TAXPAYER’S WORDS DURING AUDIT COME BACK TO HAUNT HIM AT THE TRIBUNAL

Taxpayer’s words during audit come back to haunt him at the Tribunal

In last month’s decision of RRKC and Commissioner of Taxation, a taxpayer’s purpose and intention in entering property transactions were key to determining whether he had understated his GST and income tax liabilities arising from those sales. Despite the qualitative nature of those determining factors, the taxpayer’s assertions to the ATO at audit and the Administrative Review Tribunal (Tribunal), were inconsistent and described as “strange and unnecessary contortionism”.

The taxpayer was involved in the construction, renovation and letting of residential properties for many years. In 2008, three of its residential units were sold after having previously being rented out. A dispute arose between the taxpayer and the Commissioner about whether:

• GST was chargeable on those disposals; and

• whether the properties were ‘trading stock’ for income tax purposes, as compared to capital assets.

The thrust of the taxpayer’s argument at the Tribunal was that:

• he was engaged in rental investment activity, not as part of any business; and

• the sale of the properties was driven by personal factors rather than profit-making intention, noting he had to settle a property division arising from a marital breakdown.

The taxpayer was unsuccessful at the Tribunal, noting it was his burden of proof (as is the case in all tax review and appeals). In short, the Tribunal was satisfied that, by the pattern of sale activity of over 30 properties and the taxpayer’s steps to construct, subdivide and renovate those properties, the requisite income tax and GST obligations applied.

However, this case is otherwise notable in scrutinising the taxpayer’s engagement with the ATO at audit.

Originally, the taxpayer had lodged a business activity statement declaring no GST payable for the period when the properties were sold. This became the subject of ATO review.

In a telephone call with the ATO, the taxpayer’s tax agent conceded that the property activities comprised the taxpayer’s “main source of income” and that he had mentioned to his client that it was “borderline [on the taxpayer being in] business”. After the matter was escalated to audit (perhaps partly because of the equivocal position put forward by the tax agent), the tax agent advised the ATO that it was accepted the taxpayer carried on a business of building residential premises. Yet the matter continued to be disputed by the taxpayer.

The Tribunal quipped that the tax agent’s evidence at hearing “now seeks to pump the brakes on those earlier comments, explaining that those comments were made for strategic and practical reasons, despite a belief in the position being otherwise”.

In his witness statement, the tax agent said those positions were adopted with the Commissioner in order to finish the audit quickly with minimum cost, but a view was held that the taxpayer was not carrying on a business of property development.

Whilst, ultimately, the Tribunal decision turned on the evidence given at the Tribunal, its unclear if the taxpayer’s audit strategy achieved its goal of reducing costs and time. The interactions with the ATO, even ostensibly informal ones, are not usually the forum for ambiguous or speculative remarks. A clear strategy should be adopted as early as possible when identifying tax risks and engaging with the ATO in respect of them. Inconsistent positions to the Commissioner or a decision-making body are likely to affect credit and may even fall foul of the statutory rules about the formulation of grounds of objection and what a taxpayer is allowed to articulate at hearing before the Tribunal.

This case demonstrates the importance of adopting a consistent strategy and position from the outset of ATO engagement. Contradictory statements or ‘off-the-cuff’ comments made during ATO engagement can be harmful for taxpayers down the track.

Smailes Krawitz advises taxpayers on every stage of an ATO engagement, including audits, objections and matters in the Tribunal or Federal Court.

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