ATO Fraud or Evasion: How Far Back Can the ATO Amend Your Tax Returns?

0:00
You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

If you haven't paid the right amount of tax, is it an error, is it a mistake, or is it evasion?

0:20
That distinction matters because if it's evasion, the ATO has an unlimited ability to go back and assess that tax that should have been paid.

More and more, the ATO are alleging fraud or evasion has occurred.

To unpack what fraud and evasion is, practically, how to assess that and what steps you may be able to take, I'm joined by Tyson Bateman.

0:46
Welcome, Tyson.

Thank you, Andrew.

Tyson, it sounds scary, doesn't it? Fraud and evasion. It sort of suggests you're going to jail.

We were talking before the show that this sort of has that, I guess, criminal connotation to it.

1:04
But that's obviously not what we're talking about today, is it?

Yeah, that's right.

The words certainly jump out at people, and perhaps when they receive a notice from the ATO where it alleges fraud or evasion, the immediate connection is that criminal idea of fraud or evasion.

But we're not looking at that today.

1:20
Today is, I guess, the tax law concepts. Similar connections to it, but it is different from that criminal sort of designation.

Yeah. And we're really unpacking it in one sort of limited context with amendment periods.

So what's the normal amendment period?

1:36
Yeah, that's right. So amendment periods are designed to give some fairness and equity, and I guess certainty, for taxpayers in their affairs.

The Commissioner has a right to go back and make amendments to the returns of taxpayers for income tax.

For small taxpayers and individuals, that's generally two years, and then for others it's four years.

1:57
So the general idea is that if you've got something that's happened far in the past, the Commissioner can't knock on the door and issue a notice of assessment.

The one caveat to that, which we're going to discuss today, is about fraud or evasion.

So that two and four year time limit is out the window.

2:15
If the Commissioner forms that opinion, then the Commissioner is able to go back as far as he wants and issue amended assessments, often very far in the past.

And that makes sense because taxpayers should have an ability to have some certainty over things. In general, I know there's some provisions that don't have amendment periods, but in general, you go and you do your tax affairs and at some point there's a sort of, it's not quite a statute of limitations, but it's sort of an end point to having to keep records and so on and so forth as well.

2:49
Yeah, definitely. There's a bit of an equity, I guess fairness idea to all this. Two years on its own, it's not a very long period at all compared to perhaps your statute of limitations, many, many more years.

And I guess perhaps that's why sometimes taxpayers get caught off guard if there isn't an amendment period limitation. We're seeing at the moment, it's quite topical with FTDT that's going all the way back.

3:11
And so that means it's a very big conflict compared to the income tax two-year amendment period.

Yes, yes, yes, yes. So in general, either two or four years for most things, unless the Commissioner's of the opinion that there's fraud or evasion, you're sort of home and hosed.

3:30
Yeah, that's right. Sometimes you can almost put the tax returns or the records away. Of course, you've got to keep them. But for some of those transactions that are beyond two or four years old, perhaps it becomes a bit out of sight and out of mind.

And it's only until you receive a notice or an audit or review notice from the ATO, perhaps there's an allegation of fraud or evasion, that these sort of transactions get brought back up again.

3:53
Yeah. Well, let's just unpack what those terms mean a little bit, because they're quite loaded. It's fraud or evasion.

I think probably most people would understand what fraud is, but what is evasion?

Yeah, it's a tricky one.

4:08
It's not defined in the tax Acts, and there is a body of case law that's developed over the last 70 or so years to try and give meaning to it.

But even with that case law, it's still a bit tricky to understand.

The general understanding is that it's more than a mere avoidance or mistake of tax.

4:26
The phrase blameworthy omission is thrown around, but those words are quite difficult to nail down.

So we're falling somewhere between fraud, which is deliberate. Someone's turned their mind perhaps to committing the fraud. And then we're above a mistake though.

4:43
So you're in quite this large grey area for evasion where, when you're having a look at all the factors, perhaps the mind was turned to it, or if it wasn't, it should have been.

It's a lot more subjective about what was in the mind, I guess, of the taxpayer at the time and how they did it.

4:59
But it is difficult to nail down, and I think the greyness makes it very hard.

Often taxpayers perhaps feel like they're closer on the mistake side of it, and the Commissioner has a very different opinion on that.

Yeah. Well, let's perhaps go through the case that we've discussed, because I think it probably brings out these principles in a practical way.

5:22
There's a case from 2025 called Kirtlan, which I understand is one of the rare ones that the taxpayers had to win.

Yeah, that's right. In this fraud or evasion space, there's been a lot of losses for taxpayers.

And I think perhaps while we chat through this case, it'll become clearer some of the difficulties that taxpayers have when a finding's been made.

5:42
So Mr Kirtlan, he was splitting his time between the UK and Australia. We're going all the way back to the 2006, 2007 and 2008 income years.

He lodged his Australian returns on the basis of not being an Australian tax resident.

