The question of whether a taxpayer has a reasonably arguable position is an important consideration to be taken into account in determining the level of penalties payable by a taxpayer where there is a tax shortfall. A tax shortfall is where a taxpayer makes, or fails to make a statement that results in an underpayment of tax. However no penalty or a reduced penalty may arise if, when making the statement, the taxpayer treated the income tax law as applying in a way that was reasonably arguable.
The reasonably arguable test is also relevant under the new "promoter penalty” regime since the definition of tax exploitation scheme cannot be satisfied if it is reasonably arguable that the "scheme benefit” is available at law, or would be available at law if the particular scheme had been implemented.
The tax law defines what is meant by the words reasonably arguable. Under the present definition applicable to the 2004-2005 and later income years, a matter is reasonably arguable if it would be concluded in the circumstances, having regard to the relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect. The word "about” in the above definition was added to the reasonably arguable test by amendments in 2005 to effectively restore the position which applied prior to the 2000-2001 tax year, i.e. before the relevant provisions in the Income Tax Assessment Act 1936 were repealed and replaced by similar provisions in the Taxation Administration Act 1953. Prior to the 2000-2001 year the test was whether, having regard to the relevant authorities, the taxpayer’s position is about as likely as not correct.
Without the word "about” being included in the present definition (such as occurred for the 2002 - 2004 income years inclusive) the reasonably arguable test for taxpayers would be technically more onerous, although the Explanatory Memorandum to the amending law indicated that the Tax Office had applied the law in those years, as if the word "about” had actually been included in the definition.
Notably, whether dealing with the 2001 and subsequent income years or with earlier years, the question as to whether a taxpayer has a reasonably arguable position must be determined having regard to relevant authorities.
What then are relevant authorities?
The meaning of relevant authorities is defined in the law and includes a taxation law, material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901 (such as any Explanatory Memorandum of the relevant Parliament), a decision of a Court or of the Administrative Appeals Tribunal (AAT), or a public ruling. Importantly, if any of this material is relevant to the matter under consideration, the material must be taken into account in determining whether the taxpayer’s position was reasonably arguable. For example, in Walstern v Commissioner of Taxation, in the context of a deduction claim under the general deduction provision, Hill concluded that it was not reasonably arguable that the expenditure incurred by the taxpayer was not of a capital nature because there was authority found in UK case law which had been "cited with approval by Dixon in Associated Newspapers Ltd and Sun Newspapers Ltd v Federal Commissioner of Taxation” that contradicted the taxpayer’s assertion.
What then is a reasonably arguable position?
In Walstern v Commissioner of Taxation, Hill made the following observations in relation to what it means to have a reasonably arguable position:
- the test to be applied is objective, not subjective
- the decision maker will determine the taxpayer’s argument and compare it with the decision on the law already made by the decision maker (which will be contrary to the taxpayer’s position)
- it is not necessary that the decision maker form the view that the taxpayer's argument in an objective sense is more likely to be right than wrong
- on balance the taxpayer's argument must be one that while wrong, can objectively be said to be one that could be argued on rational grounds to be right
- the argument must be one where, in making it, the taxpayer has exercised reasonable care, however, mere reasonable care will not be enough, and
- the case must therefore be one where reasonable minds could differ as to which view, that of the taxpayer or that ultimately adopted by the Commissioner, was correct.
The Explanatory Memorandum (EM) to the 2001 amendments to the reasonably arguable test should also be noted, in view of the fact that these amendments were not dealt with by Hill in Walstern v Commissioner of Taxation. That EM states in particular that:
- A reasonably arguable position must involve a clearly contentious area of law. That is, the law must be unsettled or there must be a serious question of applying settled principles to a taxpayer’s circumstances.
- The test does not require the taxpayer’s position to be the "better view”, it only needs to be arguable on rational grounds.
- There should be a reasonable expectation that the taxpayer could win in court or at the AAT.
It is clear that a taxpayer’s argument must be cogent, well-grounded and persuasive. There can be no reasonably arguable position just by stating and arguing the facts that are relevant to the case.
Is an opinion an authority?
Whilst in Walstern v Commissioner of Taxation, Hill expressed the view that an opinion based on the specific facts of a case could satisfy the definition of relevant authority, the position after the 2001 amendments is clearly different. In this respect it is to be noted that the EM to the amending law states that, "An opinion expressed by an accountant, lawyer or other adviser is not an authority. However, the authorities used to support or reach the view expressed by the adviser, including a well-reasoned construction of the relevant statutory provisions, may support the position taken by a taxpayer.” The need for the adviser to take into account all relevant authorities is obvious.
Conclusion
Having a recognised reasonably arguable position is a vital consideration that the Commissioner takes into account when levying penalties in relation to tax shortfalls. In the event that the Commissioner forms the view that the position adopted is not reasonably arguable the burden of proving otherwise falls upon the taxpayer.
In this difficult area of the law it is crucial that a detailed analysis of all relevant authorities is performed to form a proper view as to whether the taxpayer’s position is reasonably arguable. This requires a forensic legal analysis to be undertaken by skilled professionals. It is only when a detailed analysis is performed which results in a positive conclusion that taxpayers will be in a position to convince a Court that their onus of proof has been discharged.
For more information please contact:
| Michael Bersten
Partner
+ 61 2 8266 6858
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| Geoff Dunn
Director
+ 61 2 8266 5220
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| Daniel McInerney
Senior Associate
+ 61 3 8603 5625
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