1. Client Risk Review

A client risk review in the Australian tax context involves a systematic assessment of a client’s tax arrangements to identify potential compliance risks and ensure correct tax treatment. Key elements include:

• Reviewing the client’s tax governance framework, significant transactions, and differences between accounting and tax results
• Assessing arrangements such as loan agreements, royalty agreements, payments to overseas entities, and independent contractor relationships for compliance with tax law
• Applying risk assessment frameworks, such as the ATO’s risk differentiation framework or the Justified Trust approach, to categorise the client’s risk level and determine the likelihood and consequences of non-compliance
• Using data matching, industry benchmarking, and third-party reporting to identify discrepancies or unusual patterns that may trigger further review or audit
• For cross-border financing and related-party arrangements, self-assessing transfer pricing risks and categorising arrangements into risk zones (e.g., white, green, blue, yellow, amber, red) to guide compliance activity
• Documenting findings and recommending actions to mitigate identified risks, such as amending agreements, improving documentation, or making voluntary disclosures to the ATO

A client risk review helps proactively manage tax compliance, reduce exposure to penalties, and prepare for potential ATO engagement or audit.

2. ATO information gathering process

ATO information gathering involves the collection of data and documents to verify tax compliance and investigate potential risks. The key elements include:

• The ATO may request information directly from taxpayers, their agents, or third parties, either informally or through formal notices under the tax law.
• Formal information gathering powers allow the ATO to require production of documents, provision of information, or attendance for examination. These powers are broad and can be exercised even if the information is held offshore or by third parties.
• The ATO can conduct interviews, site visits, and audits to gather facts and clarify issues.
• Data matching is used to compare taxpayer information with third-party sources, such as banks, government agencies, and employers, to identify discrepancies.
• The ATO may use industry benchmarking, risk profiling, and analytics to target reviews and audits.
• Information can be gathered through international cooperation under treaties, allowing the ATO to obtain data from foreign tax authorities.
• The ATO may also issue formal notices to financial institutions, employers, or other entities to obtain relevant records.

These methods enable the ATO to comprehensively assess taxpayer compliance and identify areas requiring further investigation or enforcement.

The ATO gathers a wide range of information during compliance reviews and audits, including:

• Financial records such as trial balances, supporting working papers, and detailed transaction records
• Written contracts and agreements used in business dealings
• Information about business operations, structure, ownership, and influences on the business
• Tax governance frameworks, significant and new transactions, and differences between accounting and tax results
• Records of meetings and interviews with key personnel, including summaries or recordings (with consent)
• Data from third parties, such as banks, employers, government agencies, and tax agents
• Information obtained through data matching, industry benchmarking, and risk profiling
• Details of claimed deductions, work-related expenses, rental property expenses, and capital losses
• Information about related-party transactions, cross-border arrangements, and transfer pricing
• Any other documents or information relevant to assessing tax risk or verifying compliance

The ATO may request this information informally or use its formal statutory powers if necessary. The scope and detail of information gathered depend on the complexity of the case and the specific risks identified

3. ATO audit Position Paper

An ATO audit position paper is a formal document provided to a taxpayer during the course of an audit, outlining the ATO’s preliminary views and findings regarding the taxpayer’s tax affairs. The key elements involved include:

• The position paper sets out the facts as understood by the ATO, the relevant law, and how the law applies to those facts.
• It details the issues identified during the audit, the ATO’s interpretation of those issues, and the basis for any proposed adjustments to the taxpayer’s tax position.
• The paper provides the taxpayer with an opportunity to respond, clarify facts, provide further evidence, or make submissions before the ATO finalises its audit findings.
• It may include references to supporting documentation, calculations, and legal provisions relied upon by the ATO.
• The taxpayer is usually given a specified period to reply to the position paper, after which the ATO will consider the response and issue a final audit decision.

This process ensures procedural fairness by allowing taxpayers to engage with the ATO’s findings and present their case before any formal assessment or adjustment is made.

