Snapshot: tax litigation in Australia

Overview

What is the relevant legislation relating to tax administration and controversies? Aside from legislation, are there other binding rules for taxpayers and the tax authority?

The largest form of revenue is income tax which is administered at the federal level, as is the goods and services tax and a range of other less significant taxes. Stamp duties, payroll taxes and a number of other less significant taxes are administered at the state and territory level. Relevant income tax legislation is the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997. The legislation relevant to the goods and services tax is the New Tax System (Goods & Services Tax) Act 1999. The administrative apparatus regarding these taxes is contained in the Taxation Administration Act 1953. Australia has an extensive network of double tax agreements that are given force of law by the International Tax Agreements Act 1953. The Australian Taxation Office (ATO) is the tax authority that administers federal taxes and it may issue public rulings relevant to the taxpayer community at large or private rulings specific to individual taxpayers which are binding against the ATO.

What is the relevant tax authority and how is it organised?

The relevant authority at the Federal level is the Australian Taxation Office (ATO), and at the State or Territory level it is the local Office of State or Territory Revenue. The ATO is led by the Federal Commissioner of Taxation who is appointed by the federal government on a seven-year term and can only be removed by a vote in Parliament. The Offices of State or Territory Revenue are also led by a state or Territory Commissioner of revenue. Within the ATO hierarchy there are three Second Commissioners in the second level of hierarchy, and several dozen Deputy Commissioners at the third level of hierarchy.

Enforcement

How does the tax authority verify compliance with the tax laws? Does this vary for different taxpayers or taxes?

Tax compliance is broadly administered as a ‘self-assessment’ system where taxpayers make filings largely unvetted by the ATO or other tax authorities. The ATO, however, has an enforcement framework that includes a range of reviews, audits, pre-assessment and pre-transaction clearance. The ATO encourages early engagement from taxpayers prior to undertaking significant transactions, and will make real-time enquiries of transactions identified from market intelligence or the media. The ATO is currently rolling out a ‘top 5000’ review of the largest 5,000 businesses in Australia. This review involves a detailed examination of the internal systems and processes of taxpayers to ensure complete accuracy of filings. ATO reviews can take months and in some cases years, and where significant concerns are identified the review may progress into a formal audit, followed by amending assessments. It is not uncommon in the case of large taxpayers for amending assessments to not be raised for several years after the commencement of an ATO review.

What is the typical procedure for the tax authority to review a tax return and how long does the review last? What limitation periods apply?

The level of reporting requirements is dependent on the type and size of taxpayer, with larger corporate groups subject to the most extensive reporting obligations. All taxpayers are subject to review however the probability or extent of review again depends on the size and complexity of the taxpayer. Reviews or audits of large corporate groups can extend to a duration of several years.  

What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?

The ATO has the power to compel the production of all documentation in relation to a taxpayer’s affairs, including compelling third parties to produce any information in their possession regarding a tax matter relating to another taxpayer. The only significant restriction on this power is any protection afforded by legal professional privilege. Additionally, the ATO also has the power to compel any individual to an interview, including in relation to the affairs of third-party taxpayers. The state and territory authorities have similar powers.

What actions may the tax authority take if the taxpayer does not provide the required information?

The tax authorities can ultimately obtain prosecution of companies or individuals who do not comply with compulsory information powers, with penalties including fines and imprisonment. 

How may taxpayers protect commercial information, including business secrets or professional advice, from disclosure? Is the tax authority subject to any restrictions concerning what it can do with the information disclosed?

Legal professional privilege is effectively the only significant mechanism for preventing disclosure to tax authorities. The tax authorities are legally prohibited from sharing taxpayer information for any reason, subject to very narrow exceptions. One of these exceptions is the sharing of information between the federal and state and territory tax authorities, and with foreign tax authorities. 

What limitation period applies to the review of tax returns?

What (if any) alternative dispute resolution (ADR) or settlement options are available?

Taxpayers generally have a right of objection against assessments, which result in a fresh review by another review team within the tax authority. The ATO also has a range of options for resolving disputes. This includes in-house facilitation, an independent review process, alternative dispute resolution and early assessment and resolution.

How may the tax authority collect overdue tax payments following a tax review?

Tax authorities have an almost unfettered legal right to collect overdue tax payments including obtaining asset freezing orders, seizure of assets and garnishee of payments from third parties.

How are penalties calculated?

What defences are available if penalties are imposed?

In what circumstances may the tax authority impose penalties?

Tax authorities have extensive powers to impose penalties for failures of compliance, particularly for any underpayment of tax. The tax authorities have extensive guidelines that they follow in administering discretions granted to them by legislation. 

How are penalties calculated?

No updates at this time.

What defences are available if penalties are imposed?

No updates at this time.

In what circumstances may the tax authority collect interest and how is it calculated?

