ATO Dispute Guide: Stages and Processes of a Tax Dispute

Navigating a tax dispute with the Australian Taxation Office (ATO) can be daunting, but understanding the various stages can help manage expectations and respond appropriately. Below is a step-by-step breakdown of the ATO's dispute process, including timelines and what you can expect at each stage.

The stake for taxpayers gets higher and higher as they progress through the stages that is why they are best dealt with properly at an early stage. Taxpayers should seek tax and legal advice to prevent their ATO dispute from getting out of hand.

Stage 1 – Risk Review

In the Risk Review stage, the ATO identifies potential areas of concern in a taxpayer's compliance. The ATO may want to investigate specific issues or transactions or have a general review of a taxpayer’s affairs. The ATO has extensive data matching processes that cross reference taxpayer’s lodgements with third party sources, including employer records, bank accounts, government agencies, online selling platforms, and most recently, insurance policy data on ‘lifestyle’ assets (including caravans, motorhomes, motor vehicles, marine vessels and thoroughbred horses).

• What you can expect: You may receive a letter from the ATO asking you to provide detailed information or explanations about specific transactions or deductions.

• What you should consider: Although the ATO letter may seem friendly, the Risk Review stage should be taken seriously. It is important you engage in the risk review, assess the requests closely, understand the ATO’s powers and your rights, clarify ambiguous questions, and consider making a voluntary disclosure to reduce penalties. Failing to properly engage at the Risk Review stage could see the ATO dispute ‘snowball’ quickly!

• Timeline: This stage typically takes 3 to 6 months, depending on the complexity of your affairs and the volume of information requested by the ATO.

Stage 2 – Audit

If the ATO believes there are unresolved issues after the Risk Review, they may escalate to a more comprehensive formal audit. The audit involves a thorough examination of a taxpayer’s affairs to ensure compliance with tax laws and will target specific tax issues (i.e. income tax, GST, FBT, etc) and tax years. Generally, the ATO will issue a ‘position paper’ that sets out its understanding of the facts, specific tax issues identified, its findings on those tax issues, and proposed assessments or amended assessments.

• What you can expect: You can expect the information gathering process from the ATO to continue, with ongoing requests from the ATO officer. This stage can be stressful for you with many document requests, however, the best defence at the audit stage is to be ready with up to date and appropriate record keeping.

• What you should consider: Your strategy in responding to the ATO’s information requests during the audit needs to be managed appropriately. Again, it is important you engage with the ATO during the audit, or else you risk the ATO issuing default assessments with large penalties (more on this below). If the ATO issues a position paper, it is important that it is reviewed closely. There is an opportunity to persuade the ATO to reverse its position if the ATO has come to its position based on incorrect or incomplete facts, or if you disagree with the ATO’s interpretation of the law.

• Timeline: An audit can last between 1 to 2 years, depending on the complexity of the case and your level of cooperation.

Stage 3 – Assessment

If the ATO does not change its position after a taxpayer’s response to the position paper, the ATO will proceed to issue the relevant adverse assessments or amended assessments based on the position paper. The assessments will likely include interest and penalties payable on top of the disputed tax. The penalties are calculated as a percentage of the tax shortfall based on the culpability of the taxpayer and their agent. The base penalty amount ranges from 25% (failure to take reasonable care or adopting a position that is not ‘reasonably arguable’) to 75% (intentional disregard of tax law or default assessment), and there may be a further uplift of 20% in some circumstances.

• What you can expect: You can expect to receive a notice of assessment or amended assessment, and notice of assessment for a shortfall penalty, based on the position paper. The notices will set out the change to your assessment and amount payable to the ATO.

• What you should consider: When you receive the assessment, you should consider whether the assessment is valid and whether it has been issued correctly. The Commissioner generally has a two- or four-year time period to issue or amend an assessment (except if fraud or evasion is involved). A very difficult aspect of being issued an assessment is that once it is raised, the burden is on you to show that the assessment is incorrect or excessive and not the ATO – this is why it is important to try to persuade the ATO to alter its position at the Risk Review and/or audit stage.

• Timeline: The assessment process usually takes 2 to 4 weeks after the audit is finalised.

Stage 4 – Objection

If a taxpayer disagrees with the assessment, the taxpayer can challenge the assessment by lodging an objection with ATO. The objection will be looked at with fresh eyes by a new ATO case officer with little prior knowledge of the facts. On this basis, a taxpayer’s objection should be fulsome and contain all the reasons they disagree with the ATO’s decision with supporting arguments and evidence. Preparation of the objection can become costly if the risk review or audit has been mismanaged, and the taxpayer must embark on a reconstruction exercise of their historical tax affairs.

• What you can expect: This is the final chance for you to convince the ATO their position is incorrect before progressing to expensive and time-consuming litigation. You must provide detailed reasons and evidence to support your objection and respond directly to the specific issues raised and meet all deadlines for filing the objection. You can either download the ATO dispute form or write an objection letter.  

