The ATO continues to identify taxpayers who are avoiding their tax obligations by not reporting or under-reporting income, i.e. targeting the “cash economy.”
Where declared assessable income appears to be inadequate to support a taxpayer’s personal expenses or a tax return is not lodged at all, the Commissioner may make a default assessment of a taxpayer’s taxable income upon any basis that is reasonable and takes into account their particular circumstances using, for example, the asset betterment method which involves estimating the amount upon which income tax ought to be levied.
Under this method, the net worth of an entity at the end of each relevant year is compared with the net worth at the beginning of each of those years, and an estimate of annual asset growth is obtained. Non-deductible expenditure is added to this estimate and liabilities and exemptions are subtracted. A figure is then computed for total taxable income.
Recently, the Full Federal Court confirmed that the ATO’s use of the asset betterment method was adequate and just. Moreover, the Court rejected the taxpayer’s objection in relation to the Commissioner’s use of this method who argued that the issued assessment was excessive. The law does not require the Commissioner to endeavour to ascertain the assessable income and allowable deductions which the taxpayer has. In contrast, the taxpayer bears the onus of proving the assessment is excessive and requires to demonstrate what their income should be.
In summary, if a taxpayer receives an assessment based on the asset betterment method, he or she must be able to justify the increase in their assets, rather than proving the assessment is wrong or excessive.