Interest is typically levied where tax is not paid on time, and is levied from the date that the tax would have been paid had the taxpayer correctly complied with the law. The rate of interest is set by various benchmarks or legislation and is significantly higher than the rate of inflation, and more closely approximates small business lending rates by major financial institutions. 

Can criminal consequences arise as a result of tax non-compliance? Are these different for different types of taxpayers?

Criminal consequences would normally only follow cases of fraud or evasion. Criminal sanctions will be applied to individual taxpayers and also directors or, rather, senior officers of companies involved in serious cases of fraud or evasion. Advisers also face criminal consequences, particularly where they are involved in promotion of aggressive tax minimisation products or schemes. Criminal penalties include imprisonment. 

Are there specific rules or provisions regarding perceived tax avoidance?

No updates at this time.

What is the recent enforcement record of the authorities?

The tax authorities have a good enforcement record, particularly in the large corporate sector.  This record is achieved through increasing use of sophisticated intelligence and data gathering tools to identify non-compliance, as well as various review and audit programmes. 

Third parties and other authorities

Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?

Can a tax authority involve third parties as part of the authority’s review of a taxpayer’s returns?

Tax authorities have almost unlimited power to compel the production of information or obtain interviews from third parties in relation to tax matters relating to other taxpayers. These powers are supported by potential criminal sanctions including imprisonment. 

Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?

No updates at this time.

Financial or other hardship

Do any special procedures apply in cases of financial or other hardship, for example when a taxpayer is bankrupt?

The tax authorities will often exercise discretion to allow deferred payment terms in cases of hardship, and in exceptional cases may even waive tax debts, particularly for individuals. Tax authorities will rank as unsecured creditors in the case of an insolvency, unless they have been successful in obtaining security from the taxpayer. 

Are there any voluntary disclosure or amnesty programmes?

Voluntary disclosure is a key feature of the self-assessment system and broader tax administration process, and is commonly used by taxpayers as a means to significantly reduce or eliminate potential penalties. The ATO has occasionally run amnesty programmes, particularly in relation to the disclosure of hidden offshore assets. A feature of these amnesty arrangements has been a potential waiver of historical tax debts that are dated beyond a certain period, for example, four years. Although there is no formal current amnesty programme operating, it is likely the ATO would accept an informal application and apply similar incentives or waivers to those previously applied.

Rights of taxpayers

What rules are in place to protect taxpayers when dealing with the tax authority?

There is no bill of rights in Australia that protects taxpayers. The tax authorities, particularly the Australian Taxation Office (ATO), publish various guidelines on how they will deal with taxpayers. These guidelines are not binding; however, the ATO has a strong practice of adhering to these administrative guidelines. 

How can taxpayers obtain information from the tax authority? What information can taxpayers request?

There are no legislated or formal authority request procedures; however, taxpayers may make freedom of information requests or seek documents or other evidence as part of court litigation. Taxpayers may only seek documents pertaining to their own individual circumstances. 

Is the tax authority subject to non-judicial oversight?

At the federal level, there is both an Inspector General of Taxation and a Tax Ombudsman who provide critiques of ATO action. However, they are generally considered lightly resourced and do not have significant influence. The ATO is subject to regular appearances and questioning at Senate committees of the Federal Parliament. 

Court proceedings

Which courts have jurisdiction to hear tax disputes?

At the federal level, a taxpayer has the option of challenging a tax assessment in either the Federal Court or the Administrative Appeals Tribunal. Appeals may be escalated through the Federal Court or Full Federal Court and ultimately to the High Court of Australia. At the state level, taxpayers may challenge assessments at the State Supreme Court or the applicable tribunal, with appeals also ultimately extending to the High Court of Australia. 

How can tax disputes be brought before the courts?

Taxpayers are generally required to first object to a disputed assessment, and upon denial of the objection by the tax authority they can challenge the assessment in the applicable court or tribunal. Only the taxpayer may bring the claim and there is no threshold amount for claims.  The claim will specify the specific amendments required to the assessment. 

Can tax claims affecting multiple tax returns or taxpayers be brought together?

Tax claims will often involve multiple assessments covering multiple years which relate to the particular issues in dispute. Taxpayers may only bring claims in relation to their own affairs. This may include multiple entities within the same corporate group; however, generally claims by multiple taxpayers cannot be brought together. On occasions, the tax authority may treat a particular case as a ‘test case’ and agree to respect the outcome for taxpayers generally where there are common facts. 

Must the taxpayer pay the amounts in dispute into court before bringing a claim?

Tax assessments are payable in full within the time specified in the assessment; however, payment is not sought while the taxpayer follows the objection process with the relevant tax authority. Once a claim is lodged with a court or tribunal, the Australian Taxation Office (ATO) will generally require only 50 per cent of the assessment to be paid with the balance payable only in the event that the taxpayer is unsuccessful in the appeal. In the case of state taxes, it is common that tax assessments be paid in full as a statutory precondition to lodging a claim with the relevant court or tribunal. Pre-claim payments are refundable to the extent that the taxpayer is successful in the litigation.

