5 tips for successfully objecting against ATO decisions

5 tips for successfully objecting against ATO decisions

You’re probably at this page because you’ve felt your heart sink after the friendly ATO auditor just sent you a massive tax bill based on something nebulous.

This is how ATO decisions are usually made: The ATO usually forms a theory and works backwards from it. You probably got triggered for an audit because your business wasn’t profitable enough or some number somewhere didn’t reconcile with another number somewhere else by a few bucks. Whatever the reason you got flagged for audit, that’s the theory the ATO is now going to try to prove.

You see, the ATO has a lot of faith in its data matching and analytics and applies that overlay over everything it sees.

Let’s say the ATO data says that a business should make a 20% profit margin.  If you don’t make a 20% profit margin then the ATO will be suspicious.  There could be many reasons for this, for example, not every business will make a 20% profit margin, this is an average so it means some people will be above it and others below it, or if everyone makes a 20% profit margin regardless of how much effort they put in wouldn’t everyone just slack off and earn the 20% profit margin?

These points are all logical, but unfortunately do not address the core concern of the ATO which is why you are outside the 20% profit margin. 

You can’t really win, because at the end of the day the ATO theory will be that the 20% profit margin is coming off the back of you collecting cash payments to hide it and the reason you have nothing to show for it is because you spent all the money on alcohol, drugs or gambling.  You also didn’t give them all the information they requested because you didn’t disclose the invisible cash you apparently made and spent.  So here comes a big bill and a big penalty.

It’s the standard playbook and the Government is encouraging it by giving the ATO more money to do it even more.

This means you are likely to have to go to objection, and probably to Court because the objection team will often be too scared to overrule an auditor because no one at the ATO wants to be the guy/girl who let someone off with a lower bill than they could have got.It is helpful to understand the background of how ATO decisions are made, as this helps formulate a strategy for addressing it.
Here are 5 tips to successfully objecting:

1.Know you are in it for the long game

Your strategy should not be to win at the audit stage or the objection stage, it needs to be to win at the Court stage.  You will know very quickly whether the ATO is likely to find in your favour.  If they are working a theory like you should have a higher profit margin there is little point bothering.  You need to wait it out until you get to someone who is actually independent which means the judiciary.  The ATO doesn’t mind losing in Court even if it means they have to pay your legal bill because it also means they aren’t the one who made the decision to reduce your tax bill – it was the Court – so they can’t be criticised for not trying to collect the maximum amount possible.

2.Cover all bases in your grounds of objection

When you go to Court, you will be limited to the “grounds” of objection you listed in your objection to the ATO.  You need to make sure all your grounds are in there.  This means you will need to include alternatives and hypotheticals.  An example of this is to say that even if you owe the tax under this section, you would not owe the tax because of a different section, and so on and so forth.  You really want to include all the possibilities you can.

Remember:  The key is to set it up for a Court victory.

3.Tease out all of the ATO’s conspiracy theories

This is important but often missed.  The ATO will often have bizarre conspiracy theories such as how you have a gambling problem or something else that’s out there.  Don’t fight this, but write it all down, or better yet reduce it to email and send it to them as your understanding of your conversation with them.  All of this stuff needs to be documented because you will want to use it later.  If the rationale is way out there, it will be helpful in seeking compensation for defective administration.  It also casts into doubt the entire administration process, which is another thing you can bring up in Court.  It won’t affect the technical aspects of your case, and to be frank the ATO is not embarrassed by ineptitude because they are usually proud of it, but it does give you a higher chance of getting more of your legal costs paid by the ATO if you win so it is worth doing.

4.Get very specific on the issues in dispute

Usually the issues in dispute can be narrowed down to only a handful of things.  It is good to get this as precise as possible because it means you can focus your case on a specific point, which will save you time.  Otherwise there will be a lot of legal issues to cover and each legal issue means more time and more chances of losing.  You want to run a tight ship and take a sniper shot to what the ATO is relying on and beat them with that one shot.

The ATO usually doesn’t mind spending a lot of time in litigation, because they don’t have to pay the bills (even if they lose).  It’s the taxpayer that pays the bills.  So they don’t really feel any need to be efficient or to run the case in an economical way.  They are more about covering all the different issues they think are important, which, if you have to respond to it, means a lot more work (and cost) for you.  Hence – make the issues specific.

5.Stay objective

Justice usually happens in the end – the key word there being the end.  You could use up a lot of energy fighting the tax office along the way and it will be for no point.  You need to be honest with yourself during the process and judge the officer you are dealing with at a human level – is this person, fundamentally, going to be helpful?  If the answer in no, then don’t bother fighting them, you will just get tired and end up going nowhere.  You need to move through the process as fast as you can until you get to someone who will be helpful.

Never forget the fundamental factors at play – and the best way to do this is pretend you are working at the ATO.  The Government is in deficit and needs money.  They are asking you to get money.  You are trying your best to get money.  That’s all you’re thinking about.  So if you are a tax officer and someone is fighting you, wouldn’t you just make an adverse decision and kick the can down the road?  Nothing happens to an ATO officer if they make a poor decision which ends up getting overturned in the taxpayer’s favour.  But if an ATO officer makes a poor decision which favours the taxpayer instead of the Government, well, then God help them.  Remember that.  They are not going to risk their job for you.  ATO decisions can be challenged, and its up to you to challenge them.

We offer a free 15 minute consultation to anyone who wants to talk about this issue.  After dealing with the ATO for so many years, and after earning a track record of success, we would be happy to share our experience.

Adam Ahmed is an Australian international tax lawyer. Adam has over a decade of experience working at 3 of the big 4 accounting firms and one of the top tax law firms in Australia. He is currently the managing director of Adam Ahmed & Co. 

5 tips for successfully objecting against ATO decisions

5 tips for successfully objecting against ATO decisions