Understanding the stages of an ATO tax dispute
From review and audit to objection, appeal and resolution. What happens at each stage, and why early decisions matter.
Teigen Kershaw · Principal · LLB, LLM, CTA · Approximately 10 minutes
A tax dispute will generally follow a set path, from review or audit to assessment, objection and, if needed, review in the Administrative Review Tribunal or an appeal to the Federal Court.
Each stage has its own rules, time limits and opportunities. Decisions made early, often before the matter looks like a dispute, determine what can later be argued and proved.
The stages below are set out in the order they usually occur. How they apply to your matter depends on your facts and the stage you have reached.
The stages at a glance
Review or audit: the ATO examines the taxpayer’s position.
Assessment: the ATO determines or changes the tax liability.
Objection: the taxpayer formally challenges the assessment or decision.
Tribunal review or Court appeal: the taxpayer seeks external review of the decision.
Giving effect to the outcome: the assessment is amended where required.
Not every matter proceeds through every stage. Settlement can occur at any stage, and debt management runs alongside the dispute.
Read about managing the debt while a dispute is ongoing.
Reviews and audits
Most disputes begin with a review or an audit.
A review examines a particular risk or issue, often prompted by data matching, a discrepancy with third-party reporting or a focus on a type of arrangement. It may close with no change, or be escalated to an audit.
An audit is a formal examination of whether the correct amount of tax has been reported and paid. It is the stage most likely to end in an amended assessment.
The ATO gathers information through informal requests, interviews or formal notices requiring documents or answers.
Your responses become part of the record the ATO relies on.
Gaps or inconsistencies at this stage can become difficult to correct later.
Before finalising an audit, the ATO will usually set out a preliminary view in a position paper and invite a response. A well-evidenced response can narrow the issues, correct the facts or resolve the matter before any assessment issues.
The audit may then end either with no further action or with amended, default or penalty assessments. The ATO will often also provide its reasons for the decision. However, the ATO sometimes amends an assessment with little information about its basis.
A review of the audit position is available to some small business decisions.
The assessment
An assessment is the Commissioner's ascertainment of your taxable income for the relevant period and the tax payable on it.
There are several kinds of assessment. For companies and some other entities, lodging a return or a business activity statement is itself treated as an assessment of the amounts in it. Assessments for individuals, amended assessments and penalty assessments are issued as a separate notice of assessment. The ATO can also make numerous other assessments and decisions. The types most often in dispute are amended, default and penalty assessments.
Amended assessments
An amended assessment changes an assessment that has already been made. The ATO can amend within set periods, generally two or four years from the notice of the original assessment depending on the taxpayer. However, an assessment can be amended at any time if the Commissioner is of the opinion that there has been fraud or evasion. An amended or default assessment, often with a penalty assessment, is the usual outcome of an audit that finds a shortfall.
Default assessments
A default assessment is made where a return has not been lodged or where the ATO is not satisfied with a return that has been lodged. The ATO assesses the amount on which, in the Commissioner's judgment, tax ought to be levied, often using indirect methods such as an analysis of bank deposits or changes in asset values. A default assessment may rest on limited information, and the ATO can choose whichever method it considers appropriate to determine your liability.
Tax, penalties and interest
An assessment makes the tax due and payable. It is often accompanied by administrative penalties, calculated as a percentage of the shortfall and shortfall interest charge on the additional amount. General interest charge accrues on any amount unpaid after the due date.
Outside the objection and review process, the assessment, depending on the type, can be conclusive or prima facie evidence of the debt it records. Objecting to the assessment is the only way to challenge the underlying liability, and the grounds of that challenge are framed by the assessment and the ATO's reasons.
Objection
An objection is the formal process for challenging an assessment, penalty assessment and other taxation decisions. It is governed by Part IVC of the Taxation Administration Act 1953.
An objection must:
be in the approved form;
be lodged within the time limit; and
state fully and in detail the grounds relied on.
The grounds must identify each part (known as a particular) of the assessment in dispute and explain why it is incorrect. If the matter proceeds to the Administrative Review Tribunal or the Federal Court, you are limited to the grounds you stated in your objection unless the Tribunal or the Court gives leave to amend them.
An objection can generally be made only once against each particular of an assessment for the relevant tax year. Where the Commissioner amends an assessment, an objection to the amended assessment is limited only to the changes the amendment made.
Objections are considered by ATO officers independent of the original decision maker, under protocols that govern how the two communicate. The ATO may request further information in writing, generally allowing 28 days to provide it, and may rely on information from third parties. During the objection, you can provide supplementary material to be considered in deciding it.
The ATO must decide the objection and give written notice of the decision with reasons. The decision allows the objection in whole or in part, or disallows it.
If a decision is delayed
If no decision has been made within 60 days of lodgement, or of providing information the ATO requested in writing, you can give written notice requiring a decision. If the ATO does not make a decision on your objection within a further period of 60 days, the objection is taken to have been disallowed and you can proceed to review or appeal.
Out-of-time objections
Each objection has a time limit. The period depends on the tax type, the type of assessment or decision and whether it is an original or amended assessment. The ATO publishes the time limits for each type of assessment and decision.
An objection lodged after the time limit cannot be considered unless the ATO grants an extension of time. The objection should be lodged together with a written request that it be treated as lodged in time, setting out in full the reasons it is late. If the extension is granted, the objection is treated as lodged within the time limit.
