This article first appeared on The Law Reviews.
Introduction
Australian taxes are imposed and administered at the federal (Commonwealth) level and at the state and territory level, reflecting Australia's federal system of government. The state and territory level also covers local government taxes.
Federal taxes are imposed by the Commonwealth government and administered by the Australian Taxation Office (ATO). The federal government generally derives its taxing power from the Australian Constitution, which remains an important limitation on the Commonwealth's taxing power. However, some taxing power is conferred by agreement with the states.
State and territory taxes are imposed by the relevant state or territory. They are administered by the revenue office of the relevant state or territory. State taxing powers are unfettered, except where there is conflict with a Commonwealth taxing power that is validly imposed under the Constitution. States also confer limited taxing powers to local governments, which impose taxes such as rates.
The Australian judiciary is comprised of a mixture of federal and state courts and tribunals, some established by legislation and others derived from the British legal system. In respect of tax matters, some courts have inherent jurisdiction while others have powers set out by legislation. Tribunals are empowered by legislation. There are no tribunals or courts dedicated to tax matters.
Taxpayers and the tax authorities take few tax cases to the courts and tribunals in Australia. Reasons for this vary between taxpayers, the main ones being costs and time. The recent decision in Commissioner of Taxation v. Shell Energy Holdings Australia Limited [2022] FCAFC 2 illustrates a case dealt with unusually expeditiously and which did not proceed to a decision of the ultimate court of the land, the High Court of Australia ( the High Court ); this judgment was delivered some 10 years after the relevant transactions. However, it is not uncommon for state tax matters to be dealt with more quickly by the state courts.
As a result, tax precedents are often lacking, or their development lags many decades after the issues come to the fore. The ATO does offer a test case funding programme for appropriate cases; however, in general, taxpayers have to fund their matters first, with the potential ability to recover some of their costs if they are successful. Currently, the ATO is particularly interested in bringing cases involving client legal privilege before the courts to better define the boundaries of that privilege and behaviour that is an abuse of that privilege.
The tax authorities and taxpayers resolve the vast majority of tax disputes between themselves. There are both administrative and legislated procedures to be adopted, with alternative dispute resolution (ADR) becoming a more common part of the resolution of matters.
Criminal prosecutions in relation to tax matters are handled by the police departments in the relevant jurisdictions and their corresponding prosecutors' offices. These matters may arise on referral by the tax authorities.
Commencing disputes
i Income taxes
Income taxes are imposed by the Commonwealth government and administered by the ATO. Although the states have power to impose income taxes, none currently do.
Australia's tax system broadly adopts a self-assessment model whereby the ATO assumes that taxpayers have completed their tax returns in good faith and that information provided by taxpayers is true and correct. The ATO has a range of compliance programs involving reviews and audits, as well as data collection and matching programs, that are designed to test the correctness of tax returns lodged by taxpayers. Its data collection programs and pre-filling of data on the income tax returns for individuals has significantly simplified the preparation of these returns, and it is expected this will continue to be improved and expanded over time.
Some income tax returns, mainly those of corporate taxpayers, are treated as an assessment made by the ATO without any further action being taken by the ATO; in the case of other income tax returns, the ATO must issue an assessment. The making (or deemed making) of an assessment is important to subsequent dispute processes, including time limits.
Once an assessment has been made (or deemed to be made), it may be amended by either the taxpayer or the ATO within specified time limits, ranging from two years to an indefinite period. Usually, an amendment by the ATO comes following a process of reviews and audits, although special assessments can be made without a prior review or audit.
Following an assessment (including a deemed or amended assessment), an objection may be lodged by the taxpayer within specified time limits. An objection is the first step in initiating a tax dispute in relation to income tax matters. Objections are made in the manner provided for by Part IVC of the Taxation Administration Act 1953 (Cth) (TAA). Broadly, a taxpayer making an objection is required to do so in the approved form, lodge it with the ATO within a certain time period and state the grounds that the person relies on in full and in detail in the objection.
