Evasion – who should bear the “burden of proof”?

Evasion is a matter of great concern in our tax system and the Commissioner of Taxation is given exceptional powers to detect and deal with those who choose to evade their social responsibilities. In the main, the Commissioner uses his great powers wisely. However, in my long experience as a legal practitioner working in the SME area, recently, there has been a growing tendency to conduct audits spanning many years. The most egregious example I have experienced is 23 years.

Beyond the four-year period (or two-year period for small business taxpayers), an amendment is only possible if the Commissioner forms the opinion that there has been fraud or evasion. Recently, the Commissioner seems more ready to form that opinion based on suspicion rather than fact. The burden of demonstrating that the assessments are incorrect and what is the correct assessment is then cast on the taxpayer.

My main complaint here is that often the problem of discharging this burden depends on the production of receipts, documents and records which have been legitimately discarded in accordance with the statutory retention period. For income tax purposes, the usual retention period is five years for a taxpayer carrying on a business. Records relating to transactions subject to capital gains tax must be kept from the date of acquisition to the date of the CGT event and five years beyond. My concern here is with normal trading and not capital gains.

Often, a tax audit for a period beyond the four-year period will require a taxpayer to demonstrate that some amount received (as shown in bank statements, which never seem these days to be discarded by the banks) is not income or some expenditure is not sourced from income (for example, identified in the bank’s records of credit card transactions) and the records become critical. If the personal records have been discarded by the taxpayer consistently with the statutory retention period, it then becomes near impossible for the taxpayer to demonstrate that there had been no evasion.

It is time that the Commissioner’s ability to rely on a lack of information, where that information has been discarded consistently with the retention requirements, to succeed in out of time amendment cases, is critically examined. The right to amend out of time should be brought into line with the retention period. This might be done in a number of ways. One approach, and the one I prefer, is to reverse the burden of proof when the amendment relates to a period after the statutory retention period.

This would curtail the Commissioner’s enthusiasm for issuing out of time amendments based on mere suspicion of evasion. It is time that the legislature focused on this issue and brought fairness and certainty to taxpayers potentially beset with the crippling costs and emotionally distressing conduct of an audit where records are no longer kept and not required to be kept in accordance with the law.

Ken Schurgott

Ken Schurgott is President of the National Council at The Tax Institute.

The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.


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