Contesting the Tax Commissioner
In 2017, a covert tax audit utilised entries in the couple’s bank accounts to assess their income tax liability and the ATO issued a default assessment based on the unexplained deposits and expenses. The couple objected to the assessment and this objection was partly allowed. A second assessment was then issued to which the couple again objected before the Administrative Appeals Tribunal (AAT) on the grounds that the assessment was excessive.
Can the Tax Commissioner really decide how much tax you should pay?
The Tax Commissioner has the power to issue a ‘default assessment’ for the amount he believes is owing from overdue tax returns or activity statements. The assessment is the amount the ATO believes is owing, not what has been declared.
The problem with a default assessment is not just the Tax Commissioner deciding how much tax you should pay, it is the potential addition of an administrative penalty of 75% of the tax-related liability for each default assessment issued. This penalty may be increased to 95% of the tax-related liability in certain circumstances for taxpayers who have a pattern of non-compliance.
But, here is the problem for the couple. While genuine gifts of money are not taxable, the burden is on the taxpayer to prove that the gift is truly a gift, if the ATO asks. The AAT held that, “absent any reliable evidence…, there is no proper basis to make any findings as to whether the deposits constitute part of the applicants’ taxable income or not.”
The Tax Commissioner can rely on a “deficiency of proof”.
The couple’s stance that the deposits were either gifts from the father or loans from a friend were rejected by the AAT. This is despite an affidavit and evidence from the wife’s father stating that the amounts transferred to them were gifts. The couple did not demonstrate what their income actually was to prove the Tax Commissioner’s assessment was unreasonable, and they could not substantiate that the gifts were indeed gifts from a very generous father.
The Federal Court dismissed the couple’s appeal with costs, leaving the Tax Commissioner’s default tax assessment and penalties in place.