A peculiarity though is that he also lodged his UK returns on the basis of not being a UK resident.

6:01
So he's in this funny situation where he's a resident of nowhere.

The Commissioner issued amended assessments in 2018. So yeah, we're looking at 10 plus years.

10 plus years. So it's well outside the amendment period. And if the Commissioner hadn't formed the view that there was evasion, then of course he was out of time.

6:22
The case was, I guess, finally handed down in 2025, so that's already seven years from assessments being issued. Perhaps an indication of how long these things take.

The single ground is whether the Commissioner should have formed the view that there was evasion.

That was the single ground.

6:38
If he was able to show the Commissioner shouldn't have formed that view, he succeeded and everything fell away because the Commissioner was out of time.

However, if he failed, he was looking at an amended assessment which included $3.8 million in unpaid tax and $1.7 million in administrative penalties.

6:54
So the stakes were clearly quite high for Mr Kirtlan.

Peculiarities in that case is that his accountant at the time was a Mr Spence, and they were very close friends. Based on the judgment, they spoke weekly and perhaps were closer than most relationships you see in a professional setting.

7:13
Mr Kirtlan advised Mr Spence of all of his plans about moving to London, his intention to move his family over there, the lease that he had taken up and various other very important details.

Mr Spence had formed the view that, well, based on what you've told me, I don't consider you to be tax resident of Australia.

7:30
I'm advising you to lodge your 2006, 2007 and 2008 tax returns as if you aren't a resident of Australia.

And not including that foreign income.

Yeah, that's right. So that was the main thing. He had a lot of UK-sourced income, which of course, not being a tax resident of Australia, wasn't getting picked up in his Australian tax return.

7:50
Mr Kirtlan lodged on that basis. And it's not until many years later, I'm not sure what the start of the review was that caused the ATO to have a look at it, but they've picked it up and seen that there was considerable income during those years.

And they've formed the view that actually, we don't think you had ceased your tax residency.

8:08
They were able to have a look at his dates in Australia, the fact that he maintained a residence here, he had a young family at the time who moved back, and then in the fallout of the 2008 financial crisis, he also moved back.

So it didn't appear quite as permanent perhaps as...

8:25
It didn't look like he really ceased his tax residence.

That's right, that's right.

So of course the review kicks off and the Commissioner is out of time but for fraud or evasion. So he has to make that allegation and ultimately form the opinion.

The member made an interesting comment that if the question he was being asked was whether Mr Kirtlan was a resident of Australia, that's probably a question that wouldn't fall in Mr Kirtlan's favour.

8:50
But that wasn't a question that he was being asked to look at. It was whether the Commissioner should have formed evasion.

The member had a look at the evidence from Mr Spence, his accountant, who gave a very detailed affidavit and was able to recall the conversations.

He had the information that Mr Kirtlan provided and was able to say that, based on the information given to me, I formed the view that he wasn't a tax resident of Australia.

9:12
The member said that based on that, he was of the view that Mr Kirtlan didn't commit evasion. In his mind and his view, acting on the advice of a fully informed tax agent or adviser who is aware of all the facts and circumstances does not amount to evasion.

9:32
Now the position was incorrect. Clearly, he was a tax resident of Australia, but it wasn't evasion on the part of Mr Kirtlan.

So this was one of the few times we've ever seen fraud or evasion fall away, at least in the tribunal setting.

But I think importantly, it shows that in order for that to happen, you had to have quite a unique case of a tax agent being fully across the facts for a client, perhaps having a closer relationship than many other advisers and clients would, and really being informed on the facts at that time.

10:03
Where these things often fall aside is that you don't have good books or records or don't have good evidence.

But here we had Mr Spence, who was able to recall all the things he'd been told and the things he told Mr Kirtlan.

Yeah, yeah. It's interesting because these evasion discussions, I mean, they're only relevant if there's something that's done wrong to start with.

10:24
And unless it's sort of black and white, cut and dry, you probably would start with a dispute about whether or not that thing is correct or not.

But for the evasion discussion, I sort of think about it as, well, how wrong was it?

Yeah, almost.

Yeah.

10:40
As much as the member was like, look, I don't have to look at this issue about his residency, it clearly plays a part.

If Mr Kirtlan claimed he wasn't a resident but he was in Australia 365 days of the year, the position's not even close to being arguable.

10:57
But here it was grey. It probably fell against Kirtlan, but at least there was a certain amount of greyness.

But you're right, this evasion question often comes down to, like, how wrong are you? How credible was it really for you to take that position?

And in this case, they found there was enough credibility.

11:14
Look, if it was different, if it was not about residency, but perhaps there was just a tradesperson taking cash jobs or something, then what basis would you have at all to?

Yeah, it probably assists Kirtlan that the residency question is already a very tough grey one.

11:32
It's not certain. We're looking at the resides and the domicile test. Perhaps it's an indication that we should just move to a 183-day bright line objectivity test.