To what extent can the costs of a dispute be recovered?

It is customary for costs to be awarded against the losing party in a tax litigation, consistent with awarding of costs in litigation of matters other than tax. In practice, the taxing or calculation or amount of costs to be recovered has the effect of resulting in a material portion of actual costs not being recovered by the successful party given the cost award. 

Are there any restrictions on or rules relating to third-party funding or insurance for the costs of a tax dispute, including bringing a tax claim to court?

There are no restrictions on third-party funding or insurance for the cost of a tax dispute, including litigation costs. There is an active market for the provision of tax dispute insurance. In cases where there is genuine uncertainty in the law and the ATO considers its resolution to be a priority, the ATO may designate the case to be ‘test case’ and make a contribution to the taxpayer's litigation costs. Many appeals by the ATO are conditioned on the ATO paying the costs regardless of the outcome. Test cases are not common.

Who is the decision maker in the court? Is a jury trial available to hear tax disputes?

The decision-maker in the first instance will generally be a single Justice in the relevant court or the single member or President in the relevant tribunal. Appeals in the Full Federal Court are generally heard by three Justices. However, on rare occasions the Full Federal Court will sit comprising five Justices. Appeals to a Supreme Courts of Appeal are also generally heard by three Justices. There is no automatic right to appeal decisions of the federal or state courts of appeal to the High Court. Applications for the granting of special leave to appeal to the High Court will be heard summarily by two or three High Court Justices, depending on the interest or complexity of the matter. In cases where special leave to appeal to the High Court is granted, the Court will frequently sit as the full court comprising five or all seven Justices. There are no jury trials in tax cases. 

What are the usual time frames for tax hearings?

There is no usual time frame for a tax trial as the trial would depend upon the complexity of the issues. At a minimum a case heard only once, which is not then subject to further appeal could potentially be finalised within a year; however, in complex cases involving multiple appeals the dispute could extend for several years. In some cases, the final outcome may not be obtained until more than 10 years after the year of assessment.

What are the requirements concerning disclosure or a duty to present information for trial?

Disclosure is essentially undertaken through the tax authority's audit or investigation process as well as the taxpayers' objection and other submissions.

What evidence is permitted in tax hearings?

Evidence in a tax trial is increasingly made by document but is also supported by oral evidence. Taxpayers can be required to testify, however where they are required by the tax authority they can only be asked leading questions and not be cross-examined. Experts will be permitted and often testify. Evidence may be translated if relevant but is rare.

Who can represent taxpayers in a tax trial? Who represents the tax authority?

Taxpayers are generally represented by tax counsel. Although taxpayers can represent themselves, this is rare as a taxpayer is at a significant disadvantage and also bears the risk of costs being awarded against them. A taxpayer’s inability to fund their legal representation acts as a practical obstacle to their ability to challenge an assessment in court. The tax authority may engage external tax counsel to represent them in court.

Are tax hearings public?

Tax trials are conducted in public and all judgments are published in the official court reporting services. Information on judgments is also disseminated through the tax professionals’ community through private reporting services such as Thomson Reuters. Interested members of the public also have the ability to obtain copies of documents presented to the court with the payment of an applicable fee.

Who has the burden of proof in tax hearings?

The burden of proof in a tax trial rests with the taxpayer.  

What is the case management process for a tax hearing?

The case management is undertaken by the Court or Tribunal Registrar or Justice or Tribunal member hearing the case, who will provide directions as to the timetable and conduct of the case. 

Can a court decision be appealed? If so, on what basis?

Court decisions can generally be appealed on questions of law rather than on questions of fact.  In practice, however, the distinction between questions of law and fact is often unclear and results in the appeal court giving substantial consideration to the facts. In federal cases, a case heard in first instance by a single Justice may be appealed to the Court of Appeal of three Justices. However, in rare cases where there are conflicting precedents, the Court of Appeal may sit as a full court of five Justices. Appeals can then be made to the High Court of Australia provided the High Court grants special leave to appeal.  

Update and trends

What are the current trends in enforcement of tax controversies? What are the current concerns of the authorities and taxpayers in relation to the enforcement and handling of tax controversies and are these likely to change? Are there proposals to change the relevant legislation or other rules?

A significant current issue in the enforcement of tax controversies is the use of legal professional privilege (LPP) by taxpayers to deny access to the Australian Taxation Office (ATO). The Commissioner is challenging in particular the claim by taxpayers that their interaction with large accounting firms is entirely protected by privilege on the basis that the advice has been led and supervised by legal practitioners within those multidisciplinary accounting firms. The ATO has issued a Draft Protocol (September 2021) dealing with LPP and has been consulting widely on it with the professions and other stakeholders.

* The information in this chapter is correct as at November 2021.

What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?

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