05 – Dealing with the ATO

You should assume your SOA will be read by the Australian Taxation Office (ATO).

A good rule of thumb is to never say or write anything you would not want the ATO to hear or read.

Play within the rules. Never encourage a client to do anything other than comply with both the strict letter and the clear intention of the tax law.

Your tax advice must pass the “sleep well at night” test. Smart clients do not want to be at the edge, the frontier of tax propriety. They want to be well within the rules. Smart clients know that sleepless nights are not worth it. If your clients are not sleeping well your tax advice needs to improve.

This is a simple rule, but you would be surprised how often advisers, particularly accountants ignore, or even encourage, client non-compliance with the tax law. Most aggressive tax schemes leap from the accountant’s pen. Be wary, and be conservative. Realize that when the chips are down clients will point their finger at you, and blame you, if at all possible. So play by the book and make sure you have nothing to hide should the ATO call.

Private binding rulings

If there are doubts about the tax implications of a proposed transaction or strategy ask the ATO for a private binding ruling (PBR)[1].

But take care if you lodge a PBR request on behalf of a client. Paradoxically, PBR requests can trigger tax audits. This is, of course, an illogical response from the ATO. Common sense says the person asking the ATO’s opinion on a proposed transaction or strategy is unlikely to be doing something wrong.

Its actually a very dumb response from the ATO.  It is an obvious disincentive for taxpayers and their advisers to cooperate with the ATO prospectively to achieve certainty and confidence in business and investment matters, and to avoid costly disputes before they arise. It costs the ATO revenue dollars.

EY Chartered Accountants have published an excellent newsletter on PBRs and similar ruling facilities and you can read it here: EY Newsletter 2013 on binding private rulings.

Tax audits, and why they can be very scary

Take even more care if your client is subject to a tax audit or similar ATO enquiry.

You should definitely refer the matter to an experienced tax solicitor.

Dealing with ATO auditors can be scary. The law is on their side. The burden of proof is tipped on its head, and you have to prove you didn’t, the ATO does not have to prove you did. The normal rules of evidence are upside down as well. And the tax officers know it.

Few financial planners have the skill and experience to deal with a situation like this. It’s in your client’s best interests to refer tax audits and similar exercises to a skilled and experienced tax solicitor.

As a practical tip, step number 1 in a tax audit is to lodge an FOI request so you can learn exactly where the ATO is coming from, and why. Step number 2 is to contact MLA Lawyers.

Tax audit insurance

You or your clients may have been offered “tax audit insurance” by an accountant.

The idea is simple enough: you pay an extra fee of say$500 a year in return for the accountant promising to handle any tax audit free of further charge. Its not a good deal. The reality is you have only a very low chance of being selected for an audit, particularly a full field audit rather than a minor enquiry such as a questionnaire on car costs. 

Accountants make small fortunes  convincing their clients the audit is nigh, and “tax audit insurance” is needed. They know its money for jam. That’s why they do it.

[1] You can read the ATO materials on PBRs and other rulings here: ATO Ruling Materials

The Dover Group