taxpayer or to a promotion or to an increase in income and the taxpayer is currently
employed in a position utilising those skills, all the expenses related to that course can be claimed.

Seminars and self-development course


The seminar or course can only be claimed if the seminar/course is directly related to the taxpayer’s current income earning activity. In some instances
only some of the subjects in a course would be related to the current occupation. A percentage of the total course fee can then be claimed.


Rental Properties


The main attention in 2018 will be on the loan interest, property repairs and property investment seminars/courses attended and claimed. Since 1 July 2017,
travel to inspect or collect rent on residential in