| ATO Tax Audits can be daunting for both clients and | | | | enable them to retrieve records efficiently during an |
| advisers. They can have serious implications. | | | | audit. The tax laws impose a positive obligation on |
| Consequently, you need to prepare. Regulatory | | | | taxpayers to maintain records that document and |
| Background The Commissioner of Taxation | | | | explain all transactions and other acts engaged by the |
| (Commissioner): • has the general administration of | | | | taxpayer that are relevant for the purposes of the |
| the taxing acts; and • is required to report to the | | | | taxation laws.6 Taxpayers should determine which |
| Commonwealth Treasurer on any breaches or | | | | documents are protected by "privilege", mark them as |
| evasions of the taxing acts of which he is aware.1 In | | | | privileged and arrange for them to be kept separate |
| 2005/2006, the ATO's compliance activities raised | | | | from "non-privileged" documents. This enables the |
| $6,244 million including tax, penalties and interest.2 The | | | | taxpayer to minimise the risk of privilege being |
| ATO's Compliance Activities ATO compliance | | | | inadvertently waived. Which documents are privileged? |
| activities include telephone calls, letters to taxpayers as | | | | Generally, if a taxpayer has a document that is |
| well as audits. During an audit, the ATO: • examines | | | | privileged, then it usually does not have to show that |
| the tax affairs and records of a taxpayer to ensure | | | | document to the ATO or to a court. The types of |
| that reported information is accurate and to confirm | | | | privilege available to a taxpayer include legal |
| the taxpayer's tax liability3; • may examine the tax | | | | professional privilege, accountants' privilege and |
| records of other persons which may shed light on the | | | | corporate board document privilege. Legal professional |
| taxpayer's tax position; and • may cross-check | | | | privilege Legal professional privilege protects: • |
| data against different sources (for example, interest | | | | confidential communications between a client and the |
| payment records forwarded by financial institutions) | | | | client's legal advisor for the dominant purpose of |
| may send ATO officers to visit the taxpayer's (or third | | | | obtaining or giving legal advice; and • confidential |
| party's) premises to examine records. Tax audits | | | | communications between a client, the client's legal |
| sometimes last months or even years. Risks to the | | | | advisor and third parties, for the dominant purpose of |
| Taxpayer A taxpayer involved in a tax audit faces the | | | | use in relation to pending litigation or contemplated |
| following risks: • the risk of discovery of breaches in | | | | litigation.7 A document is not protected by privilege if it |
| tax obligations and the imposition of penalties and | | | | is part of preparing for, or furthering, a crime or fraud.8- |
| interest; and • the risk of adverse affects on | | | | including a 'sham contrivance'.9 Accountants' privilege |
| business operations. Reducing the risks - Audit | | | | Although Legal professional privilege does not protect |
| Strategy All taxpayers need an appropriate audit | | | | communications between a client and their |
| strategy to minimise these risks. An audit strategy | | | | accountant10, the Commissioner has voluntarily |
| should cover actions for the taxpayer: • to take | | | | respected the confidentiality of some documents |
| before the ATO selects them for an audit; and • to | | | | prepared by external professional accountants.11 The |
| take during an audit. This article examines the pre-audit | | | | Commissioner distinguishes between 3 categories of |
| strategy. The March 2007 edition of ClearLaw will | | | | documents: • Source documents. The |
| examine the strategies for dealing with audits. | | | | Commissioner seeks access to source documents |
| Pre-Audit Strategy All taxpayers should conduct their | | | | which are papers: o prepared in connection with the |
| affairs in anticipation of an ATO audit. Accordingly, a | | | | conception, implementation and formal recording of a |
| taxpayer should: • take great care in entering | | | | transaction or arrangement; and o which explain the |
| transactions with taxation implications; and • assume | | | | setting, context and purpose of the transaction or |
| that the Commissioner will scrutinise the transaction. | | | | arrangement - for example accounting ledgers. • |
| The taxpayer's care needs to extend throughout | | | | Restricted source documents. The Commissioner |
| documenting, executing and recording the transaction. If | | | | usually respects the confidentiality of restricted source |
| possible, the taxpayer should obtain ATO rulings (both | | | | documents which include: o advice prepared by an |
| private and public) if a particular transaction is in doubt. | | | | external accountant solely for the purpose of advising |
| 1. Private and public rulings An ATO ruling binds the | | | | a client on matters associated with taxation, and o |
