This is Part 3 in a three part series examining the various stages of a taxation dispute. Part 1 and Part 2 explored the pre-audit and audit stages respectively. In this Part 3, we examine the post-audit stage and the management of a formal dispute with the ATO.

Completion of an audit

An audit will most often be concluded with the Commissioner issuing a Position Paper in respect to its findings. Such Position Papers have no real legal effect and are issued as a precursor to the issue of assessment(s). It may not always be in the best interest of the client/taxpayer to provide a substantive response to the ATO in reply to matters raised in the Position Paper. Rather, it may be preferable to wait until a taxation assessment is issued, to make formal objection to that assessment and then to appeal to the Federal Court or the Administrative Appeals Tribunal (AAT) as discussed below. The decision as to whether or not to respond in detail will largely depend upon the circumstances and is ultimately a question of strategy (given factual and legal issues), including technical and legal matters. The taxpayer should obtain the assistance of lawyers in formulating an appropriate strategic position.

The ATO will then either issue an original Notice of Assessment or a Notice of Amended Assessment based on the results of the audit.

Objecting to a tax assessment

A taxpayer can object to a disputed tax assessment. Such objection would generally need to be made within two to four years from the date of the original assessment. If an amended assessment is issued by the ATO outside of that period, then a taxpayer has 60 days in which to lodge an objection to the amended assessment. Where the time limit for an objection has expired, an application to provide additional time to object can be made. A decision refusing additional time is reviewable by the AAT.

Objections to assessments are not determined by the original ATO decision maker and hence it is possible that a “fresh set of eyes” will consider a matter differently. It should be noted that under section 175A of the ITAA36, a taxpayer may only object to an “assessment”. Assessment is, in general terms, defined as an ascertainment of taxable income. Not all decisions in relation to the ultimate tax liability of a taxpayer are with respect to the ascertainment of taxable income, including a taxpayer’s entitlement to various tax credits, meaning such decisions cannot be objected to.

Objections should be crafted with care for the following reasons:

  • The form and content of an objection will have significant implications for the conduct of any appeal of review including as follows:
  1. the grounds of an appeal to the Federal Court or review by the AAT are limited to those raised in your objections, unless the Court or AAT orders otherwise: sections 14ZZK and 14ZZO of the Tax Admin Act. It should not be assumed that the Court or Tribunal will automatically allow an amendment to the grounds of objection.
  2. factual matters traversed in objections can also have significant ramifications on appeal, particularly if a later investigation or review uncovers information that is not entirely consistent with the facts outlined. An inadvertent error in an objection can lead to an uncomfortable cross-examination of the taxpayer on appeal.
  • Failure to exercise proper care with an objection can also have unforeseen consequences. In 2011, the Tasmanian Court of Criminal Appeal in Saxby v R [2011] TASCCA 1 (7 February 2011) convicted a director of a company of multiple offences in relation to denials of liability made in an objection lodged on behalf of the company with the ATO. The Court held that, unlike pleadings in civil proceedings, statements in an objections amount to statements of truth and hence, if they are false, they will be false and misleading statements and a criminal offence under section 8K(1)(a) of the Tax Admin Act. The old days of making a bare denial to the tax liability in an objection are surely over.

Too often objections are treated just like any piece of correspondence with the ATO. What many forget is that an objection is effectively your “pleading” for any appeal or review. It is important to get the balance right between outlining all relevant grounds and ensuring that it is only the fundamental and incontrovertible facts that are contained in the objection. As much care should be given to an objection as would be to a statement of claim when commencing a civil proceeding.

Recovery of tax debt by the Commissioner

Once the Commissioner issues a Notice of Assessment, it may proceed to recover the tax debt notified on the Notice of Assessment, even where that debt is disputed by the taxpayer in the form of an objection or by subsequent review proceedings. This is because the fact that a review of the assessment is pending does not affect the validity of the assessment. Accordingly, tax may be recovered as if no review was pending and may proceed all the way to personal bankruptcy or the winding up of a company even though the proceedings for the legal determination of the underlying taxation assessment have not been determined. However, the Australian courts retain an inherent power to stay a judgment in an appropriate case. Generally, a court will not order a stay of recovery proceedings in relation to debt notified in a notice of assessment unless it can be shown that the effect of a refusal to order a stay would prevent the taxpayer with continuing with the proceedings to review the Notice of Assessment.