4. Amended Assessments

An amended assessment in Australia involves the following steps:

– The Commissioner of Taxation may issue an amended assessment if new information comes to light, or if an error or omission is identified in the original assessment. This can occur as a result of an audit, review, objection, or voluntary disclosure by the taxpayer.

– The amended assessment replaces the original assessment for the relevant year or period, specifying the revised taxable income and tax payable.

– The Commissioner must serve a written notice of the amended assessment on the taxpayer, which details the changes made and the reasons for amendment.

– Time limits generally apply to the amendment process. For most taxpayers, the Commissioner can amend an assessment within two years (individuals and small businesses) or four years (other taxpayers) from the date of the original assessment, except in cases of fraud or evasion.

– Taxpayers have the right to object to an amended assessment if they disagree with the changes, following the same procedures as for an original assessment.

– Any additional tax payable as a result of the amendment must be paid by the due date specified in the notice. If the amendment results in a refund, the taxpayer will receive the refund, potentially with interest if applicable.

Amended assessments ensure that tax liabilities reflect the most accurate and up-to-date information available to the Commissioner.

5. Appeal or Litigation

Appeal and tax litigation in Australia involve several key steps:

– If a taxpayer is dissatisfied with the outcome of an objection to an assessment or decision, they may appeal to the Administrative Appeals Tribunal (AAT) or the Federal Court. The appeal must generally be lodged within 60 days of receiving the objection decision.

– The taxpayer must file an application or notice of appeal, stating the grounds for review and providing supporting documentation. The appeal is usually limited to the grounds raised in the original objection.

– The AAT or Federal Court reviews the case, considering evidence, legal arguments, and relevant law. The taxpayer bears the burden of proving the assessment is excessive or incorrect.

– The proceedings may involve written submissions, oral hearings, examination of witnesses, and presentation of expert evidence.

– The tribunal or court may affirm, vary, or set aside the Commissioner’s decision. If the decision is set aside, the Commissioner must amend the assessment accordingly.

– Further appeals may be available to higher courts, such as the Full Federal Court or the High Court, but only on questions of law and subject to strict time limits.

– Tax liability is generally not suspended during litigation, and the ATO may continue recovery action unless a deferral is granted.

Appeal and litigation provide taxpayers with independent review and judicial oversight of tax disputes, ensuring procedural fairness and correct application of tax law.

6. Settlement and Dispute Resolution

Settlement and dispute resolution in Australian tax disputes involve several key steps and considerations:

– Settlement is an agreement between the taxpayer and the ATO to resolve matters in dispute, where one or both parties make concessions on what they consider is the legally correct position

– Settlement negotiations can be initiated by either party and may occur at any stage of the dispute, including before assessments are raised, during reviews, audits, or even during litigation

– The ATO’s Code of Settlement (PS LA 2015/1) sets out the policy and procedures for settlements, including factors to consider such as:

+ The relative strength of each party’s position

+ The cost versus benefit of continuing the dispute

+ The impact on future compliance for the taxpayer and the broader community

– Settlement is generally not considered where:

+ There is a contentious point of law requiring clarification

+ It is in the public interest to litigate

+ The taxpayer’s behaviour warrants a strong message to the community

– Alternative dispute resolution (ADR) methods, such as mediation and conciliation, may be used to facilitate settlement. The ATO offers in-house facilitation for less complex disputes

– Settlements must be finalised by a written agreement, usually a deed of settlement, which sets out the terms agreed to by both parties. Model deeds are available from the ATO

– The settlement agreement typically requires the taxpayer to withdraw objections or appeals related to the settled issues and may limit future objections on those matters. The agreement may also specify how similar issues will be treated in future years, subject to changes in law or material facts

– The ATO has a Widely based Settlement Panel to advise on settlements involving multiple taxpayers in similar arrangements, ensuring consistency and transparency

Settlement and dispute resolution provide a flexible, efficient alternative to litigation, aiming to resolve disputes early and cooperatively while balancing the interests of the taxpayer, the ATO, and the broader community.