A small step forward – the ATO’s new practice statement on fraud or evasion

Introduction

On 17 May 2018, the Commissioner issued an updated version of Practice Statement Law Administration PS LA 2008/6 ‘Fraud or Evasion’ (2018 Statement). The practice statement was previously updated in 2012 (2012 Statement).

The practice statement provides guidance to ATO staff on matters relating to a finding that a taxpayer has engaged in fraud or evasion. Where a finding of fraud or evasion is made, the period for review of a taxpayer’s income tax assessments (usually two or four years) can be extended.

The changes made in the 2018 Statement, in part, reflect the recommendations contained in a 2015 report of the House of Representatives Standing Committee on Tax and Revenue (Committee) on Tax Disputes.1 The changes also come in the context of comments made by Inspector-General of Taxation Ali Noroozi, who in early 2017 was reported as saying that the Commissioner’s policies around fraud and evasion were ‘not sufficiently robust and may lead to unfair outcomes’.2

The 2018 Statement demonstrates a move towards more thorough processes and policies around findings of fraud and evasion. However, despite the changes, taxpayers may still face significant difficulty discharging the burden of proof and defending allegations of fraud or evasion.

Key differences between 2012 and 2018 statements

The table below summarises the key differences between the 2012 Statement and the 2018 Statement.

 

Item 2012 Statement 2018 Statement
1 Restricts a finding of fraud to EL2 officers. Restricts a finding of fraud to SES or EL2 officers.
2 Gives officers the option to refer fraud or evasion matters to ‘Law and Practice’ business line. Requires officers to refer fraud or evasion matters to the National Fraud or Evasion Advisory Panel.
3 Summarises key cases. Incorporates, by reference, the new ‘fraud or evasion guideline (period of review)’ (Guideline). The Guideline, among other things, includes key case summaries and practical examples of fraud and evasion.
4

Makes reference to:

the Tax Evasion Reporting Centre;

aggressive tax planning and promoter penalty laws;

‘Law and Practice’ business line (see item 2 above);

The Taxation Authorisation Guidelines.

Provides that an ATO officer must notify the Tax Crime area in the Public Groups and High Wealth Individuals (PGH) business line where they have formed an opinion of fraud.

 

References Aggressive Tax Planning (ATP) and provides that ATO officers should refer arrangements with an ATP nature to the ATP area in the PGH business line.

 

5 N/A Establishes a new set of four principles underpinning the Commissioner’s approach to fraud and evasion.

 

The four principles

The 2018 Statement introduces four principles governing the conduct of ATO officers where they suspect fraud or evasion.

First, the Commissioner will consider fraud or evasion as soon as practicable in the audit process. This principle reflects a recommendation of the Committee3 and aims to ensure that assessments being conducted into income years outside the statutory periods of review do not continue without reason.

Second, the Commissioner will distinguish between general enquiries into taxpayers’ affairs and enquiries that relate to allegations of fraud or evasion. Where the Commissioner considers that fraud or evasion may apply, the Commissioner will ensure that the taxpayer is given an opportunity to respond before an opinion is formed.

These two principles are a welcome addition to the 2018 Statement. It is often the case that the ATO will conduct lengthy and costly audits into a taxpayers affairs outside of the period of review without a timely consideration of whether the taxpayer has engaged in fraud or evasion. That is, the ATO’s current modus operandi appears to be to conduct full audits for any period it deems appropriate (even if outside the period of review), and then to subsequently consider fraud or evasion.

Third, the Commissioner has put a process in place to ensure that findings of fraud are only made where evidence of fraud exists. The nature of the process is not clear, although this principle is consistent with a recommendation of the Committee.4

This principle may reflect the Committee’s concern about the bundling of allegations.5 That is allegations of ‘fraud and evasion’ where the evidence only supports a finding of evasion. The Guideline makes it clear that officers should consider the possibility of each finding separately.

Fourth, a finding of fraud or evasion can now only be made by an Executive Level 2 (EL2) or a Senior Executive Services (SES) officer. The Committee recommended that the power to find fraud or evasion be limited to SES officers only.