The ATO will review the objection from a taxpayer and is required to decide whether to allow it, wholly or in part, or disallow it. The ATO's decision is called an 'objection decision'. Although the ATO is subject to certain time limits in relation to the making of the decision, the general practice is for the ATO to request and be allowed further time to make a determination. The default position is that, if the ATO does not make a decision within the time limit specified, the objection is deemed to be disallowed.
It should be noted that not all decisions made by the ATO in relation to income tax are reviewable.
ii Goods and services tax
Goods and services tax (GST) is imposed by the Commonwealth government on behalf of the state governments under an agreement between the governments. It is administered by the ATO.
Similar to income taxes, GST disputes usually relate to an assessment (including a deemed or amended assessment).
The objection process and avenue for appeal and review broadly follow the same process as outlined above for income taxes.
It should be noted that not all decisions made by the ATO in relation to GST are reviewable.
iii Stamp duty
Stamp duty is a tax imposed by the states and territories on certain transactions or documents. Each state and territory has differing rules.
In New South Wales (NSW), if a taxpayer is dissatisfied with a notice of assessment from the NSW Office of State Revenue (OSR), the taxpayer can lodge an objection with the OSR. An objection must be in writing, lodged within the specified time limits and include all supporting evidence to support the taxpayer's case.
The OSR will review the objection from a taxpayer and is required to decide whether to retain the assessment as made or amend it.
iv Land tax
Land tax is imposed by the states and territories (except the Northern Territory) on certain land holdings, which may include investment and commercial properties. Each state and territory has differing rules.
In NSW, the objection process and avenue for appeal and review broadly follow the same process as outlined above for stamp duty.
v Payroll tax
Payroll tax is imposed by the states and territories. The payroll tax rates and thresholds vary between the states and territories.
In NSW, the objection process and avenue for appeal and review broadly follow the same process as outlined above for stamp duty.
The courts and tribunals
As noted previously, the Australian judiciary is comprised of a mixture of federal and state courts and tribunals. They are completely independent of the tax authorities, including in respect of funding.
Subject to the applicable legislation, and subject to any inherent jurisdiction of the relevant courts, federal tax disputes can be brought before the Administrative Appeals Tribunal (AAT) 2 or the Federal Court of Australia (the Federal Court), and from there to the High Court of Australia (the High Court).
Again, subject to the applicable legislation, state and territory tax disputes can be brought before the relevant state or territory administrative tribunal 3 or the Supreme Court of the relevant state or territory. Appeals can be made from there to the High Court.
Each forum has its own advantages and disadvantages that should be carefully considered by the taxpayer. These can range from costs, confidentiality and the matters that may be reviewed.
Each higher court binds the lower courts and tribunals in respect of legal principles, with courts at the same level generally considering themselves bound by prior decisions.
i AAT
If a taxpayer is dissatisfied with an objection decision or a deemed objection decision in relation to income taxes, the taxpayer may lodge an appeal to the AAT within specified time limits of the taxpayer being served with the objection decision or the deemed objection decision. Similar appeal rights apply in respect of other federal taxes.
The AAT is an administrative body that has jurisdiction to conduct a merits-based review of decisions made by the ATO. The AAT may affirm, vary, set aside, or set aside and remit a decision. The AAT can be attractive for taxpayers as the rules of evidence do not formally apply, the hearing can be held in private and confidentially, and parties are generally responsible for their own costs as costs are unlikely to be awarded against the parties.
ii Federal Court
As an alternative to lodging an appeal with the AAT, a taxpayer who is dissatisfied with an objection decision or a deemed objection decision in relation to income taxes may lodge an appeal to the Federal Court within specified time limits of the taxpayer being served with the objection decision or the deemed objection decision. Similar appeal rights apply in respect of other federal taxes.
Furthermore, the Federal Court also has the power to review decisions by the AAT. It also has power to hear certain matters at first instance, including procedural matters (for example, orders to cause the ATO to take or cease taking certain actions).
