Tax disputes - is the Administrative Appeals Tribunal an option?

By Brett Young CA

In a previous Charter article, I explained what tax disputes are and provided a discussion of how and when tax disputes commonly occur in the Australian economy.

In this piece, I will discuss some of the important issues that arise when a taxpayer seeks review of the Taxation Objection Decision by the ATO in the Administrative Appeals Tribunal (AAT).

By way of background, and in general terms, if a taxpayer disagrees with the ATO’s decision to issue a Notice of Amended Assessment, a Notice of Assessment of Net Amount, or any Notices of Penalty (the Assessments), a taxpayer will lodge an Objection to the Assessments (for example, refer Taxation Ruling TR 2011/5 Income tax: Objection against tax assessments).

On receipt of an adverse Taxation Objection Decision issued by the ATO, a taxpayer will have a choice of seeking review of the ATO’s Taxation Objection Decision in either the federal court or the AAT.

The choice of location to conduct a tax dispute in either the federal court or the AAT is an important choice, as different strategies may be used in both forums and each location may have advantages and disadvantages depending on the circumstances of each particular case. Where the tax dispute involves a smaller quantum of tax in dispute and the issues are less complex, the AAT may be an appropriate location to conduct the dispute. However, and importantly, the AAT does not have jurisdiction to hear all types of tax disputes (see examples outlined in my Charter article from November 2011).

For the remainder of this article, I will discuss what some of the important issues are when a taxpayer seeks review of the ATO’s Taxation Objection decision in the AAT.

Filing an application in the AAT

To seek review of the adverse Taxation Objection Decision in the AAT, the taxpayer must:

  1. File Form 1 (a copy of Form 1 can be downloaded from aat.gov.au)
  2. File a copy of the adverse Taxation Objection Decision (the Application)
  3. Pay an AAT filing fee (currently $777).

In general terms, the time limit for lodging an Application is 60 days from the date of the ATO’s Taxation Objection Decision. Circumstances of any delay should be explained in writing when filing an application in the AAT (refer Brown v Federal Commissioner of Taxation 99 ATC 4516). Examples of tax disputes commonly before the AAT include the following tax technical matters. Practise and procedure in the AAT After filing the Application, the ATO must lodge with the AAT certain documents, known as the T-Documents, and provide a copy of the T-Documents to the taxpayer (refer section 37 of the Administrative Appeals Tribunal Act 1975 (Cwlth) (AAT 1975)).

The T-Documents are the material documents relevant to the review of the ATO’s Taxation Objection Decision.

The practise and procedures in the AAT are generally governed by a series of AAT directions hearings, whereby the AAT will order parties to perform certain actions, such as the filing of a Statement of Facts Issues and Contentions or the filing of evidence.

Strict compliance of the orders of the AAT must be a priority for any taxpayer.

At the first AAT directions hearing (usually held six-10 weeks after an Application has been lodged with the AAT), a brief Statement of Issues (which may be one page) is lodged with the AAT at least one working day prior to the first conference.

Statement of facts, issues and contentions

Sometime after the first directions hearing, the AAT will require the taxpayer to prepare and lodge with the AAT, a Statement of Facts, Issues and Contentions (SFIC), being a summary of:

  • Facts – What are the factual matters that form the tax dispute, including the material factual matters, that arise? For example, what are the contractual relationships between the parties that the taxpayer relies on in order to claim an income tax deduction?
  • Issues – What are the issues that form the tax dispute, including the material issues that arise? For example, what is the meaning of ‘liabilities’ for the purposes of section 152- 20 of Income Tax Assessment Act 1997 (Cwlth) (ITAA 1997) and the operation of the small business CGT concessions (refer Commissioner of Taxation v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127)?
  • Contentions – What are the parties’ contentions that form the tax dispute, including the material contentions that arise? The taxpayer submits that the expenditure is deductible pursuant to section 8-1 of ITAA 1997.

At first instance, the taxpayer will file a SFIC at the AAT and serve a copy of the SFIC on the ATO. Thereafter, the ATO will respond and file a SFIC at the AAT and serve a copy of the SFIC on the taxpayer.

Witness statements

Once both parties have exchanged SFICs, the taxpayer will prepare and file evidence in the AAT.