• What you should consider: Why is the assessment invalid or defective? What is the underlying data on which the assessment relies? Has the Commissioner acted reasonably in forming his or her assessment? By necessity, assessments will involve some guesswork and may be factually inaccurate, however where the assessment is made with an intelligible basis, it will be invalid. The ATO is not permitted to pluck a figure out of the air or make uninformed guesses about the tax amount.

• Timeline: Generally, an objection with ATO must be lodged within 60 days of receiving the assessment (there is scope for an objection to be lodged out of time, but this is at the Commissioner’s discretion). The ATO then has 60 days to provide their decision on your objection, however recent experience has seen this become up to 2 to 4 months to respond, depending on the complexity of the case.

Stage 5 – Tax Debt Management

Once an assessment has been issued, the ATO can commence debt recovery action regardless of whether the taxpayer intends to challenge the assessment.

To the extent the ATO has concerns regarding assets of the taxpayer being dissipated, as part of that process the ATO may seek freezing orders or injunctive relief preventing the taxpayer from doing so. That might involve, for example, seeking orders freezing bank accounts or restraining the taxpayer from selling real property. We have had involvement in several recent proceedings where this has occurred.

The ATO has other enforcement mechanisms available to it, including garnishee notices requiring third parties to pay money directly to the ATO.

Where there is not a defence to the ATO’s claim, taxpayers that fail to pay debts or negotiate suitable payment plans with the ATO may be the subject of bankruptcy proceedings (in the case of individuals) or winding up proceedings (in the case of corporations).

• What you can expect: After a brief hiatus during the COVID-19 pandemic, the ATO has renewed its focus on recovering outstanding debts, particularly against taxpayers that the ATO considers have chosen not to engage and who have purposefully avoided their payment obligations. The Commissioner is also issuing director penalty notices (DPNs) against company directors for amounts the company failed to pay. Under the taxation regime, directors can become personally liable to pay penalties equal to the amounts owing by the company.

• What you should consider: First (and obviously), consideration must be given to whether the ATO’s claim is correct, or whether there are defences which might be available. For example, in the case where a DPN is received by a director, are the matters in the notice correct (are the figures accurate, were lodgements said to have been made late in fact made on time)? Were you acting as a director in the relevant period? Were there outstanding circumstances, such as personal illness, that prevented you from meeting the liability?

• Second, in the event the debt is owing, if there is a capacity to pay the debt in full, you should consider paying immediately, or seeking a payment arrangement with the ATO as soon as possible. In certain cases (in the case of non-lockdown DPNs), acting quickly to appoint a liquidator, voluntary administrator or small business restructuring practitioner may see part or all of your personal liability remitted.

Consulting your professional advisors (including your accountant and lawyer) at this time is essential and may significantly impact the outcome.

Stage 6 – Review sought by Taxpayer

If a taxpayer is unsatisfied with the outcome of the objection by the ATO, they can have the objection decision reviewed in the Administrative Review Tribunal (ART) or the Federal Court of Australia. This formal legal process involves presenting the case in front of an independent judge or tribunal member.

• What you can expect: You must prepare to present legal arguments, often requiring representation by a lawyer or tax professional. The case will be decided based on the merits of the evidence and legal arguments presented.

• What you should consider: Choosing the most advantageous forum to have the objection decision reviewed is critical. Generally, the ART is considered less formal, lower cost, and more flexible. The ART can decide on questions of fact and law, while the Federal Court can only consider questions of law. The ART can exercise the Commissioner’s discretion to remit penalties and allow a late application for review, while the Federal Court cannot. However, the Federal Court has broad powers to make costs orders, where the ART cannot.

• Timeline: The review process can take 6 to 12 months in the ART, or 1 to 2 years in the Federal Court.

Stage 7 – Further Appeal by Taxpayer or ATO

If either the taxpayer or the ATO is dissatisfied with the outcome of the ART or Federal Court decision, they may pursue a further appeal to a higher court, such as the Full Federal Court or (when all other avenues have been exhausted) the High Court of Australia. Such appeals are limited to questions of law, so the parties are limited to whatever facts were established in the ART or in the initial Federal Court matter.

• What you can expect: Appeals are complex and costly, often involving intricate legal arguments.

• What you should consider: You should weigh the costs and benefits before pursuing this stage. The quantum in dispute could easily be dwarfed by the costs of further litigation. Litigants also risk receiving an order to pay the ATO’s legal costs in the event they are unsuccessful. The high costs and risks of the appeal process highlight why taxpayers should take action early in any dispute with the ATO.

• Timeline: A further appeal could take more than 6 months to more than a year, depending on the court's schedule and the complexity of the legal issues involved.

Conclusion

This guide outlines the key stages of a tax dispute with the ATO, from initial risk review to potential appeals in higher courts. Each stage involves different powers for the ATO and different obligations for you as the taxpayer. Understanding these stages and their timelines can help you manage the process more effectively and decide when to seek professional advice.

For ATO queries, you may also need to contact them directly – ATO contact number. If you need legal assistance, please do not hesitate to contact us.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.