The Federal Court generally hears appeals on points of law, then makes orders to remit the matter for consideration by the ATO or the AAT (depending on the original source of the appeal). It is rare for the Federal Court to hear matters in private, and the Federal Court can make costs orders where the losing party generally bears the burden of paying some of the winning party's legal costs. Additionally, strict rules of evidence apply.
The Federal Court has an appellate division, with appeals against single-judge decisions being heard by the Full Federal Court (usually comprising three judges not previously involved in the matter).
iii State administrative tribunals
The NSW Civil and Administrative Tribunal (NCAT) is the applicable state administrative tribunal in NSW. It has power to review tax and duty assessments made by the NSW OSR, including in respect of stamp duty, land tax and payroll tax.
NCAT was established by the Civil and Administrative Tribunal Act 2013 (NSW) with certain objects, including resolution of disputes as 'justly, quickly, cheaply and with as little formality as possible'. The tribunal is usually conducted in a more informal manner and is generally not bound by strict rules of evidence. Each party is normally responsible for paying its own costs.
If either party is dissatisfied with the decision of NCAT, that party may have a right to appeal to an appeal panel of NCAT, and, if they are still dissatisfied, that party may have a right to appeal to the Supreme Court in NSW.
Similar administrative tribunals exist in the other states and territories.
iv State Supreme Courts
The Supreme Court in NSW hears tax matters both at first instance and on appeal, including appeals from the NCAT. It is the superior court of record in NSW and has inherent jurisdiction.
The Supreme Court is a more formal hearing where the rules of evidence apply strictly. Unlike NCAT, the unsuccessful party generally pays the costs of the successful party.
The Supreme Court may also have a significant role to play in federal tax matters, including income tax matters. There may be legal matters that the Supreme Court has jurisdiction over that may determine federal tax disputes. An example is Thomas Nominees Pty Ltd v. Thomas & Ors [2010] QSC 417, where a trustee made an application under trust law in relation to the administration of the trust; the court concluded the distribution resolutions for the relevant years were effective to distribute franking credits (a federal income tax concept) in accordance with the intention of the trustee.
The Supreme Court has an appellate division, with appeals against single-judge decisions being heard by the Court of Appeal (usually comprising three judges not previously involved in the matter).
v High Court
The High Court is Australia's highest court, and is established under the Australian Constitution, with powers given to it by various legislation. Apart from limited matters at first instance (usually disputes between the Commonwealth and the state governments or matters involving the Constitution), it hears matters on appeal (including on tax matters from the Federal Court or the Supreme Courts).
There is no automatic right of appeal to the High Court. Instead, leave must be sought through a 'special leave application'. This application needs to establish why the matter is of sufficient importance for it to be heard by the High Court. If special leave is granted, the matter is then heard in full (although, this can happen simultaneously in some cases).
Penalties and remedies
i When can penalties be imposed?
The uniform administrative penalty regime found under Part 4-25 of Schedule 1 to the TAA applies to federal taxation laws (for example, income tax and GST).
There are various components of the regime, including penalties for:
false and misleading statements;
taking tax positions which are not 'reasonably arguable';
late lodgement of returns and other documents; and
failing to meet other taxation requirements.
The penalties escalate depending on the degree of culpability, rather than the amount of tax involved, although base penalties may be calculated based on the amount of tax involved. They may also increase based on the size of the taxpayer.
ii Safe harbour provision
An administrative penalty may not apply for false and misleading statements made if:
the taxpayer and the taxpayer's tax agent (if relevant) took reasonable care in connection with making the statement; or
the taxpayer engaged a tax agent and provided them with all the relevant taxation information and the false and misleading statement did not result from intentional disregard or recklessness of taxation law by the tax agent. A taxpayer wishing to rely on this exemption bears the evidential burden, which in practice can be difficult to satisfy.
