1 Fraud and Evasion
The policy of the law is that taxpayers with simple tax affairs should be able to treat their tax affairs as closed after two years, or, otherwise, four years.
Outside those limitation periods, the Commissioner may only amend an assessment if he has formed the opinion that there was “fraud or evasion”.
That is a simplistic and idealistic view. There are numerous examples of extended and unlimited amendment periods related to the operation of particular provisions. Sometimes those particular exceptions, to the above rule, about limited time for amendment, reflect the particular problems raised by special provisions. I put those to one side.
‘Fraud or evasion’, in terms of section 170 of the Income Tax Assessment Act 1936, opens the door to an unlimited time for amendment, regardless of the taxing provisions concerned. Item 5, at section 170(1) simply provides:
The Commissioner may amend an assessment at any time if he or she is of the opinion there has been fraud or evasion.
Those words have a long heritage. According to searches at Austlii, the first use in Australasia, was in a New Zealand stamp duties law, of 1867. However the present context, relating to opening up periods of review, appears only to have emerged later. When it emerged in Federal income tax, in 1922, it was actually part of a reform introducing a limited period of amendment. There was no time limit previously.
Looking to the present, there is chatter that the Commissioner is becoming more inclined to form the opinion that there was ‘fraud or evasion’, allowing him to amend taxpayers’ assessments outside the review periods. The hard statistics about that may not bear this out. But the Commissioner has recently provided some visible process and rigour to making such determinations.
Such a decision raises the stakes for taxpayers under audit. First, anyone who has ever acted for a taxpayer, who is accused of ‘fraud or evasion’, will know that the accusation stings. On the other side, is a revenue authority, suddenly less willing to compromise, or discuss, matters with someone they regard as having not been straightforward with the ATO.
The accusation makes the relationship between the parties fraught. Advisers’ full skills of persuasion and communication, come to the fore, in attempting to have both sides look beyond these natural, human reactions.
With the allegation of fraud or evasion, generally goes a higher level of penalty, given the way that behaviour is relevant there; and most likely some element of uplifted penalty. With multiple past years of tax assessments, together with the high level of penalty, and the burden of interest going back possibly more than a decade, you have a problem which is often insoluble in monetary terms.
Though perhaps justified, or even required, by the legislation, such assessments and liabilities can themselves be an impediment to progressing the relationship between taxpayer and ATO.
Having set the scene, I briefly now treat each of the following topics:
▪ Elements of fraud or evasion
▪ Taxpayers’ options when the Commissioner has formed such an opinion
▪ A survey of the case law, ancient and modern, and some predictions.