The ATO Tax Con. Here’s how it works

A practical guide to how you will be treated by the ATO if/when they assess you have a debt.

I chatted last week with a Federal politician about the extraordinarily oppressive powers of the Australian Taxation Office (ATO). The politician is well-versed in tax issues but was quite shocked when I laid out the core of the ATO’s legislative powers which enables the ATO’s abuse of taxpayers.

Yesterday, I had a long chat with an experienced tax accountant. The accountant was explaining how the ATO has become increasingly aggressive towards taxpayers and accountants. He stated that the ATO is releasing more and more declarations about what it views as its interpretation of tax law. Further, whether that ATO view is correct or not, the ATO assesses tax and enforces it according to its interpretation. On top of that, accountants now have obligations to report to the ATO any of their clients that they believe, even suspect, might be involved in dodgy tax dealings. This includes taxpayer behaviour that may not align with the ATO’s view of tax law. If the accountant doesn’t report, then they can be struck off as a tax agent.

Photo by Jon Tyson on Unsplash

It might seem reasonable that accountants should be deregistered if they fail to report suspect clients. But let me explain, hopefully in clear point form, why the ATO’s behaviour and powers stink. It’s the same explanation I gave which shocked the politician.

It boils down to this.

When the ATO conducts an assessment of someone’s income or tax dealings and assesses that a tax debt is owed, that ‘assessed debt’ becomes a debt at law. Consequently:

• The debt is legally due and payable immediately.

• Straight away the ATO starts charging interest and applies financial penalties against the ‘debt’.

• The ATO can legally garnishee (forcibly remove) money from the taxpayer’s bank account to pay the debt.

• The ATO can report the debt to credit rating agencies, thereby killing someone’s credit rating.

• The ATO does not have to prove its assessed debt. The taxpayer must ‘disprove’ the ATO’s assessment, but the ATO has no obligation to co-operate with the taxpayer about how the ATO came to its assessment.

Let me walk you through how this plays out in a practical way for any taxpayer. I’ll paint you a general scenario based on my 20 years-or-so of close, detailed involvement with significant numbers of taxpayers, mostly small businesspeople, who were confronted by incorrect and/or dubious ATO debt assessments.

Here’s what happens.

An ATO Audit

Say the ATO decides to audit you. You’ll receive a politely worded letter announcing the audit. You are required to provide information and data which often extends beyond the five years you are required to keep records. The ATO can demand such extended records when it ‘forms an opinion’ that there may be tax fraud. The ATO does not have to, and frankly never does, explain why it ‘formed an opinion’ that you have engaged in fraud.

On the issue of the ATO’s ‘forming opinions’ of fraud, there is, by way of example, solid documented evidence in the 2012 GST gold scandal of the ATO falsely accusing small business gold traders of fraud. The ATO evidence was literally non-existent (I’ve studied the documents) and in my opinion was an ATO cover-up of its incompetence. See The bungles that forged Australia’s biggest tax fraud. Further, I cannot see how the GST theft could be covered up for so long unless there was ATO insider, collusive activity.

And don’t think that ATO fraud opinions occur only with high-profile cases. The ATO forms such opinions on very ordinary mundane things that can affect anyone. I’ve seen repeated ATO fabrications of fraud on very silly stuff. Remember, the ATO was directly complicit in the horrific false allegations of fraud against social welfare recipients in the Robodebt scandal. See my analysis The ATO is out of Control. The fact that the ATO couldn’t get it right when assessing the lowest of income earners demonstrates that its incompetence starts at the most basic of levels.

So, moving on.

ATO tactics

The ATO has completed an assessment and has declared a tax debt against you. It may have formed an opinion of fraud or not. You receive a long (say, 10-page) letter in complex ATO language that you don’t really understand. It may cite a complex piece of tax law that seems to condemn you. In fact, the condemnation is based on the ATO’s opinion of the law which may or may not be correct. Or the ATO asserts that an expense you claimed is not an actual expense.

Now it’s perfectly acceptable for the ATO to make assessments. But here’s (let’s call it) the legalised scam. Whether or not the ATO’s assessed tax debt against you is accurate or not, the ATO immediately starts charging you interest and applies penalties. The current (January 2025) interest the ATO charges is 11.42 per cent. This compares with mortgage rates around 6 per cent. I’d call this extortion by the ATO, but it’s all legal!

Suddenly the financial clock is ticking and ticking fast. What was initially an assessed debt of (say) $20,000 will quickly blow out to (say) $25,000. You go to your accountant. $5,000 worth of accountant’s time six months later and your accountant advises you to just pay the money. It’s going to cost far too much to dispute it. Plus remember your accountant risks being struck off as a tax agent if he or she departs from the ATO’s view of your situation. Fear rules!

And your accountant requested accessing the ATO’s internal Alternative Dispute Resolution (ADR) process but it refused. Accessing ADR is not your right at law but granted entirely at the whim of the ATO. Read the ATO’s ‘outs’ in the ADR link.

But now let’s say that the assessed debt is $200,000. To pay this would mean needing to sell your home. You’re forced to appeal the ATO-assessed debt. With your accountant you decide to go to the Australian Administrative Appeals Tribunal. The AAT is supposed to be a cheap process, but it isn’t. You need a lawyer to work through the complex legal procedures. After six months, the ATO has changed its claim against you twice and refused to provide you key information on which it has based its assessment. (Yes, they can and do this almost as standard procedure.) You’ve had one AAT hearing about when to have a hearing. You now owe the lawyer and accountant $15,000—and that’s at mates’ rates.

Photo by Headway on Unsplash

You’ve had one face-to-face meeting with ATO officers, and you were surprised about how aggressive they were towards you. You tried to present alternative facts, to receive ‘facts’ from them, but what happened was that they played bureaucratic games with you. They threatened to report your ‘debt’ to credit reporting agencies. This could lead your bank to refuse to refinance your home mortgage!

You’re totally confused, wondering how this could happen, having arguments with your spouse and you’re feeling very on edge.

Lessons

What I’ve described is a very standard scenario. What I’ve concluded after many years of close study of numerous cases, is that the ATO strategy and tactic is designed to induce fear, confusion and emotional upset of the targeted taxpayer—that is you! And the truth is that the ATO’s tactics are only possible because of the ATO’s powers under the 14,000 pages of Australia’s tax legislation (a number which keeps growing).

Frankly, these powers, handed to the ATO in 1936, are an affront to any notion of criminal or civil justice. Neither the UK, nor Canada nor the USA grants its tax authority such oppressive power. In those countries a tax assessment does not become a debt until all appeals have been finalised. Plus, the onus of proof of a debt is on the tax authority, not the taxpayer.

Here’s a core change needed to legislation to at least align Australia’s tax assessment laws to international standards. I’ve explained this and more in recent Substack articles.

• “A tax assessment cannot be declared a ‘debt’ until all appeals have been finalised.

• Tax owed can only be reported on or collected once an assessment has been declared a debt.

• The onus of proof of a debt is on the ATO.

• Interest and penalties cannot be applied until a tax assessment has been declared a debt.”

In addition, we need a properly resourced and empowered Tax Ombudsman, and I’ve talked about that. (see end of article)

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My other Substack articles on ATO Reform are here.

There’s a huge amount of detail on the ATO recorded in the Self Employed Australia website (available for historical record)