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Tax Guide: Clients' Rights and Obligations in Australia

As a client of a firm, the Tax Agent Services Act 2009 mandates that you are advised of your rights and obligations under the taxation laws in relation to the services provided to you. These will vary according to the particular taxation services which you require from time to time.

Tax advisers must ensure that you are provided with this advice in a timely and professional manner as issues arise.

Set out below is a brief explanation of some matters of general relevance concerning the operation of Australian federal taxation legislation. If you have any queries, concerns, or issues with any of the matters discussed below please feel free to contact us.

The self-assessment system

The Australian tax system operates as a self-assessment system. This means that when your tax return or BAS is lodged the ATO accepts the information in the return at face value and issues you with an assessment notice based on that information. It is important to understand that this does not mean the assessment is final as the ATO can conduct a review or audit of the information provided in the return at a later time, subject to the time limits discussed in the topic below.

The Commissioner’s power to amend an assessment

The ATO accepts the information lodged in your return at face value. However, the ATO also has the power to undertake an audit and amend the assessment if they find it to be incorrect. The following rules generally apply:

Individuals

  • For most individuals, the ATO can amend an assessment within 2 years after you receive your notice of assessment. If the individual carries on a business and is not a Small Business Entity, that period extends to 4 years. (A Small Business Entity is an entity that carries on a business and has an aggregated turnover of less than $10 million).

  • If the individual is a partner in a partnership or a beneficiary of a trust, the period is 2 years. If the partnership or trust carries on business and is not a Small Business Entity, the period extends to 4 years

Companies

  • The ATO can amend a company assessment within 2 years after the company receives a notice of assessment where the company is a Small Business Entity. The same period applies where the company is a partner in a partnership or beneficiary of a trust that is a Small Business Entity.

  • In any other case, the period is 4 years.

Trusts

  • The ATO can amend an assessment within 2 years after the trustee receives the notice of assessment if the trust is a Small Business Entity.

  • If the trustee is a partner in a partnership or a beneficiary of a trust that is not a Small Business Entity, that period extends to 4 years.

  • In any other case, the period is 4 years.


If the ATO amends an assessment this will potentially involve, apart from increased taxes, penalties, and interest. If you discover an error in the information declared in the return, lower penalties generally apply for making a voluntary disclosure.

Note:

There are no time limits on the ATO amending an assessment where they believe there has been fraud or evasion. The Commissioner tends to take a broad view of what constitutes “evasion”.


ATO obligations

Obligation to keep records

The tax laws specifically require taxpayers to keep records that properly explain the transaction they have entered into.

Individuals

Individuals claiming deductions for work-related expenses are subject to the Substantiation rules in the tax laws. This requires taxpayers to keep receipts, invoices, and documentary evidence of the expenses they incur. Where the expenses relate to a taxpayer travelling interstate or overseas, a travel diary may also need to be kept. Where the expense relates to a motor vehicle, a record of the journeys taken, such as a log book may need to be kept. A failure to keep the appropriate records can lead to the ATO denying a particular deduction which may involve the imposition of penalties and interest. Substantiation records must be retained for 5 years after the tax return for the relevant year was lodged.

Businesses

The tax laws specifically require a taxpayer who carries on business to keep records that record and explain all the transactions they have entered into. This includes all the documents that explain how the income and expenditure of the taxpayer was determined. Where the tax laws allow or require a taxpayer to make a choice, election, estimate, or calculation documents containing particulars of these matters must be kept. All these records must be retained for a period of 5 years after your tax return is lodged. There are penalties for taxpayers who fail to do so.

Capital gains tax


where an asset has been sold during the year, you must retain the details of the asset's acquisition including its cost base, and any additions to the asset for a period of 5 years after lodgement of the income tax return for the year of sale.

Obligation to provide complete and accurate records

In order for our firm to be able to lodge returns on your behalf, it is your responsibility to provide the tax agent with complete and accurate records. Further, in order to lodge your return on time we will require you to provide the relevant information as and when requested.

Where you are unable to provide the tax agent with complete and accurate records, we may be unable to prepare and lodge your return. Under the Tax Agents Services Act 2009, tax agents are subject to a Professional Code of Conduct which prevents them from acting for a client where insufficient records or information exists so as to be able to determine the amount of the client’s income or deductions.


