Documentation the ‘the big message’ from 2023 court cases, says BDO
A raft of tax disputes in the courts this year have shown that good records are vital for winning disputes with the Tax Office, says a BDO tax partner.
Several prominent court decisions this year [including name a few] have further demonstrated how critical maintaining good records is for taxpayers, according to BDO tax partner Mark Molesworth.
“If I look at retrospect at the 2023 year, the rule around keeping good documents has really come to the fore,” said Mr Molesworth.
“We’ve had cases like the Guardian decision where the taxpayer lost in respect of one year, but they won in respect of several other years because they had kept really good records.”
In the Guardian decision handed down in January this year, the Full Federal Court rejected the ATO’s position on the application of s 100A for certain income years in relation to trust distributions made by a trust to a wholly owned corporate beneficiary.
The original 2021 decision had rejected s100A assessments by the Commissioner on the trustee, Guardian AIT, which added up to more than $5.5 million including substantial penalties for the three years in question, 2012–14.
The ATO did not appeal the primary judge’s decisions in respect of the 2014 income year but contested 2012 and 2013.
In the appeal decision, Justices Perry, Derrington and Hespe unanimously decided that s100A did not apply to the 2012 income year and further that Part IVA did not apply to enable the Commissioner to determine in respect of the 2012 income year.
Mr Molesworth also referred to the more recent Bowerman decision, Bowerman and Commissioner of Taxation (Taxation) [2023] AATA 3547, which was a determination by the Administrative Appeals Tribunal.
“In the Bowerman decision, the taxpayer managed to claim a loss on the disposal of a property. I question whether if the taxpayer had had such good records whether that decision would have gone that way.”
“So the really big message coming out of the court and tribunal decisions over the course of the 2023 year has been that really good documentation is the secret to even having a chance of winning your arguments against the Tax Office,” said Mr Molesworth.
Mr Molesworth said if tax professionals ensure clients have thorough documentation and records, then this will help deter the ATO from taking on a case against their client.
“That’s the approach we always try to take, it doesn’t always work, but the Tax Office may think that that running a case against our taxpayer is less attractive,” he said.
Mr Molesworth said accountants should be thinking about the documentary support for every transaction that they see.
“That’s particularly relevant in relation to journal entries. The journal entry itself is not evidence of anything but the question we should be asking ourselves is what documentary evidence we have to support the making of that journal entry,” he said.
“That could be for things like loan repayments or set offs of loans between taxpayers and those sorts of things where unfortunately there is no underlying documentation.”
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