Out of the shadows: Tax commissioner happy to go to court
With a new Commissioner of Taxation at the reins, the Australian Taxation Office has a clear message for corporate Australia.
“We continue to challenge aggressive profit shifting and will litigate disputes to test legal principles in this space,” new commissioner Rob Heferen has warned, describing the ATO this month as “well-resourced to address priority tax risks as we seek to sustain multinational and large taxpayer performance”.
The era of tax disputes being settled behind closed doors feels like a distant memory considering the ATO’s very public recent stance of renewing its focus on investigations and disputes, while administering expansive new anti-avoidance laws.
Transfer pricing, royalty withholding tax, intangibles, related-party debt and GST are all areas ripe for investigation.
This has ignited conversations around whether the approach of ventilating tax disputes in the public domain will lead to better outcomes for taxpayers and the broader community.
On one view, obtaining certainty on untested areas is a welcome development for the business community. However, it can also be a drawn-out and costly process.
Foreign powers are watching too. Earlier this year, the US Treasury wrote to its Australian counterpart urging it to withdraw a draft ATO ruling on the distribution of software and intellectual property or revise it.
The Americans took the view that the draft ruling was out of step with OECD regulations and created a “concerning imbalance” in the Australia-US tax treaty – having warned back in 2022 that this “could lead to treaty disputes”.
The impact of the ATO’s new approach is already evident in the bottom line. The Tax Avoidance Taskforce has helped generate more than $32.4bn of revenue from the largest public and private businesses in Australia over the past eight years – including $10bn just in the past two years – and has now been extended to run until 2028. The level of disputed tax returns is the highest in recent memory, almost double the levels disclosed in 2020, being $9.7bn in the last year.
With so much at stake, there is enormous pressure on multinationals to ensure they follow all existing tax rules, keep abreast of new court decisions and changes to government policy. No company wants to be the “one” that is airing their facts in court, but sometimes this is the best way to obtain certainty on the interpretation of the law – especially in periods of immense change and where interpretation has yet to be tested in court.
This is not only important for the company involved but also for the international tax community, which watches with interest as Australian jurisdictional law has significant international ramifications.
On a state basis, revenue disputes are on the rise, too, with the various states and territories administering relatively new laws spanning stamp duty, land tax and payroll tax. In response, we’ve seen a first-of-its-kind class action launched this year in Victoria seeking a refund of up to $500m, paid by various residents of foreign jurisdictions in relation to foreigner stamp duty surcharges and land tax surcharges. Participants in the class action are arguing that the Victorian laws breach Australia’s international tax commitments.
While the states have imposed higher costs on foreign buyers of residential property for years in the form of stamp duty charges or land taxes, it is rare to see a class action challenging a position in this context. We’ve also recently seen the Victorian Court of Appeal uphold a decision for the Commissioner of State Revenue in Victoria regarding capital raisings, resulting in substantial duty consequences in this space.
In this context of global and domestic tax reform the landscape is evolving rapidly, raising genuine questions of law which have not yet been definitively settled.
And with governments under extraordinary fiscal pressure and on the lookout for extra revenue, companies operating in Australia need to exercise extreme caution around their tax affairs, take advice and potentially be prepared to defend themselves in court should their operations fall into an area of dispute.
Simone Bridges is a Baker McKenzie partner and Australian head of tax.
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