The taxpayer’s evidence will include witness statements of the material witnesses that relate to the key events in the dispute. Important contractual and other documentary evidence should also be filed with such witness statements.

Depending on the case, a taxpayer may also require the AAT to issue summons to third parties to produce documents or attend as witness to give evidence at any hearing. The AAT is not bound by the rules of evidence, however, in the federal court, the court is bound by the rules of evidence. Ultimately, the above evidentiary considerations form part of the overall litigation strategy adopted by the taxpayer and the taxpayer’s advisors.

It is common for the ATO to not file any evidence, especially in light of the operation of section 14ZZK of Taxation Administration Act 1953 (Cwlth) (TAA 1953), which imposes on the taxpayer the evidentiary burden to prove the taxpayer’s case.

Hearings

Thereafter, the matter will be set down for a formal hearing by the AAT. The hearing is the opportunity whereby:

  • The taxpayer presents the abovenamed evidence to a new decision-maker, being a tribunal member of the AAT
  • The tribunal member of the AAT will hear the evidence of the tax dispute, being the oral evidence of the key witnesses, including the evidence of the taxpayer.

During the conduct of the AAT hearing, any evidence will also be tested by crossexamination by the ATO’s solicitor or barrister. In general terms, cross examination is used to ‘test’ the validity and quality of the evidence before the AAT.

At any time prior to a hearing, a tax dispute may settle or be discontinued, and therefore not proceed to a hearing. Many tax disputes settle between the ATO and a taxpayer. Furthermore, Alternative Dispute Resolution and other informal measures may also be used by parties to tax disputes. Effective use of such procedures may also result in the practical settlements of tax disputes.

Taxpayer bears onus of proof

Most importantly, in the AAT, the taxpayer has the onus of proving that the Assessments are excessive (refer s14ZZK of TAA 1953).

The onus of proof is determined based on the balance of probabilities. In general terms, the balance of probabilities requires the AAT to be ‘reasonably satisfied’ of the existence of a fact in dispute.

For example, where an oral agreement existed in relation to the acquisition of services by a taxpayer, the taxpayer will be required to provide evidence of the conversations that occurred between the parties to the legal agreement and the terms of an oral agreement in relation to the existence of a contract and the precise terms of such a contract (for example, refer to a recent decision and the evidence in Badaoui and Konig and Commissioner of Taxation [2011] AATA 672).

Legal costs

The decision as to whether a taxpayer files an Application in the AAT also requires consideration of the legal costs to be incurred by the taxpayer in the tax dispute.

The AAT has no power to award a party to pay another party’s legal costs in a taxation matter.

If a taxpayer is unsuccessful in seeking a review of a Taxation Objection Decision, then the AAT cannot order the taxpayer to pay the ATO legal costs of the conduct of the AAT proceedings.

Conversely, if the taxpayer is successful, the taxpayer cannot obtain a cost order that the ATO must pay the taxpayer’s legal costs of the conduct of the AAT proceedings. In my respectful view, a successful taxpayer should be able to recover legal costs from the ATO in relation to tax disputes in the AAT. Such a reform would require amendment of the AAT Act 1975.

What are the prospects of success?

Prior to filing an Application in the AAT (or the federal court), it is of significant importance that the taxpayer receives independent legal advice in relation to the question, “what is the taxpayer’s prospects of success?”

In my opinion, at least two questions should be considered at this stage and in relation to the taxpayer’s prospect of success, being:

  1. What are the prospects of success based on the evidence the taxpayer intends to file in the AAT; and/or
  2. What are the prospects of success based on any technical legal argument that the taxpayer intends to argue in the AAT (for example, and per the above, what is the meaning of “liabilities” for the purposes of section 152-20 of ITAA 1997 and the operation of the small business CGT concessions (refer Commissioner of Taxation v Byrne Hotels Qld Pty Ltd [2011] FCAFC 127).

In summary, if a taxpayer is organised, and has obtained the necessary evidence to discharge the evidentiary burden imposed on the taxpayer to prove the taxpayer’s case, a taxpayer can obtain a favorable decision by the AAT in relation to a tax dispute.

Brett Young is a barrister at Fifth Floor Selborne Chambers brettyoung@selbornechambers.com.au

Article last updated 7 February 2012