What if I get it wrong? The benefits of having a ‘Reasonably Arguable Position’

Introduction

Unfortunately, there are many instances where Australia’s tax laws are not black and white. For private businesses and their owners, some difficult tax issues include:

• do the small business CGT concessions apply to me?
• is the sale of that property ‘income’ or a ‘capital gain’?
• can I use tax losses within a trust?
• is that expense tax-deductible?
• does this loan result in adverse tax consequences under Division 7A?
• do the general anti-avoidance rules (Part IVA) apply?

Each of the above tax issues can be very complex, and they are just a snapshot of tax issues that can be faced by business owners when navigating the Australian tax minefield.

While your accountant or lawyer can provide you with their advice, ultimately you need to determine what position to take (e.g. through the way in which your tax return is lodged).
 

What if you get it wrong?

What are the consequences of getting it wrong? What if you lodge your tax return on the basis that the small business CGT concessions applied, and the ATO or the Court ultimately disagrees with that position? 

Australia’s tax system contains a robust system of penalties. These penalties typically operate to impose a financial impost on a taxpayer that has a ‘tax shortfall’ (in other words, paid less tax than they should have).

Broadly, the rate of penalty imposed is based on the taxpayer’s behaviour or ‘culpability’. Penalties can range from 25% of the tax shortfall up to a whopping 95% of the tax shortfall. On top of the tax shortfall and penalties, the ATO can also impose substantial interest. Unfortunately, getting it wrong can be a very expensive mistake.
 

Benefits of a ‘Reasonably Arguable Position’ Paper

The good news is that the rate of penalty can be nil even if the ATO or the Court concludes that the position you adopted is incorrect. For instance, if you and your tax agent have taken ‘reasonable care’, and the position adopted is a ‘reasonably arguable position’ – the penalties imposed on the tax shortfall will be eliminated. While the actual tax shortfall and interest would still be payable, having a ‘reasonably arguable position’ may avoid a very expensive financial impost on top of that.   

A common way of demonstrating that you have taken ‘reasonable care’ and evidencing that the position is ‘reasonably arguable’ is through a ‘reasonably arguable position paper’ (RAP Paper). A RAP Paper usually takes the form of detailed written tax advice that sets out the basis upon which a tax position is ‘reasonably arguable’ (not the lyrics to a new Eminem song). 
 

What is a reasonably arguable position?

A position is ‘reasonably arguable’ if it could be concluded in the circumstances, having regard to 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. Being about as likely to be correct as incorrect will suffice (i.e. the taxpayers’ positions need not be more likely to be right than wrong, or even 50-50).]

Whether a position is ‘reasonably arguable’ is an objective test that is determined on the basis of the authorities applying at the time that the position or statement is made. Those authorities include the relevant legislation, court decisions and extrinsic materials (such as explanatory memorandums).
 

Doyle’s Case – A Cautionary Tale

Doyle v FC of T [2020] AATA 345 (Doyle) is a timely reminder of the importance of a position being in fact, reasonably arguable. In Doyle, the taxpayer lodged their tax return on the basis that the receipt of net proceeds from the sale of certain properties were capital gains (not ordinary income). The Tribunal disagreed and the taxpayer had a tax shortfall.

The taxpayer argued that no penalties applied on the tax shortfall because it took a ‘reasonably arguable position’ (that was consistent with an advice obtained from a professional adviser at the time). The AAT disagreed with the taxpayer’s contentions that its position was ‘reasonably arguable’. Briefly, this is on the following basis:

1. the Tribunal confirmed that a taxpayer’s position would not be reasonably arguable where the position is founded upon an unreasonable view of, or disregard for the facts; and
2. the Tribunal found that the taxpayer’s position in Doyle was founded upon an unreasonable disregard of certain facts. Those facts included that one of the purposes of acquiring the properties in question was to develop and sell the lots for profit. Based on those facts, the authorities at the time were ‘clear’ that the net proceeds would be income.

The recent case of Doyle is a timely reminder of the importance of a position being in fact, reasonably arguable. The mere fact of having a document that states your position is reasonably arguable does not automatically mean that it is. A RAP Paper must be more than ‘lipstick on a pig’. It is important to ensure that the position is, in fact, reasonably arguable.
 

Conclusion

For taxpayers considering adopting a position that is less than certain (and wish to be protected from substantial penalties), it may be worthwhile to consider obtaining a RAP paper from a professional adviser (as an alternative to seeking a private binding ruling from the ATO).

However, it is critical to ensure that a RAP paper is correctly founded upon a proper consideration of all of the relevant facts and the applicable law at the time. That way, even if the position is ultimately incorrect, no additional penalty impost applies to the tax shortfall.
 

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.