An opinion of ‘fraud’ or ‘evasion’ means the ATO is not subject to the usual two or four year periods it otherwise has to amend an income tax assessment. Instead, the amendment period is unlimited which can result in amended assessments over many years, and potentially a significantly higher tax liability as a result.

But how should a taxpayer respond when the ATO has formed an ‘opinion’ of either ‘fraud’ or ‘evasion’? Recent decisions in the Full Federal Court and Administrative Appeals Tribunal highlight the rules for taxpayers challenging assessments issued following a finding of ‘fraud’ or ‘evasion’.

Who needs to prove what?

The recent decision of Binetter v Commissioner of Taxation [2016] FCA FC163 sets out the following principles.

  1. The taxpayer has the onus of disproving fraud or evasion.
  2. The ATO does not have to prove anything. ATO officers will often give reasons for why an opinion of ‘fraud’ or ‘evasion’ was formed, but they do not have to. The taxpayer will not have done enough by simply showing the ATO’s reasons were insufficient or inadequate. The taxpayer must actually prove there was no fraud or evasion.
  3. The taxpayer has to do this on the balance of probabilities.
  4. Evidence from the taxpayer is a start, but corroborating evidence is critical.

‘Unexplained deposits’

Particular problems arise for ‘unexplained deposits’. These are amounts the ATO often identifies as deposits in a taxpayer’s bank account that are assumed to be income – unless there is a credible explanation for why the amounts are not income.

The decision in Binetter gives the taxpayer some problems if the taxpayer cannot remember what the deposit represents. If the ATO forms an opinion of ‘evasion’, the taxpayer has to prove there was no evasion, which generally requires an explanation of the deposit.

In the reported cases, the ‘unexplained deposits’ are significant sums of money, where it seems reasonable to expect an explanation from the taxpayer as to why these amounts are not income in the circumstances.

Hopefully common-sense prevails so that a relatively small deposit received many years ago does not support an amended assessment issued following an opinion of ‘evasion’. Otherwise, this type of amended assessment would effectively be unchallengeable if the taxpayer cannot recall what the deposit was for. This was noted in the AAT decision Nguyen v Commissioner of Taxation [2016] AATA 1041.

Taxpayers’ circumstances will vary significantly and it would not be unusual to see taxpayers receiving sums of money outside the four year amendment period that the taxpayer cannot explain. The further into the past, the more likely that the taxpayer’s memory will be fallible and that corroborating evidence will be unavailable.

How do you respond in an audit context?

If the ATO proposes a finding of fraud or evasion, it is important to respond:

  • promptly – before the ATO works through its internal process to form the ‘opinion’ of ‘fraud’ or ‘evasion’
  • with evidence from the taxpayer, which is corroborated by other sources
  • by applying the evidence to the actual tests of either ‘fraud’ or ‘evasion’.

We often see a taxpayer or their advisers not provide a comprehensive response in the first instance. If evidence is later provided, the ATO often looks at it sceptically – particularly if the ATO earlier invited the taxpayer or adviser to provide evidence and they chose not to for some reason.

What is evasion?

We have seen the ATO form opinions of ‘evasion’ because there was a ‘blameworthy act’. This is not the test. The ‘blameworthy act’ must be a type of act or omission in the sense used in Denver Chemical Manufacturing Co. v Commissioner of Taxation (NSW) [1949] ACA 25.

In that case, the High Court provided the following guidance:

I think it is unwise to attempt to define the word ‘evasion’. The context of s.210(2) show that it means more than avoid and also more than a mere withholding of information or the mere furnishing of misleading information. It is probably safe to say that some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated. An intention to withhold information lest the Commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion.

‘Evasion’ therefore requires something more than a mere ‘blameworthy act’. It is important that the evidence meets the explanation of ‘evasion’ as set out by the High Court.