But this was inherently subjective in terms of the subject matter. Perhaps he wouldn't have been successful on a much more objective part of the law.

11:49
Yeah, yeah, yeah. But I mean, there are so many parts of the law that affect taxpayers that are unfortunately grey.

Yeah, that's right.

The big fraud or evasion one we're seeing in recent ART cases is unexplained deposits. And unfortunately, these are all coming up as losses at the tribunal.

12:09
It might be because they're the only ones that are getting there, but they all have a very similar fact pattern of unexplained deposits into bank accounts of taxpayers and then a lack of books and records or a credible explanation for what that could be.

And I wanted to just pick up on that point and explore that a bit further.

12:24
ATO alleges that there's this fraud or evasion. The taxpayer has to prove that that's not the case.

Yeah, that's right. It's unfortunately another issue with the onus on the taxpayer, and it probably is a good time to discuss how is the best way to try and fight this allegation?

12:44
The best time is before, I guess, that opinion's been formed. And the process of this happens is that at audit there'll be an allegation of fraud or evasion, or perhaps it's part of the review.

The ATO case officer will then need to make submissions to something called the National Fraud or Evasion Panel.

13:01
On that panel sits senior members of the ATO. They review the submissions and they ultimately provide a recommendation whether to form the opinion or not.

That is an administrative requirement, and so it's probably best at that stage to try and make sure that the evasion opinion isn't formed.

13:20
Once there is an assessment and the evasion opinion is in that assessment, suddenly you're fighting against the onus of proof, and the taxpayer has to prove that the Commissioner shouldn't have formed that opinion.

So, you know, it's very difficult to prove a negative in one of these things.

13:38
And so the best time is obviously before the audit, if possible.

Yeah, yeah, yeah. Like most things in an ATO dispute, try to engage early and before an assessment issues.

Unfortunately, that's always the advice, but it rings true. I think there's a reason why a lot of these ART cases ultimately are a loss for the taxpayer on this issue, because the cards are stacked against you on many of these things.

13:58
That's why Kirtlan stands out as a bit of an anomaly. But even within that, there's some anomalies in that case which don't apply for everyone. So important to keep in mind.

It's interesting with record keeping as well because, I mean, this Kirtlan case wasn't until, you said, 2018 until it starts to be agitated, and you might be forgiven for thinking, oh, well, it's 10 plus years ago, I don't need to keep records.

14:22
Yeah, but then if you don't, how are you going to disprove? Especially when it's your onus to prove that.

So it makes it very, very difficult with these historical allegations.

Taxpayers are prejudiced often if it's so far in the past. I have seen cases where perhaps key decision makers have passed away or they've moved on, or perhaps they're in ill health. It's not realistic to be able to get the records or any sort of evidence from these people.

14:47
So I think that comes back to the balance of why there are time limits on the ATO making amended assessments.

But the issue is, once that fraud or evasion finding's been made, it can take many, many years for that to run out.

Well, related to that, I wanted to touch on, I guess, the relevance or importance of advice, particularly sort of contemporaneous advice.

15:10
So there's some sort of transaction, some sort of greyness on how the law applies. What's the benefit of getting that advice?

Yeah, obtaining advice falls, I guess, within one of the things the ATO looks at when they're assessing if there's been evasion. The complexity of the law, the number of years that the matter runs over, the nature of the matter.

15:34
And so if you are in a grey area, it is important you obtain specialist advice on the issue.

Kirtlan stands for that. If you obtain advice from a fully informed adviser who knows all the issues and the facts, that will go a long way to protecting you from potential evasion allegation.

15:53
Unfortunately, we see times where perhaps taxpayers have acted without advice and it does weigh against the taxpayer, because then suddenly they're having to try and prove that evasion should not have been formed.

But you can't show they've turned their mind to the issues or turned their mind to the issues in an appropriate way.

16:11
So it is important to go and get advice, particularly if there is a grey area.

It would be very unfortunate to get past that four-year review period thinking that you're home and hosed, but unfortunately an evasion allegation pops up.

Well, Tyson, I want to thank you for being part of this discussion on fraud or evasion.

16:27
We've discussed the importance of that distinction going back to amendment periods. How far back can the ATO go? What if the ATO does allege that? What's the process internally within the ATO, the benefits of engaging with the ATO early, and then the really interesting Kirtlan decision where taxpayers actually won that evasion allegation?

Fraud and evasion allegations really sit in a different sort of category.

16:55
We're not talking about a substantive tax liability in one sense, but it all goes to whether or not the Commissioner can actually go back.

If you're in a situation where the ATO is alleging fraud or evasion, I'd certainly recommend getting specialist advice as early as possible because that can really affect the trajectory of the dispute.

17:18
Reach out to Tyson if you have any issues before the issue gets away from you.

Thanks again.

Thanks, Andrew.