The ATO now has access to a lot more information than it once did, including from an increasing number of international authorities and sources. As well, the data analytics it employs in each of the segments of multinationals, large businesses, small to medium enterprises, high-wealth individuals, and other taxpayers will almost certainly identify significant unusual activity.
Through its sophisticated and tailored profiling activities, the ATO determines which taxpayer segments and particular high risk activities it will target and investigate for possible compliance action.
The ATO’s tolerance for game-playing and cross border tax avoidance has dropped considerably. Last year, it completed 3.8 million compliance activities and, for example, it has recovered $1.2 billion through its International Structures and Profit Shifting Program since 2013.
However, there are sensible ways to manage the risk of an enquiry from the ATO.
Understand the ATO’s areas of focus
There is no excuse for not being aware of the compliance risk areas identified by the ATO.
The ATO is very active in publicising its views about the activities and transactions that will attract a compliance review. More importantly taxpayers across all segments are expected to be aware of those ATO views and manage their own tax risk accordingly. This enables the ATO to influence compliance and allows it to deal with taxpayers in a consistent way.
It is important to objectively assess your own tax compliance from the ATO's viewpoint rather than aiming to merely rationalise your existing tax positions. If you expect a disagreement with the ATO, or you genuinely have a difference of opinion on the interpretation of the law, talk with the ATO rather than wait for a review or an audit. This is also important to mitigate against penalties and interest in the event of an adjustment of the tax liability.
If the ATO initiates a review and then an audit, it is imperative to have a clear understanding of the risks it has identified and the basis of its view. This will then put you in the best position to engage and support your case with the ATO and explore resolution of the issues.
Difference of opinion with the ATO
A genuine difference of opinion on tax law doesn’t mean that there has been any attempt to avoid tax or to defraud or mislead the ATO. There are areas of genuine dispute about how tax law should apply to particular facts of a taxpayer's circumstances.
Each case must depend on its own facts. Often taxpayers don’t understand or appreciate how the facts in their case impact the conclusion on the operation of the tax law. Therefore it is critical to ensure the ATO understands your facts and that you are in a position to prove every assertion. If you are confident about your position on the law and the facts of your case, then it becomes a matter of presenting your evidence in the most compelling way to the ATO as early as possible.
In the high-risk zone
For companies with cross-border transactions, the ATO has issued specific draft guidance on what it will look at closely and intra-group financing transactions are in the high-risk zone. The ATO’s audit team will apply the guidelines in its risk profiling and investigations.
Publishing such guidelines is a very effective way of influencing behaviour and can mean companies and individuals often will discuss their situation with the ATO to head off any action. The ATO raised $975 million in liabilities as a result of voluntary disclosures in the 2015–16 tax year. This included about $285 million from large businesses.
Get independent advice
If you are facing questions about your tax compliance, it’s important to get objective, independent advice on how to engage with the ATO and present your position. It is also advisable to consider obtaining advice from objective advisers who are not constrained by the advice given at the time of the transaction or when the tax position was being considered. It is important to remember that the ATO values, and is assisted, by, the views of advisers who are independent when representing taxpayers.
MinterEllison is a one-stop shop for legal and tax advice. We are uniquely placed to help companies and individuals faced with risk assessments and audits because we also act for the ATO. This gives our firm a deep and relevant understanding of how the ATO manages audits and what’s important in the process.