The safe harbour provision does not apply to other penalties such as those imposed due to a failure to have a 'reasonably arguable' position. This is broadly a tax position that is about as likely as not to be correct.
iii Culpability
For some penalties, the amount is increased based on the culpability of the taxpayer and whether there is a shortfall amount. For example, the penalty for a false or misleading statement where there is no shortfall amount is 20 penalty units for failing to take reasonable care, 40 penalty units for recklessness and 60 penalty units for intentional disregard. However, where there is a shortfall amount, the penalties for a false and misleading statement are potentially more stringent and are, broadly, 25 per cent of the tax shortfall where there is a failure to take reasonable care, 50 per cent of the tax shortfall where a taxpayer has been reckless and 75 per cent of the tax shortfall where a taxpayer has demonstrated intentional disregard of the law.
iv Size of taxpayer
For some penalties, the size of the taxpayer can affect the penalty amount. For example, the penalty amount for failing to lodge is increased if the taxpayer is considered a medium or large entity. Whether an entity is medium or large depends on whether a certain threshold amount is exceeded in relation to the withholding amount, its assessable income or its GST turnover. For example, if the entity has assessable income for the year that is more than A$1 million but less than A$20 million, it will be considered a medium entity.
Additionally, penalties are significantly increased (typically doubled) for entities that are considered significant global entities (SGEs). Broadly, SGEs are entities (or part of a group of entities) that have an annual global income of A$1 billion or more.
v Mitigation or remission of penalties
A taxpayer can generally expect a reduction in penalties where a voluntary disclosure is made to the ATO. The extent of the reductions varies depending on how early a taxpayer makes the disclosure. For example, if a voluntary disclosure is made before the ATO conducts an examination, penalties may be reduced by 80 per cent. If the voluntary disclosure is made after the ATO commences conducting an examination, penalties may only be reduced by 20 per cent.
A taxpayer may also request the ATO to exercise its discretion to remit penalties. The ATO may choose to remit some, all or none of the penalties applied. As such, it is imperative that taxpayers ensure they maintain a good compliance history with the ATO to maximise their chances in receiving leniency by the ATO when penalties arise.
vi Shortfall interest charge and general interest charge
The ATO generally applies various interest charges to ensure taxpayers who underpay or delay the payment of tax do not receive an unfair advantage over those who pay correctly. Additionally, the ATO compensates taxpayers who are impacted by late payments from them (for example, tax refunds).
The shortfall interest charge (SIC) applies to shortfalls of specific taxes such as income tax and petroleum resource rent tax when the ATO amends a taxpayer's assessment. The amount is calculated on a compounding daily basis at a rate published by the Reserve Bank of Australia. The effect of daily compounding can result in the interest quickly exceeding the tax shortfall.
General interest charge (GIC) is payable where the tax debt (including the amount of tax and any penalty) remains due beyond its due date. It is calculated at the same rate as the SIC, plus a penalty rate.
Similarly with penalties, the taxpayer may seek a remission of GIC and SIC with the ATO if there are extenuating circumstances. Remission is not usually granted.
An income tax deduction can be claimed on GIC or SIC imposed in the income year it is incurred.
vii Promoter penalty regime
Penalties apply for entities that promote tax exploitation schemes to others (such as promising large upfront deductions or deferral of assessable income). Taxpayers themselves are generally not subject to this regime unless they actively promote the schemes to others.
viii Criminal prosecution
Severe consequences may apply for cases of tax fraud and evasion, such as criminal penalties and prosecutions.
ix State tax penalties
Similar to federal taxes, in NSW (as an example), the failure by the taxpayer to adhere to taxation laws can result in interest and penalties under the Taxation Administration Act 1996 (NSW). Interest and penalties broadly apply where there is a late payment or a tax shortfall. The penalty amount can vary depending on the level of culpability, and remission may be applied by the NSW OSR in appropriate circumstances.