Under PS LA 2003/7, the ATO considers:
the reasons for the delay;
the circumstances of it;
whether you have an arguable case;
any prejudice to the ATO such as lost documents; and
any negligence.
Illness, absence overseas, postal delays, changes in the law and incorrect advice from the ATO are examples of reasons that may support an extension.
The ATO's decision on an extension must be given in writing and will usually be contained within the final objection decision. A decision not to allow an extension can be reviewed by the Administrative Review Tribunal.
After the objection decision
If the ATO disallows the objection, or allows it only in part, you can apply to the Administrative Review Tribunal for a review of the decision or appeal to the Federal Court. Both have strict time limits running from the date of the objection decision.
The whole objection decision goes before the Tribunal or the Court, including any part the ATO allowed. However, the amounts the ATO allowed will often be conceded by them. The ATO is not confined to the original reasons and can defend the assessment on a different basis, which can put earlier concessions back in issue.
Administrative Review Tribunal
The Tribunal stands in the Commissioner's place. It can exercise the Commissioner's powers and discretions for the purpose of reviewing the decision, and decides the matter afresh on the evidence before it.
It is not bound by the rules of evidence and proceedings are less formal.
Tax hearings can be held in private at your request, and each party generally bears its own costs.
Federal Court
The Federal Court hears the appeal as a court of law. It can confirm or vary the objection decision, and any amendment is undertaken by the ATO in accordance with the Court's decision.
The Court cannot interfere with the Commissioner's exercise of a discretion unless the discretion was exercised contrary to legal principle.
Proceedings are formal, legal representation is in practice necessary, and the taxpayer is generally named in the published judgment.
Costs generally follow the outcome, and a successful party usually recovers part of its costs.
The choice turns on the nature of the dispute. Cost, privacy and the amount in dispute also weigh in the decision.
The burden of proof
In the Tribunal or the Court, including on any further appeal, the burden of proof is on the taxpayer. For an assessment, you must prove that the assessment is excessive or otherwise incorrect and what it should have been.
Amended assessments
For amended assessments, usually made under sections 166 and 170 of the Income Tax Assessment Act 1936, the burden of proof can be discharged by evidencing that the particular amounts amended by the ATO are excessive and what they ought to be.
Default assessments
However, for default assessments, usually made under section 167 of the Income Tax Assessment Act 1936, proving the assessment excessive is significantly more demanding than for an assessment amended under section 166 and 170.
If you cannot prove what your true taxable income was for each year in dispute, you cannot prove that the assessment is excessive, and it will stand.
This requires a rigorous analysis of every incoming and outgoing amount for every year in dispute. Showing that the ATO made an error in reaching the figure is not enough.
For other decisions the onus differs, but generally you must prove that the decision should not have been made or should have been made differently. The ATO is not required to prove the assessment is correct.
The standard is the balance of probabilities. In tax cases, however, documentary evidence carries significant weight.
Rectification
A successful outcome has to be carried through to the assessment itself. Where an objection is allowed, the ATO amends the assessment to give effect to the decision. Where the Tribunal or the Court decides in your favour, the ATO must take the action needed to give effect to that decision, including amending the assessment, within 60 days of the decision becoming final.
Where the underlying tax is reduced, general interest charge and any shortfall interest charge are reduced in proportion, and penalties calculated on the shortfall are recalculated, if not otherwise reduced to nil by the decision. Overpaid amounts are refunded, and interest may be payable on them.
The debt runs alongside
Disputing an assessment does not suspend the liability. While an objection, review or appeal is pending, the tax remains due and the ATO can take recovery action. General interest charge continues to accrue on unpaid amounts.
The debt must be managed alongside the dispute. Depending on the circumstances, that may involve:
paying part of the amount pending the outcome;
agreeing a payment arrangement; or
responding to recovery action.
The ATO's approach to disputed debts is set out in PS LA 2011/4. One option is a 50/50 arrangement, under which you pay all undisputed amounts and at least half of the disputed tax, provide information when requested and keep up with lodgments and new liabilities. In return, recovery of the balance is deferred until 14 days after the dispute ends, and half of the general interest charge accruing on the unpaid balance is remitted.
Settlement and dispute resolution
The ATO sets out its approach in the ATO Code of Settlement.
In deciding whether to settle, the ATO weighs:
the relative strength of each side's position on the facts and the law;
the cost of continuing the dispute against the likely benefit; and
whether a settlement will secure compliance in current and future years.
Settlement is not a matter of splitting the difference.
The ATO will generally not settle where a contentious point of law needs to be decided by a court, where it is in the public interest to litigate, or where the conduct involved calls for a strong message to the community.
Settlement discussions are without prejudice, so what is said in them cannot be used in evidence. Both sides are expected to negotiate in good faith, which can include disclosing material information.
Nothing is binding until the settlement is recorded in writing and signed by all parties, and the agreement deals with how it will be given effect, including payment of any amount owing.
A settlement is final and is reopened only in limited circumstances.
About Teigen Kershaw
Principal · LLB, LLM, CTA
Teigen Kershaw has spent almost a decade in tax disputes and superannuation. That has included senior roles in private practice and at the Australian Taxation Office. Where she has had carriage of some of the most complex legal disputes of the past decade.
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