| Commissioner if the ruling applies to a taxpayer and | | | | created by, or contemporaneously with, a relevant |
| the taxpayer relies on the ruling and acts in | | | | transaction or arrangement. • Non-source |
| accordance with it. Significantly, a taxpayer's exposure | | | | documents. The Commissioner usually respects the |
| to administrative penalties is reduced if a ruling applies.4 | | | | confidentiality of restricted source documents which |
| Generally, there are two types of rulings - public rulings | | | | include advice papers provided after a transaction has |
| and private rulings. Public rulings - on how a provision | | | | been completed and included in a current audit file. |
| would apply The Commissioner's written public rulings | | | | However, the Commissioner will seek access to |
| are the Commissioner's opinion on how a relevant | | | | restricted source documents and non-source |
| provision applies or would apply. They: • bind the | | | | documents in exceptional circumstances and after an |
| Commissioner; • are useful to show whether a | | | | internal approval process has been complied with. |
| taxpayer's position is reasonably arguable5; and • | | | | Generally, for the Commissioner to seek access to |
| apply from the time they are published until they are | | | | these documents: • there must be reasonable |
| withdrawn (unless specified otherwise). A public ruling | | | | grounds to suspect fraud or evasion or other illegal |
| that is withdrawn will continue to apply to a taxpayer | | | | activity; • the source documents have not been |
| after its withdrawal if the taxpayer is involved in an | | | | provided or have been lost or destroyed; • neither |
| arrangement and that arrangement had already begun | | | | the taxpayer nor the taxpayer's records can be |
| to be carried out at the time of the withdrawal. Private | | | | located; or • some or all of the taxpayer's records |
| rulings - on a particular scheme The Commissioner's | | | | are located overseas. The accountants' privilege is |
| written private rulings are the Commissioner's opinion | | | | merely an administrative privilege with no legal basis. |
| on how a relevant provision applies or would apply to | | | | Accordingly, the Commissioner is not legally obliged to |
| a particular scheme. They also bind the Commissioner | | | | comply with the internal approval process. However, it |
| and they bind the relevant taxpayer. A taxpayer or | | | | is likely that a court would prevent the Commissioner |
| the taxpayer's agent may apply to the Commissioner | | | | from exercising his investigative powers unless there is |
| for a private ruling. The Commissioner may decline to | | | | an urgent basis to investigate - for example, if there |
| make a private ruling if: • the Commissioner | | | | are fears that the documents will be destroyed.12 |
| considers that making the ruling would prejudice or | | | | Corporate board document privilege Corporate board |
| unduly restrict the administration of a taxation law; or | | | | documents are documents created by advisors (either |
| • the matter sought to be ruled on is already being, | | | | a qualified in-house or independent advisor) for the sole |
| or has been, considered by the Commissioner; or • | | | | purpose of providing advice to the board of directors |
| the matter sought to be ruled on is how the | | | | on tax compliance risks. The Commissioner has stated |
| Commissioner would exercise a power under a | | | | that he will not seek access to corporate board |
| relevant provision and instead, the Commissioner's | | | | documents except in exceptional circumstances.13 As |
| decision is only as to whether to exercise the power; | | | | this is an administrative privilege and not legally binding |
| or • the Commissioner considers further information | | | | on the Commissioner, taxpayers should note that the |
| is required and it has not been provided in a | | | | issues in relation to non-compliance with the |
| reasonable time; or • the Commissioner considers | | | | accountants' guidelines also apply here. 3. Internal audit |
| that the private ruling's correctness would depend on | | | | rules Taxpayers should create internal rules for |
| assumptions about a future event or other matter. If | | | | handling documents and handling a tax audit. This |
| the Commissioner declines to make a private ruling, he | | | | ensures that taxpayers and their personnel are |
| must supply written reasons for that decision. A | | | | prepared for the audit process. Taxpayers and their |
| taxpayer can apply to have that decision reviewed | | | | staff should be familiar with the Taxpayer's Charter - It |
| under the Administrative Decisions (Judicial Review) | | | | sets out: • a taxpayers rights and obligations under |
| Act 1977 (Cth). 2. Document retention policy | | | | the law; and • the service and standards the |
| Taxpayers should implement an appropriate document | | | | taxpayer can expect from the ATO and its officers. |
| retention policy and administrative filing system to | | | | |