Tax claims
i Recovering overpaid tax
Overpaid taxes are refunded as a matter of course by federal, state and territory tax authorities, generally without further action on the part of the taxpayer. It is not uncommon for significant refunds arising from a taxpayer-instigated amendment request to be held temporarily pending a review; however, these are not held for an unduly long period of time without proper and formal denial of the refunds (in which case, the taxpayer has recourse to formal objection processes).
Refunds of withholding taxes remains a difficult issue at the federal level as there is no automatic mechanism for refunds. For example, if interest withholding tax is wrongly deducted and remitted to the ATO, there is no automatic right to its refund. It is understood that the ATO can be asked for refunds and may grant these refunds in appropriate cases.
The tax authorities are required to pay interest on refunds in certain cases. For example, certain early payments or over-payments of income tax can attract interest.
ii Challenging administrative decisions
Administrative law and constitutional law provide limited, but important, grounds for challenging tax decisions by a tax authority. Administrative law grounds tend to be procedural in nature and therefore can be appropriately addressed with care by tax authorities.
The tax authorities are not estopped by past positions that they have taken, whether against a particular taxpayer or by public statements. However, at the federal level, the ATO is required to apply private rulings granted to a taxpayer in favour of that taxpayer (even if it may be wrong) unless there is a change of law, and it is required to apply certain classes of public rulings unless it withdraws those rulings. State and territory tax authorities follow similar principles.
iii Claimants and related parties
For federal, state and territory taxes, claims for the recovery of overpaid tax can only be made by the person who paid the tax or their tax agent.
Costs
The starting point for costs incurred by a taxpayer in relation to its tax affairs is that they are deductible in the year in which they are incurred. This often extends to costs associated with state and territory taxes too as, by their nature, they are ordinary business expenses. However, costs associated with stamp duty disputes may be non-deductible or deductible over a period of five years as they are often associated with capital transactions.
Costs incurred by a taxpayer in disputed matters before the administrative tribunals, such as the AAT and the NCAT, cannot generally be recovered from the opposing tax authority as the parties are expected to bear their own costs for matters before these tribunals.
However, costs are often awarded to the successful party in matters before the courts. In Australia, typically, not all of a party's costs are recovered through costs orders as they are generally based on a scale set by the relevant court. In some circumstances, indemnity costs can be awarded, which can mean the party can recover more (and sometimes all) of its costs.
It is not unusual for the ATO and other tax authorities to appoint barristers to more significant disputes early in the course of the dispute. These tax authorities generally have preferential fee arrangements with barristers, which can offset costs via the early involvement of barristers.
As model litigants, tax authorities such as the ATO are obligated not to commence litigation until they are satisfied that it is the most suitable method to resolve a dispute. This can mitigate costs incurred by the ATO (and ultimately a taxpayer who may have costs awarded against it), but bearing in mind that most tax litigation matters are commenced by the taxpayer.
Alternative dispute resolution
In the federal sphere, litigation in tax disputes can be costly in terms of finance and resources for both the taxpayer and the ATO. The ATO is committed to promoting a resolution culture that is aimed at avoiding disputes wherever possible and that, if disputes arise, they are resolved in a cost-effective, fair and collaborative manner. The ATO defines ADR as an inclusive term for all processes other than judicial or tribunal determination, which includes mediation, in-house facilitation, conciliation and early neutral evaluation.
ADR can occur in any stage of the tax dispute, and can be ordered by the courts and tribunals.
ADR options available for a tax dispute are explored briefly below.
i Negotiation
As the ATO's preferred and most common ADR method, this involves direct contact and negotiations between the taxpayer (and their representative) and the ATO. A dispute resolution facilitator is not required in negotiation. Direct negotiation is cost-efficient.
ii Facilitative processes
Mediation involves assistance from a dispute resolution practitioner who has expertise in ADR (for example, a retired judge). The dispute resolution practitioner assists parties to reach an agreement but will not impose any views or order any outcomes. Mediation is generally voluntary but can be ordered by a court or tribunal. If mediation is voluntary, the costs are usually split between the parties.
