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The Australian Taxation Office (ATO) might identify any additional tax liabilities owed by you or your entities following a review or audit of you or your entities’ tax affairs. In that case, the ATO is likely to issue you with an amended assessment or an assessment imposing certain administrative penalties. In respect of these assessments, the ATO generally adopts a ‘pay now, fight later approach’. That is, notwithstanding any objections, that ATO may impose additional liabilities on you or your entities. Further, you will still be required to pay them within the timeframe set out in the respective assessments. The rationale behind this is that if you are successful at objecting to any of your tax liabilities, the ATO may simply refund such monies back to you with interest. This article will explain the ATO’s debt recovery powers and how you can challenge the process.

Amended Assessment

The ATO will issue you or your entities with an amended assessment on account of any changes to your tax liabilities from your original or earlier amended assessment for a particular tax period. Often, these assessments will set out the additional tax liabilities you owe to the ATO.  

Amended assessments are issued in respect of income tax liabilities. However, the ATO may also amend and assess you with any additional GST liabilities. They will do this based on any business activity statements you have lodged with the ATO. They usually present these through an adjustment of your running balance account.

Administrative Penalties

In addition to amended assessments, the ATO also has the power to impose administrative penalties on you or your entities. It may do so even if it finds that there were no additional tax liabilities to be assessed against you for a particular tax period. For example, the ATO may impose penalties where you:

  • have made a ‘false or misleading statement’;
  • fail to lodge a return or statement on time; or
  • fail to meet other tax obligations. 

The ATO may impose penalties against you on the following base penalty categories:

1. Failure to Take Reasonable Care

This applies where you have made a ‘false or misleading statement that a reasonable person in the same circumstances would not have made’, which shows that you have not genuinely attempted to comply with your tax obligations. The base penalty imposed under this category has the effect of increasing your additional tax liabilities by 25%. 

2. Recklessness

This applies where your conduct falls significantly below the standard of care expected from a reasonable person in the same circumstances. The base penalty imposed under this category has the effect of increasing your additional tax liabilities by 50%.

3. Intentional Disregard

This applies to circumstances where the ATO believes that your conduct demonstrates more than a reckless disregard of, or indifference to, your taxation obligations. The base penalty imposed under this category has the effect of increasing your additional tax liabilities by 75%.

In certain circumstances, the ATO may further increase the based penalty imposed on you by 20%.  This means that, depending on your circumstances, the ATO will have the power to increase your tax liabilities up to a maximum of 90% just on the basis of administrative penalties. 

Interests Charged

The ATO is also likely to charge interest on top of any tax liabilities they assess you with. In this regard, the ATO will typically charge two types of interest: 

  • general interest; and 
  • shortfall interest. 

General interest charges (GIC) is charged on tax liabilities that remain unpaid for the period from which it was due to the date it is paid. On the other hand, shortfall interest charge (SIC) is charged on any additional tax liabilities assessed against you or your entity following an amendment of an original or earlier amended assessment. 

The rationale behind these interest charges is to remove advantages from taxpayers who pay their tax liabilities late from those taxpayers who pay their tax liabilities on time.  

ATO’s Recovery  

Upon issuing you with the relevant assessments, the ATO may then recover any of your tax liabilities by various means if you have failed to pay your liabilities on the due date. For example, the ATO may:

  • issue a statutory demand against a company; or
  • commence debt recovery proceedings against you if you are an individual,

on account of such tax liabilities.  

Under the law, it would be an insolvency event if your company fails to comply with a statutory demand. This would then entitle the ATO to make an application to the court to wind up your company. Suppose you are an individual, and the ATO successfully prosecutes its debt against you. Then, the ATO may thereafter take steps to make you bankrupt if you fail to pay any judgment sum handed down against you.

Challenging the ATO’s Recovery Processes   

There is a very limited avenue for you to challenge the ATO’s tax recovery process outside of the ATO’s objection process. For example, you may attempt to challenge the ATO debt recovery process if: 

  • the ATO has clearly and expressly assessed income against you in two different financial years and the ATO is attempting to recover against you in respect of both of those years. For example, where there has been double counting involved on the ATO’s part;
  • where there is a deficiency in the statutory demand issued against your company. For example, where the claimed amount is not consistent with any amended assessments issued to you by the ATO); and
  • the facts of your circumstances show that the assessments issued to you or your entity are not valid on the basis of conscious maladministration. Generally speaking, conscious maladministration involves a deliberate abuse of the ATO’s powers. It occurs where there is a general absence of an honest attempt to perform its functions. There is a very high threshold to make out a claim for conscious maladministration in court. Consequently, here has been no successful taxpayer to make out this claim to date. 

Negotiating With the ATO

It may be open for you to engage in settlement negotiations with the ATO. This may allow you to settle your tax liabilities before or while you embark on the objection process. In this regard, the ATO generally requires a principled basis for any settlement it may reach with you in respect of the type of tax liabilities assessed, administrative penalties imposed, and interest charged on you or your entities. This may also involve structuring your tax liabilities consistent with the facts of your case that may reduce such liabilities.  

It may also be open for you to negotiate with the ATO to reduce the penalties imposed based on the particular circumstances of your case. For example, there may be various arguments for you to take to reduce your administrative base penalty from ‘intentional disregard’ down to ‘recklessness’.  

Safe Harbour Provisions

In some instances, where the ATO has imposed a base penalty against you on the basis of a ‘failure to take reasonable care’, it may be open for you to show that the safe harbour provisions apply in your circumstances.  Safe harbour provisions usually apply where the additional tax liabilities imposed by the ATO resulted from conduct by your accountant or registered tax agent. If these provisions apply, then the ATO should remit any penalties in full. 

Any interest charges may also be on the table when negotiating your tax liabilities. The ATO also has the discretion to partially or fully remit interest charges depending on your circumstances.  

Payment Plans

As part of your settlement negotiations, and to assist you with cash flow, it will be open for you to offer payment plans that you will be able to comply with. In those circumstances, the ATO may require security from you on account of your outstanding tax liabilities. Such security may be in the form of real property mortgages. 

Key Takeaways

The ATO has wide and discretionary debt recovery powers to recover tax liabilities against you. This is even if you wish to object to those tax liabilities. Following an audit, such liabilities would often consist of: 

  • tax shortfall amounts; 
  • administrative penalties; and
  • interest charges. 

There is a limited avenue for you to challenge these liabilities outside of the ATO’s objections process. Therefore, it is best if you attempt to negotiate with the ATO before it takes formal actions against you. If you need assistance with a debt recovery dispute or to come to a settled and negotiated outcome with the ATO regarding your tax liabilities, contact LegalVision’s tax and disputes lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is an amended assessment?

It is issued by the ATO on account of any changes to your tax liabilities from your original assessment or earlier amended assessment for a particular tax period. These assessments will often set out the additional tax liabilities you owe to the ATO.  

How can you challenge the ATO’s tax recovery process?

You can use the ATO’s objection process. Outside of that, there is a very limited avenue for you to challenge the ATO’s tax recovery process and often a high threshold to meet.

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