By Adam Tims, Partner, Martin O’Connor & Partners

Inside Racing – December 2006

ATO audits – what should I do? (Continued)

Following on from last month’s article, we continue our discussion regarding the ATO audit process. Hopefully your “case” is resolved by now due to a favourable ATO decision. However, if you receive an unfavourable decision, that is, your horse activities are viewed as a “hobby”, well there could be a lengthy fight ahead for you.

The ATO decision is “reviewable” which means the taxpayer has a right to object and appeal if necessary. The ramifications of an unfavourable ATO decision can be horrendous. If deemed a “hobbyist”, the ATO can in effect reverse your prior claims for both GST and income tax for up to four years (or earlier if there had not been an original assessment). To rub salt into the wound, if you did have successful sales of horses during the relevant period at a profit, you may also face capital gains tax. Once you’ve finally picked yourself up off the floor be prepared to also calculate interest on the adjustment amount. For some horse industry participants, the opportunity to submit a formal objection to the ATO decision is a no brainer due to the massive size of the adjustment amount.

Stage 5 – Formal objection
A taxpayer who is dissatisfied with an assessment should lodge an objection with the Commissioner of Taxation within the prescribed timeframe (usually the later of 4 years from the original notice of assessment or 60 days from the service of the amended assessment). It is very important that a formal notice of objection is ultimately drafted and settled by a lawyer. The objection must be in writing in the form approved by the tax Commissioner, must contain the required information, and must contain a declaration signed by the taxpayer verifying the information in the objection. On appeal to the Administrative Appeals Tribunal or the Federal Court, the taxpayer is limited to the grounds stated in the objection. Therefore it is stressed that it is vitally necessary for a taxpayer to state the grounds of objection in as much detail as possible.

The ATO have 60 days to respond to a formal objection. It should be noted, however, that liability to pay GST and/or income tax under an assessment is not suspended because of the lodgement by a taxpayer of a formal objection and thus cannot be used as a means of delaying the payment of tax. It would be advisable to engage in dialogue with the ATO regarding the outstanding amount with the view to possibly arriving at an agreement to pay 50% until the resolution of your matter.

Stage 6 – Administrative Appeals Tribunal or Federal Court
If a formal objection is unsuccessful, the taxpayer can challenge the ATO’s decision by appealing directly to the Administrative Appeals Tribunal or Federal Court for review of the decision. Such a decision should only be taken after consultation with your legal representatives, due to the number of factors which have to be considered prior to making such an important decision. Obviously the potential cost involved needs to be compared with a possible successful outcome. As mentioned earlier, it is important to note that such a challenge is restricted to the grounds stated in the original objection to the ATO.

Finally, under the Tax Act, a taxpayer who has paid the tax in dispute and who is successful in their objection against the assessment is entitled to be paid interest.

Summary
The ATO audit process can be a lengthy and frustrating time for all involved. To mitigate against the prospect of an unfavourable decision and a costly and time consuming process, you should approach the initial “questionnaire” with some respect by giving it your full attention. It would be advisable at the earlier stage to engage professionals and to promote dialogue with the ATO on a regular and accurate basis. An “us and them” approach is often counter productive.

As always we strongly recommend that you discuss this matter with your accountant and/or tax advisor as the circumstances and end tax result may differ on a case- by –case basis. This article is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific professional advice. No responsibility for loss occasioned to any person acting on or refraining from action as a result of this article can be accepted.