In-house facilitation is the ATO's free version of mediation (that is, no costs are involved), where a trained independent ATO officer assists parties in negotiating their dispute. As with mediation, the facilitator will not provide any advice or make any decision for the parties. The ATO also offers a free service to help certain individuals and small businesses with the dispute process, known as Dispute Assist.
iii Advisory processes
In neutral evaluation (also known as early neutral evaluation or ENE), the parties present their case to the dispute resolution practitioner who gives advice on how to resolve the dispute, and the likely outcome if the matter were to proceed to court. The practitioner in this case will often have substantial experience in tax law, and it is up to the parties on whether they accept the advice. This process generally occurs before legal proceedings commence.
Independent review is available for eligible small businesses with a turnover of less than A$10 million, and eligible large taxpayers with a turnover greater than A$250 million. The process focuses on early resolution of disputes where a taxpayer disagrees with the audit position of the ATO. An independent technical ATO officer reviews the facts and merits of the case prior to the finalisation of the audit position.
iv Blended process
Conciliation is a process whereby parties negotiate an outcome with the assistance of a conciliator. The AAT commonly refers matters to conciliation to help the taxpayer and the ATO reach an agreement prior to the hearing. The role of the conciliator is to assist parties to identify issues, develop options and come to an agreement.
v State tax disputes
Although there are no formal ADR policies set out by state or territory tax authorities, in practice, ADR is encouraged by state and territory tax authorities for disputes to be resolved efficiently and promptly. State tribunals and courts also use a range of ADR mechanisms to help parties reach an agreement prior to hearing, such as conciliation and mediation.
Anti-avoidance
Tax planning or tax minimisation generally involves arranging tax affairs in such a way that the minimum tax liability is achieved within the letter and intent of the tax law. These are classified as legitimate avenues to reduce tax, such as the dividend imputation system. On the other hand, tax avoidance generally involves arrangements that include complex transactions, distort commercial practice or take advantage of tax loopholes in order to improperly avoid tax or other obligations. The ATO takes tax avoidance seriously and administrative penalties may apply.
However, the boundary between tax minimisation and tax avoidance is becoming increasingly harder to recognise. With the community's attitude shifting towards an expectation of companies paying their 'fair share of tax' and the OECD's base erosion and profit shifting (BEPS) programme, the anti-avoidance rules in Australia have continued to tighten in recent years.
Tax fraud and evasion is a step further than tax avoidance, which broadly involves fraudulently evading tax or some blameworthy act or omission that results in an avoidance of tax. As highlighted previously, tax fraud and evasion are dealt with severely and can result in criminal prosecution.
Below is a brief summary of Australia's anti-avoidance regime.
i Specific anti-avoidance rules
There are specific anti-avoidance rules found in tax legislation that target particular types of known tax avoidance arrangements. These include:
transfer pricing rules: These rules are designed to counter arrangements where transactions between international related parties are not dealt with at arm's length, allowing deductions to be shifted onshore or income shifted offshore, ultimately reducing the overall tax payable by the related parties;
hybrid mismatch rules: As part of the OECD's BEPS project (Action 2), Australia's hybrid mismatch rules aim to target arrangements that exploit differences in the tax treatment of an entity or instrument under the laws of two or more jurisdictions;
general value shifting rules (GVSR ): The GVSR regime broadly addresses arrangements that shift value out of some assets and increasing the value of other assets, causing tax distortions;
loss duplication rules: The loss duplication rules prevent losses being duplicated within corporate groups from the one ultimate economic loss; and
thin capitalisation rules: The thin capitalisation rules limit the extent of Australian deductions for certain costs associated with borrowings, including interest. These rules are evolving and material changes are expected in the near future.
Additionally, in response to the OECD's BEPS programme, there are specific anti-avoidance rules for SGEs, such as the diverted profits tax (DPT) and Multinational Anti-Avoidance Law (MAAL) regimes (see Sections iii. DPT and iv. MAAL).
ii General anti-avoidance rule
Australia's income tax regime contains a general anti-avoidance provision (Part IVA), which gives power to the ATO to cancel a tax benefit that would otherwise be obtained by a taxpayer as a result of a scheme.