What should be understood is that preventing the Commissioner from recovering prior to lodging an appeal is extremely difficult. However, with appropriate steps, it can be achieved.

Review proceedings in the AAT or the Federal Court

Should a taxpayer’s objection be disallowed, or should a taxpayer dispute some other tax decision, an application can be made to either the AAT or the Federal Court of Australia for review of the decision. There are a number of differences between making an application to the AAT or the Federal Court and the appropriate choice to make is ultimately subject to the particular circumstances of any given case. The following are some of our observations about the differences between the two forums:

  • Proceedings in the AAT will generally take less time than comparable proceedings in the Federal Court. For this reason, proceedings in the AAT will generally be more cost effective than comparable proceedings in the Federal Court.
  • The AAT is less formal and is not bound by the rules of evidence and the “pre-trial” process is generally less rigorous in forcing the matter on. Also, the process of conciliation is generally more likely to be pursued.
  • The AAT has no power to award legal costs to a successful party whereas the Federal Court does. As a general rule, in the Federal Court costs will follow the verdict such that an unsuccessful applicant will suffer the costs of their opponent.
  • Decisions of a more administrative and discretionary character (such as decisions on the question of penalty imposition or remission) are better reviewable by the AAT. Matters of a more legal (technical) character may be better dealt with by proceedings in the Federal Court.
  • The decision as to whether a particular matter should be appealed to the AAT or the Federal Court will depend upon a number of factors and should be carefully considered for each case.

Use of illegally obtained evidence

In recent times, tax authorities worldwide have benefit from the leaking of information by employees of financial institutions situated in secrecy havens. Such conduct is often illegal under the laws of the relevant jurisdiction. Accordingly, it is critical to understand the use that can be made of information that is obtained by the ATO in breach of Australian law or the law of another country.

Section 138 of the Evidence Act 1995 (Cth) provides that:

(1) Evidence that was obtained:

(a) improperly or in contravention of an Australian law, or

(b) in consequence of an impropriety or of a contravention of an Australian law,

is not to be admitted unless the desirability of admitting the evidence outweighs the undesirability of admitting evidence that has been obtained in the way in which the evidence was obtained.

Illegally obtained evidence may, in certain circumstances, be used in Australian courts. The rule reflects a tension between resolving ‘the apparent conflict between the desirable goal of bringing to conviction the wrongdoer and the undesirable effect of curial approval, or even encouragement being given to the unlawful conduct of those whose task it is to enforce the law.’[1]

The rationale behind the rule is not fairness to the defendant – it is about balancing two public interests; the public need to bring to conviction those who commit criminal offences and the public interest in the protection of the individual from unlawful and unfair treatment. This has important consequences for how the discretion is exercised and it should not be automatically assumed that illegally obtained evidence is inadmissible in civil or criminal proceedings in Australia. For example, it could be argued that, where the evidence was obtained via criminal conduct outside of Australia by third parties, and then subsequently provided to the Australian authorities, there is less of a public interest in excluding the evidence.

Finally, the Evidence Act requirements in no way restrict the use of such information by the ATO audit officers in coming to a conclusion regarding omitted income and penalties. In Kevin Denlay v Commissioner of Taxation [2010] FCA 1434) the Federal Court found that the ATO was not precluded from using stolen information in issuing a notice of assessment on a taxpayer in Australia. In that case, the information was obtained by the ATO from a former employee of the LGT Group in Liechtenstein. In particular, the Court dismissed the taxpayers‘ argument that the use of such information by the ATO was concious maladministration.


The ATO has considerable powers at all stages of the tax audit process. However, the more significant problems, such as criminal prosecution, are often self-inflicted and arise from a failure to take considered and appropriate legal advice from the commencement of the ATO’s enquiries. As this three part series has demonstrated, the management of a taxation audit is dependent upon not only technical tax and legal issues but strategic decisions. It is this latter aspect of taxation disputes that demands the technical expertise and guidance.