It can be a tricky problem when the Tax Office forms an opinion that tax fraud or evasion has taken place.
Not only are tax assessments not limited to the normal 2 or 4-year amendment time span, but the Tax Office can legally raise an assessment (plus penalties and interest, possibly amounting to more than the primary tax) based on a mere guesstimate of taxable income and demand payment.
There is a common misconception among taxpayers, that the Tax Office has to have (or even provide) evidence to support its claims of tax payable. Unfortunately the common-sense intuitive view that the Tax Office has to fully justify its actions can lead to poorly-prepared submissions which are intended to refute tax claims.
Taxpayers in such circumstances – for example, with unexplained bank deposits or signs of wealth, are at a significant procedural disadvantage.
From Cooper Grace Ward comes this timely article with general advice and a brief look at leading cases for guidance in this area.
Perhaps the most important overriding advice is to treat the first response to the Tax Office seriously, as experience has shown that follow-up information tends to be viewed more sceptically:
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.
The challenge in unexplained income cases for the taxpayer is not simply to show that there is insufficient evidence for a tax assessment. The Commissioner’s opinion is basically all that is required to support an assessment, and there limited legal bases on which to displace it.
Provided the Commissioner has formed the requisite opinion, in an income case, the effect of the Binneter decision, and those on which it is based, may well be to make a fraud or evasion finding unchallengeable independently of the challenge to the assessability of the relevant amount. If that is so that is not a matter that the Tribunal can alter…
In matters of tax evasion, the tests for the existence of evasion are somewhat more complex, and (perhaps for that reason) there can be a little more wiggle-room for the innocent taxpayer. There is a disparity between what the Tax Office may see sufficient evidence of “evasion”, and the High Court’s guidance:
‘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.
The High Court’s reasoning is referenced from Denver Chemical Manufacturing Co. v Commissioner of Taxation (NSW)  ACA 25.
Clearly this is not an area for the faint-hearted. The weight of authority is deliberately biased in favour of the Tax Commissioner, and common-sense opinions have a lowly status. Although the Tax Office has well-publicised channels of dispute resolution, if significant amounts of tax and/or penalties are at stake, professional legal representation would be highly recommended.
For the full article from Cooper Grace and Ward see The ATO has formed an opinion of ‘fraud’ or ‘evasion’ – how should you respond?