There are three key elements for Part IVA to apply. Broadly, there must be:
a scheme;
a tax benefit; and
a sole or dominant purpose to obtain the tax benefit in connection with the scheme.
General anti-avoidance rules apply to other taxes such as GST, fringe benefits tax and payroll tax. They vary between the different taxes.
Whereas it was common to see disputes on the general anti-avoidance rules before the courts, this is now rare as many are resolved on factual matters. However, there are some technical issues within the current general anti-avoidance rules that are yet to be litigated.
The ATO also regularly publishes taxpayer alerts to warn taxpayers about new or emerging tax avoidance arrangements that are under scrutiny.
iii DPT
The DPT regime is an extension to Part IVA. The DPT regime aims to prevent SGEs from reducing the amount of Australian income tax paid by diverting profits offshore to related parties through contrived arrangements.
Broadly, the DPT regime applies, if under the scheme or in connection with the scheme:
a taxpayer has obtained a tax benefit;
a foreign related party is involved in entering into or carrying out the scheme or is otherwise connected with the scheme;
the principal purpose, or one of the principal purposes, of a person who entered into or carried out the scheme, was to enable the taxpayer to obtain an Australian tax benefit, or both an Australian and foreign tax benefit; and
certain exceptions do not apply.
If the DPT regime applies, tax at a rate of 40 per cent is imposed on the amount of the diverted profit.
At the time of writing, PepsiCo, Inc v. Commissioner of Taxation is currently in the early stages of litigation and is the first DPT dispute to reach an Australian court.
iv MAAL
The MAAL regime is targeted at artificial or contrived arrangements by SGEs to avoid having a taxable presence in Australia and is potentially relevant to foreign multinational groups who provide goods or services to Australian customers or clients.
Broadly, the MAAL regime will apply if under the scheme, or in connection with the scheme:
a foreign entity (which is a SGE) makes a supply to an Australian customer;
an Australian entity (or permanent establishment) that is an associate of or is commercially dependent on the foreign entity and undertakes activities directly in connection with the supply;
some or all of the income derived by the foreign entity is not attributable to an Australian permanent establishment; and
the principal purpose, or one of the principal purposes, of the scheme is to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit.
If the MAAL regime applies, the ATO may cancel the tax benefits obtained.
v OECD's BEPS program and future legislation
As highlighted above, Australia has committed to addressing risks highlighted by the OECD's BEPS programme and implementing its recommendations. Further legislation is anticipated in relation to tax anti-avoidance. At the time of writing, the current Commonwealth government is proposing to limit interest deductions for multinationals based on 30 per cent of earnings before interest, taxes, depreciation and amortisation (Action 4), and an integrity rule to prevent companies attaching franking credits to distributions funded by capital raising activities.
Australia is also committed to the OECD's BEPS two-pillar initiative. Pillar one of this initiative will involve a reallocation of taxing rights for large multinational groups to the countries in which goods and services are actually provided. Pillar two will involve the implementation of a global minimum corporate tax rate of 15 per cent.
vi State tax avoidance schemes
In NSW, a tax avoidance scheme applies to various state taxes, which is broadly adapted from the federal tax regime.
Double taxation treaties
Very little litigation comes before the Australian courts dealing with double tax agreements despite Australia's extensive network of treaties and the adoption of the Multilateral Instrument. However, this may change in the future, particularly as mandatory arbitration becomes important under the Multilateral Instrument.
Australia's treaties must be implemented by domestic law in order for them to be enforceable - mere entry by the federal government is not enough. It is common for the implementation of a treaty to be modified by domestic law, such that some clauses might be excluded or otherwise modified in operation. In their interpretation, Australian courts have regard to contemporaneous material from both jurisdictions as to the intended operation of treaty clauses as well as the OECD's commentaries on the model convention.