Incorporation Guidelines

The 2018 Statement incorporates, by reference, the ‘fraud or evasion guideline (period of review)’ (Guideline). The Guideline expands on the policy and procedure governing a finding of fraud or evasion outlined in the 2018 Statement. It also provides examples of fraud and evasion, outlines the process for recording an opinion of fraud or evasion, and summarises the leading case law around fraud and evasion.

The Guideline makes it clear that a separate opinion of fraud or evasion must be formed for each tax period that the ATO officer proposes to reassess.6

The incorporation of the Guidelines, by reference, into the 2018 Statement is welcomed as it provides taxpayers and practitioners with a more detailed summary of the law, and how the ATO will apply it.

New referral body

The 2018 Statement requires referrals to be made to the new National Fraud or Evasion Advisory Panel (Panel) before an ATO officer recommends, or forms an opinion, that there has been fraud or evasion in a particular case.

The Panel will be comprised of at least three ATO staff at the EL2 level or above, and at least one member must be from the Tax Counsel Network. The Guideline requires that the Panel should be approached for advice, at a minimum:

  • after an ATO officers has made sufficient enquiries and gathered relevant information and evidence such that an opinion-maker could form a preliminary view on fraud or evasion or
  • before forming an opinion of fraud or evasion or issuing the ATO’s statement of audit position, reasons for decision or objection decision to the taxpayer in which the finding of fraud or evasion is communicated, as the case may require.

The Panel is a positive introduction to the process by which the ATO, and ultimately the Commissioner, forms an opinion of fraud or evasion. While the hope is that the Panel will add a degree of consistency and oversight to this process, given that it acts only in an advisory capacity the results will remain to be seen.

Record keeping requirements and the onus of proof

Despite the changes outlined above, one of the most serious source of unfairness, related to the taxpayer’s onus of proof, remains.

The general record keeping provisions require taxpayers to retain records that explain their transactions for five years. Taxpayers with simple tax affairs are required to keep their records for two years. A finding of evasion or fraud allows the Commissioner to amend any assessment, including one issued outside the relevant record keeping time period.

Where a finding of fraud or evasion is made, the taxpayer bears the onus of proof in challenging the formation of the Commissioner’s opinion. A taxpayer accused of having engaged in fraud or evasion during an income year falling outside the years for record keeping requirements may have disposed of their records for that year. However, a lack of records may make it difficult for them to discharge their onus; particularly given the ATO’s penchant of expecting perfect record keeping practices from taxpayers. In some circumstances, it is possible that an allegation of evasion may be proven by mere lack of information.

This is compounded by the fact that a finding or fraud or evasion is almost certain to be coupled with the imposition of penalties at a rate of 50% for recklessness, or 75% for intentional disregard; as well as a 20% uplift where a penalty has been imposed for a previous period.

On this point, the Committee recommended that the onus of proof be placed on the Commissioner after the expiry of the relevant record keeping time period; with a corresponding recommendation that record keeping periods could be extended subject to concerns over regulatory costs.7 This would, of course, require legislative amendments.

Conclusion

The 2018 Statement contains some important and welcome changes. The policies underpinning the Commissioner’s approach to fraud or evasion are now clearer, and the Guideline provides helpful direction to ATO officers, taxpayers and practitioners.

The implementation of the Panel, while only acting in an advisory capacity, is also a positive step forward. Nevertheless, it remains to be seen whether the changes will result in positive outcomes for taxpayers in terms of how the ATO conducts its audits and makes findings of fraud or evasion.

This article was originally published by Thomson Reuters in its Weekly Tax Bulletin.


1‘Tax Disputes’, above n 3, 35.
2Ibid.
3Ibid.
4Australian Taxation Office, Fraud or evasion guideline (period of review), 2018, 18, 33, and 42.
5Above n 3, 36.
6House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, Tax Disputes (2015).
7Nassim Khadem, ‘Wrongly accused of fraud and evasion by the ATO? Inspector-General of Taxation Ali Noroozi wants to know’, The Sydney Morning Herald (online), 6 February 2017 <https://www.smh.com.au/business/the-economy/wrongly-accused-of-fraud-and-evasion-by-the-ato-inspectorgeneral-of-taxation-ali-noroozi-wants-to-know-20170202-gu3r47.html>.

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