Taxation Law - Don't Attempt to Rewrite History
Author(s):Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A.
Publish Date: October 22, 2008
One of the interesting things about being drawn into a taxation dispute is that clients will often adopt the mantra – deny, deny, deny or destroy, destroy, destroy. Essentially they are denying facts, the genesis of documents, or information which they say they does not exist because they have destroyed or secreted them away. Interestingly there are certain source documents which are inviolate the most important of which are bank statements. Some clients weave a story they hope will produce a positive tax outcome which will allow them to either mitigate or escape their taxation liabilities. In many cases they may be involved in an unholy alliance with other professionals who are tempering the advice of those retained to represent the recalcitrant taxpayer(s). The message through second guessing is normally all about trying to assist the taxpayer to maintain a position which is clearly untenable.
These circumstances normally come to light after the taxpayer receives a letter from the ATO indicating that they may be involved in onshore or offshore transactions which may appear to be tax non-compliant. Often Austrac has picked up these transactions and the taxpayer is put on notice that unless they notify the ATO or clarify what their true position is then they are at risk for the future, of course the only way to ensure maximum protection is to make a Voluntary Disclosure. Although a lot has been said about offshore transactions there are a number of non-complying taxpayers who are onshore. One of the most interesting problems often confronted by small to medium taxpayers are issues associated with the small business concession. Some of these situations arise when a change of structure is brought about either through the involvement of external factors such as a family law settlement or because the taxpayer wishes to restructure their affairs. One of the biggest problems is where individuals, companies and trusts are engaged to produce a tax-effective outcome yet something is overlooked, for example, shares in a company are transferred to a trust and sold within 12 months of the date of change of ownership. Of course, full capital gains tax applies and no concessions are allowed. In other words the 50% discount does not apply and unless the change in structure occurs after 2006 then there will be no active assets discount as well.
In other words if someone were to transfer a block of shares worth $1M to a trust and they were subsequently disposed of within 12 months then no concession would be available and tax would be paid at full marginal rates. If a year plus one day passed then the amount paid would be halved and if the active asset discount were to apply this figure could be further reduced. Unfortunately a number of taxpayers and their advisers try to rewrite history by drafting up a range of documents including agreements and confirming minutes which support their position. Whilst they are engaged in this and provided the matter hasn’t escalated into a full-blown dispute with the ATO on the front foot, they are hoping that whatever disclosures are made in whatever format they will prove acceptable to the ATO. One of the big problems here is that the ATO will look at all source documentation including bank statements and the flow of funds.
Essentially bank statements don’t lie. They are a transactional history showing debits and credits on particular dates and in some cases the source of those funds. Where history has been rewritten and the taxpayer(s) are trying to assert the contrary they are in for a hard time. In some of these situations clients like to maintain that a loan(s) has been made and as soon as this issue is raised the ATO gets onto the front foot as they have a great concern as to whether deemed dividends are involved and the taxpayer has tried to make a tax free distribution to himself. Yes, there are loan account considerations but if the whole story is a fabrication then it rests on the rocks of chance and opportunity rather than on the firm foundation of truth and compliance. History which is nothing more than fiction needs to be avoided at all costs because any reasonably prudent person would know that once the ATO calls for the source documentation including bank statements then the game is up. Once this happens the ATO will pursue the taxpayer(s) to the full extent of the law and their matter will definitely be referred to the CDPP for prosecution following investigation by the AFP. If you are at risk whatever your circumstances contact Frank Egan at LAC Lawyers immediately on 1300 799 888
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