The Australian Taxation Office’s (ATO) “asset betterment method” is targeted towards individuals and businesses dealing in the cash economy who fail to correctly report and remit their income tax obligations. This approach ensures that those who think they can escape paying their full amount of tax by underreporting or not reporting at all, are identified, remedied and penalised accordingly.
The ATO enforces tax compliance
The ATOs role is to administer and collect payment of taxes from individuals and businesses across the country. All entities that earn taxable income in Australia have an obligation to report and pay tax to the ATO.
However, not all eligible taxpayers are honest in meeting their tax obligations. A number of people, and businesses, are of the opinion that if they deal in cash, then the ATO will not be able to correctly assess their income tax liability and therefore they won’t have to pay tax, or at least pay less than what they might be obligated to if they reported as they were supposed to.
As you might expect, it is not that simple. The ATO has many checks and balances in place to identify those who are underreporting, or not reporting at all, and ensure that they not only pay what they owe, but applicable penalties too. Their compliance enforcement efforts continue to be strong across a number of taxation areas.
The message is pretty clear and easy to understand – do the right thing. Accurately report your income and pay what you owe. If you don’t, when the ATO finally catches up with you, you’ll likely end up having to pay more than if you had reported correctly in the first place. Not to mention the time and cost of potential court dealings and other associated costs.
What is the process for those found to underreport or not report their taxable income?
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.
One way in which the default assessment can be determined, is using the “asset betterment method”. This method involves the Tax Commissioner calculating and estimating the appropriate amount that they believe income tax should be levied on.
How does the “asset betterment method” work?
Under the “asset betterment 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. That figure is then considered to be the assessable income of the taxpayer.
What commonly happens in these situations, is that the taxpayer believes the default assessment to be excessive.
Importantly, the law does not require the Commissioner to endeavour to ascertain an accurate representation of the assessable income and allowable deductions which the taxpayer has. In fact, the taxpayer bears the onus of demonstrating what their actual income was for the relevant year. It is not enough for them to prove that the assessment is incorrect or excessive.
In summary, the “asset betterment method” could mean that you end up paying much more than you may have been required to, had you reported correctly.
Recent “asset betterment method” case study – Mr & Mrs Ross
As recently as August this year (2023), we have seen examples of the application of the “asset betterment method” and how it can result in higher tax and costs for the taxpayers involved.
In the case of Ross and Commissioner of Taxation (Taxation)  AATA 2495, an audit identified that Mr & Mrs Ross had failed to disclose assessable income.
The Commissioner then issued default and amended assessments to both Mr & Mrs Ross, as well as substantial administrative penalties at a rate of approximately 75% due to their intentional disregard of a tax law.
Mr & Mrs Ross objected to the default and amended assessments that were issued. The Commissioner disallowed the objections in full.
They then appealed to the Tribunal.
Mr & Mrs Ross presented their arguments to the Tribunal and the ruling was such that the appeal was rejected and the Commissioner’s calculation using the “asset betterment method” was accepted.
In providing their decision, the Tribunal stated that in order to establish that an assessment made by the Commissioner under section 167 of the ITAA 1936 is excessive, the taxpayer must positively provide their “actual taxable income and, in doing so, must demonstrate that the amount of tax levied by the assessment exceeds her actual substantive liability by, in effect, furnishing a return of actual income which involves establishing both sides of the equation.”
While Mrs Ross’ penalty amount was reduced to 50%, this case serves as a reminder that the onus is very much on the taxpayer to be able to provide and substantiate their actual taxable income. The Ross’ were not able to provide solid evidence to refute the Commissioner’s assessment. There was a lack of sufficient documentation as well as many inconsistencies in their evidence. Highlighting the importance of accurate recording keeping when it comes to income, not just in case you need to defend yourself against the Commissioner, but just as good practice in general.
Key takeaway: If you don’t report (or underreport) your taxable income, the ATO will calculate it for you. And it more than likely won’t go in your favour.
Do the right thing. Accurately report your income and pay what you owe to avoid potential penalties and court proceedings. It’s simply not worth it. The ATO will catch up with you eventually.
Seek Expert Tax Advice
Expert tax advice has many benefits. Seeking tax advice before any issues arise can help to ensure that you are meeting your tax obligations as well as legally minimising the amount of tax that you are liable to pay. Should problems arise, and you require assistance liaising with the ATO to negotiate any potential penalties or court proceedings, seeking assistance from professional tax accountants and lawyers, like the team at The Quinn Group, can certainly help to navigate a resolution.
Contact us by completing an online enquiry form or call 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange a meeting or teleconference.