In brief: tax enforcement in Australia
Verification of compliance with tax laws
How does the tax administration verify compliance with tax laws? Does it vary by taxpayer or tax?
Tax compliance is largely administered as a “self-assessment” system in which taxpayers file returns largely unverified by the ATO or other tax authorities. The ATO, however, has an enforcement framework that includes a range of pre-trade reviews, audits, pre-assessments and clearances. The ATO encourages early taxpayer engagement before undertaking large transactions and will conduct real-time investigations of transactions identified from market intelligence or the media. The ATO is currently rolling out a review of the “top 5000” of Australia’s 5000 largest companies. This review includes a detailed examination of taxpayers’ internal systems and processes to ensure the complete accuracy of returns. ATO reviews can take months, and in some cases years, and when significant issues are identified, the review can progress to a formal audit, followed by a change in ratings. It is not uncommon that, in the case of large taxpayers, corrective assessments are not raised for several years after the start of an ATO review.
Tax return review process and limitation periods
What is the typical procedure followed by the tax administration to review a tax return and how long does the review take? What limitation periods apply?
The level of reporting requirements depends on the type and size of taxpayer, with large corporate groups subject to the most extensive reporting obligations. All taxpayers are subject to review, but the likelihood or extent of review again depends on the size and complexity of the taxpayer. Reviews or audits of large groups can extend over several years.
Requests for information from the tax authorities
What types of information can the tax administration request from taxpayers? Can the tax administration question the taxpayer or his employees? If yes, are there any restrictions?
The ATO has the power to compel the production of all documents relating to the affairs of a taxpayer, including compelling third parties to produce any information in their possession relating to a tax matter relating to another taxpayer. The only significant restriction on this power is any protection afforded by legal professional secrecy. In addition, the ATO also has the power to compel any person to an interview, including in relation to third party taxpayer matters. State and territorial authorities have similar powers.
Failure to Provide Taxpayer Information
What measures can the tax administration take if the taxpayer does not provide the required information?
The tax administration can, as a last resort, seek legal action against companies or individuals who do not comply with the mandatory information powers, with penalties up to fines and imprisonment.
Collection of outstanding payments
How can the tax administration recover tax arrears following a tax audit?
Tax authorities have an almost absolute legal right to collect overdue tax payments, including obtaining asset freezing orders, seizing assets and garnishing third party payments.
Sanctions – scope
How are penalties calculated?
Penalties are usually calculated as a percentage of the amount of underpaid tax. For more egregious or culpable cases, the penalty percentage would typically be between 80% and 100% of the tax loss, while in less egregious cases involving negligence, the penalty may only be 20% to 25% . cent or even less, especially in cases of voluntary disclosure.
What defenses are available if penalties are imposed?
There is no absolute defense to penalties, in particular the mere use of a lawyer or accountant will not in itself normally result in a significant reduction in sentence.
Under what circumstances can the tax administration impose penalties?
The tax authorities have extensive powers to impose penalties for non-compliance, in particular for any underpayment of tax. Tax authorities have detailed guidelines which they follow in administering the discretionary powers granted to them by legislation.
Can tax non-compliance result in criminal consequences? Are they different for different types of taxpayers?
Criminal consequences would normally only follow cases of fraud or evasion. Penal sanctions will be applied to particular taxpayers as well as to the administrators or rather to the managers of the companies involved in serious cases of fraud or evasion. Advisors also face criminal consequences, particularly when involved in promoting products or aggressive tax minimization schemes. Criminal penalties include imprisonment.
What is the recent enforcement record of the authorities?
Tax authorities have a good enforcement record, particularly in the large business sector. This record is achieved through the increasing use of sophisticated intelligence and data collection tools to identify non-compliance, as well as various review and audit programs.