Tax problems can arise in many ways.
Given the gigantic number of obligations imposed by the tax laws, and the broad range of tax types and circumstances, there is significant potential for any taxpayer to experience a problem at some time.
Amongst the most common tax difficulties are:
- unpaid tax
- incorrect tax return
- tax office investigations
- failure to lodge tax returns on time
- uncertainty about an upcoming transaction
How bad can it get?
Problems with the taxation system range from the relatively minor, such as a small oversight or error in your tax return, which can usually be sorted out by a letter or simple tax return amendment with minor penalties applying and minimised through voluntary disclosure, to the very serious.
Potentially catastrophic tax issues can arise, sometimes inadvertently, when for example a capital gains transaction is treated incorrectly through the wrong calculation, or showing it in the wrong tax year, or incorrectly assuming an exemption. Such errors can easily involve millions, and with tax penalties potentially being more than the tax, bankruptcy is easily a possibility.
Actually it could be worse! Although the income tax system is all about tax and money, it is supported by an extensive regime of criminal sanctions for serious offences. So the potential “problem” doesn’t end with bankruptcy, it could be gaol-time as well.
Not only the past and the present – it’s the future as well
Another kind of tax problem arises due to the complexity of the tax laws, when a taxpayer is required to anticipate how the law should be applied to a transaction which hasn’t yet occurred.
In order to help deal with this kind of problem, there is a private rulings system which enables taxpayers to lay the detail and circumstances of a proposed transaction before the tax office to get their opinion of the proper tax treatment.
Private rulings can be obtained by all taxpayers, not just for businesses or the very complex. Unfortunately the answer from the Tax Office isn’t always what the taxpayer wants to hear – which leads to a further problem! The Tax Office always provide with tight language which narrows the scope of their opinion to the precise description of the transaction supplied to them.
If there is any material variation (which can also be a matter of opinion) in the actual transaction when it occurs the Tax Office won’t be bound by the terms of their opinion.
If an unwelcome tax opinion is received from the Tax Office, the taxpayer can
- change the way the transaction is undertaken to avoid any potentially adverse tax consequences, and taking care to dodge the tax rules which make tax avoidance potentially a criminal offense, or
- proceed with the transaction unchanged, in the knowledge that there will be a fight with the Tax Office later on
Proceeding in the face of an adverse Tax Office ruling should only be done on expert advice, because of the potential fines and penalties which can arise, not to mention the potentially substantial costs of contesting an adverse tax assessment down the track.
It’s all your fault (even when it’s not)
It is a basic principle of the Australian Tax Laws that the onus of proof is on the taxpayer. This means that in general terms the Tax Office is not obliged to accept any fact as being true, unless the taxpayer has provided “sufficient” evidence. It’s sort of like being guilty until you’ve proven your innocence.
Further, the Tax Office is not required to check any information you give them, unless they want to. Anything you tell them which is not correct, is automatically and entirely your fault.
When the Tax Office do check up by asking for information (e.g. in an audit), they nearly always “win” by amending the assessments of a taxpayer whose records don’t provide enough proof or evidence. Sometimes this applies to transactions which occurred many years ago. There are some time limitations, but those rules are also quite complex.
This means that in practice is that taxpayers are deemed (forced!) to accept responsibility for some extraordinarily complicated taxation laws and their consequences – way beyond a lay-person’s level of understanding.
When to get help for a tax issue
Finding your way through the rights, responsibilities and potential penalties in such a complex system once problems arise is definitely not easy, and not for the faint-hearted.
There are tax advisers who have seen and often solved just about every kind of problem in their daily practice. An experienced advisor will know how to reduce penalties and negotiate the short-cuts and is worth the investment.
This page was last modified on 28 July 2015