Recent Australian cases on treaties cover the following:
In Addy v. Commissioner of Taxation [2021] HCA 34, the High Court considered the operation of the non-discrimination clause in the Australia-United Kingdom double tax agreement in relation to Australia's differential tax rates for non-residents. The Court unanimously found in favour of the taxpayer, a UK national, ruling that the income tax rates that applied to her as a holiday working visa-holder (different to those that applied to residents on the same income) were in breach of the treaty's non-discrimination clause.
In Bywater Investments Limited v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45, one of the judges of the High Court considered the application and interpretation of the Australia-UK and the Australia-Switzerland double tax agreements on the question of the residence of a company, including the operation of the tie-breaker clause.
Areas of focus
The ATO is naturally focused on key areas that it considers present a high risk to the Australian revenue, particularly:
international tax crime, tax evasion and fraud, ranging from common activities such as related party dealings giving rise to transfer pricing risks to elaborate schemes that are designed solely to defraud the revenue using tax havens and false transactions;
illegal phoenixing of businesses, where businesses would fail to meet tax liabilities, become insolvent and be liquidated, only to rise in a new guise and repeat the same behaviour;
refund fraud, including incorrectly claimed concessions and grants. During the past two years, various forms of financial assistance were provided to individuals and businesses. The ATO has been carrying out checks to ensure these were correctly claimed. Other concessions, such as research and development, and normal business taxes, such as the input tax credits from GST, have been prone to abuse and remain a focus area for the ATO;
identity crime;
organised crime; and
what it calls 'black economy' activity where businesses generate income in cash or other hard-to-trace forms.
The government continues to increase the ATO's funding for specific programmes designed to protect revenue, including the Tax Avoidance Taskforce and the Serious Financial Crime Taskforce. Recent successes by the ATO programmes include:
the Tax Avoidance Taskforce raising A$3.49 billion in tax liabilities and A$1.93 billion in cash collections;
the Serious Financial Crime Taskforce raising approximately A$473.8 million in liabilities and A$79.9 million in cash collections;
the shadow economy programme raising A$1.2 billion in compliance liabilities;
the Illicit Tobacco Taskforce seizing illicit tobacco with an estimated A$176.5 million in excise forgone; and
the Phoenix Taskforce raising A$222.6 million in liabilities and A$156.3 million in cash collections.
Consideration and implementation of the BEPS measures remains an area that the federal government is invested in.
At the state and territory level, payroll tax and stamp duties are significant focus areas for the state and territory tax authorities, as they comprise significant sources of revenue. These offices carry out regular audits and investigations, some prompted by media announcements of transactions that have been or are about to be implemented. Though not a tax, the collection of mining royalties is another area of focus for Queensland and Western Australia, which are heavily dependent on the resources industries.
Outlook and conclusions
Australia's first case on the DPT (as well as the hotly debated concept of an embedded royalty) will make its first public outing in 2023, and is likely to be of significant interest to practitioners and taxpayers. The ATO already takes the view that the DPT is not a provision of last resort, marking it differently from the general anti-avoidance provisions, and potentially expanding its anticipated reach.
The ATO is also hotly pursuing what it claims are abuses of client legal privilege claims. In 2022, the Federal Court found for the ATO in FCT v. PricewaterhouseCoopers [2022] FCA 278, a case in which claims for privilege were made over 44,000 documents and disputed in the case of over 15,500 documents. More litigation on this topic is expected as the ATO seeks to clearly set the boundaries for privilege claims in tax matters.
Cross-border transactions and multinationals can also expect more and ongoing scrutiny, and it is likely that this will lead to more tax disputes in the coming years.
Finally, payroll tax continues to be an area of focus for state and territory tax authorities due to the difference in payroll tax outcomes when a business engages an employee versus when it engages a contractor.
Footnotes
3 Notwithstanding the reforms to Australia's system of administrative review announced by the Commonwealth government, changes at the state and territory level are not expected at this stage.