The ‘safe harbour’ rule

Under the Tax Agent Services Act 2009, taxpayers utilising the services of a registered tax agent will be given a ‘safe harbour’ (or exemption) from penalties even if:

  • Their tax return is later discovered to have contained an error; or

  • Their tax return is lodged late.

The ‘safe harbour’ can only apply for returns lodged on or after 1 March 2010. The key to benefitting from the ‘safe harbour’, should the need arise, is for you to ensure that you provide the tax agent with all of the relevant tax information in your possession. This includes any records or documents we request from you plus any other information you think may be relevant to the preparation of your tax return. The information provided must be complete and accurate.

It is equally important that you provide the tax agent with this information by the time it is requested so as to allow the lodgement of the return by its due date. The safe harbour from late lodgment penalties can also apply where a BAS, IAS, or FBT return is lodged late.

Whilst the safe harbour can apply to exempt the penalty for an error made in a tax return, it is important to note that any understated tax and interest will still be payable by you. Even if you are not eligible for the safe harbour, it is still possible to request the ATO to remit or reduce any penalty and for that decision to be reviewed by the Administrative Appeals Tribunal if you are unsuccessful.

Right to seek a Private Binding Ruling

When preparing your return we may identify one or more issues that are not clear under the tax laws. Where we have pointed out such issues to you, you have a right to request a Private Binding Ruling from the ATO. Upon providing the ATO with all the relevant facts, they will provide you with a ruling setting out their view on the proper tax treatment of the issue requested to be ruled upon. A Private Binding Ruling is binding on the ATO and can be relied on by you.

Lodging a tax return where the tax liability is uncertain

Taking a taxation position on which the law is uncertain without obtaining a Private Binding Ruling may result in you lodging a tax return disclosing a tax liability with which the ATO may later disagree.

If the ATO considers that there has been an underpayment of tax it will issue an amended assessment for the tax shortfall, plus penalties plus a combination of Shortfall Interest Charge (SIC) and General Interest Charge (GIC). These interest rates are generally substantially higher than ordinary bank borrowing rates.

Penalties vary as a percentage of the additional tax assessed, depending on the nature of the disclosure. The rates can vary from 25% to 75%. Where “safe harbour” applies, penalties will not be payable.

SIC and GIC are effectively annual interest amounts charged on the tax shortfall, calculated back to the time the original tax assessment became payable.

Objecting to an assessment

If the ATO issues you with an assessment that you do not agree with, you have the right to lodge an objection to that assessment. The objection must be lodged with the ATO within either 2 or 4 years. As to which period applies, this is determined in the same way as the discussion above under the heading ‘Commissioner’s ability to amend an assessment’. Where the ATO issues an amended assessment, the period for objecting is the greater of:

  • 60 days from the time the amended assessment is received; or

  • 2 or 4 years (whichever is applicable) from the time the original assessment was received.

If you remain dissatisfied with the outcome of the objection, you have the right to have the matter reviewed by the Administrative Appeals Tribunal or to appeal the matter to the Federal Court.

Payment of disputed tax

Once a tax is assessed, it becomes a debt due and immediately collectable by the ATO. This remains the case even if the assessment is disputed.

If there is a genuine dispute, the ATO will usually not seek collection of the entire amount owing. It is common for the ATO to allow 50% of the primary tax to be paid and for the balance to remain outstanding while the matter is disputed before the Administrative Appeals Tribunal or the Court. In other circumstances, the entire amount assessed is allowed to remain outstanding (but attracting GIC) while the review or appeal process is resolved.

Onus of proof

In any dispute with the ATO, the onus of proving that an assessment is incorrect lies with the taxpayer. If the taxpayer cannot suitably demonstrate that the ATO is incorrect in its assessment raised, the assessment stands. This is the case even if the ATO raised a default assessment of a suspected amount that is based on approximated assumptions.


The ATO do not have the obligation to prove their assessment is correct, the onus is on the taxpayer to prove the ATO otherwise.


DISCLAIMER: The contents of this publication are general in nature and we accept no responsibility for persons acting on information contained herein. This publication does not constitute specific advice and readers are encouraged to consult their tax advisor on matters contained herein.

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