This Chapter explains the current rules governing the amendment of assessments and discusses whether they should be changed to give taxpayers earlier certainty as to their income tax liability. The Chapter considers various approaches including shortening amendment periods, early notification of compliance activity and extending pre-assessment agreements.
The rules governing the amendment of income tax assessments attempt to balance two competing objectives, namely that:
- A taxpayer should pay the correct amount of tax according to law.
- Whether or not a taxpayer has paid the correct amount, eventually their tax affairs for a particular year should become final, unless they have deliberately sought to evade their responsibilities.
The law seeks to balance these objectives by allowing the Tax Office to amend assessments to correct errors, but only within time limits set out in the law.
This Review has examined the topic from the perspective that, in order to promote the concept of certainty, the period permitted for amendment should approach the minimum required by the Tax Office (and the taxpayer) to identify incorrect assessments and take action to correct them.
3.1 The amendment rules before self assessment
Before self assessment, the Tax Office’s ability to amend an assessment depended on whether the taxpayer had made a ‘full and true disclosure’ in their tax return of all the facts necessary for the Tax Office to make an assessment. 1
Where a taxpayer had done this, the Tax Office could increase the assessment within three years from the date that the tax on the original assessment became due and payable, but only to correct an error in calculation or a mistake of fact. The Tax Office could not amend an assessment to correct a mistake of law. In practice, this meant that if a person told the Tax Office all about a claim they were making in an attachment to their tax return and the assessor allowed it incorrectly, the Tax Office could not usually correct its mistake later. However, if an assessor had simply made a mistake in working out the details of the claim (say by wrongly calculating the proportion of private use of a motor vehicle used partly for work), that mistake could be corrected later, if discovered within the time limit.
Where a taxpayer had not made a full and true disclosure (for example, by not giving the correct details about a deduction claimed), or had been involved in a tax avoidance scheme, the Tax Office could alter the
assessment for up to six years. There were special rules allowing amendments in longer time frames in certain cases.
Finally, if the underpayment of tax was due to fraud or evasion 2. the Tax Office could amend the assessment at any time.
The rules for decreasing assessments did not depend directly on the adequacy of the disclosure by the taxpayer. Once an assessment had been made, the Tax Office could correct calculation errors and factual mistakes (for example, a forgotten claim for a tax deductible gift) within three years of the original assessment, but could only correct an error of law if the taxpayer objected to the assessment within 60 days.
3.2 The current amendment rules
The standard period now allowed for the Tax Office to amend an assessment (either to increase or reduce a taxpayer's liability) is four years. 3 For certain individuals with very simple tax affairs 4. the period is two years.
With self assessment, the concept of ‘full and true disclosure’ was removed from the amendment rules because taxpayers were no longer required to disclose the full details of their income and deductions in their returns and assessors no longer scrutinised that information before an assessment was issued. Amendment is now effectively unrestricted within the relevant time limits.
Where the Tax Office considers that there has been fraud or evasion, there continues to be no time limit on the Tax Office amending an assessment.
The law now also allows for ‘self amendment’ of assessments (to increase or decrease liability), meaning that the Tax Office can rely on statements made by a taxpayer in a request for amendment in the same way it can rely on a statement in a return.
3.2.1 Special amendment rules
There is a special period for amendment where Part IVA (the general anti-avoidance provision) is invoked. As with the previous system, the Tax Office has up to six years (from the date on which tax became due and payable under an assessment) to amend an assessment to cancel a tax benefit under that Part.
There are also some specific provisions allowing the Tax Office to amend an assessment to deal with special issues, regardless of the normal time limits. These special cases are discussed in more detail below at 3.4.6.
3.2.2 International comparisons
The table below summarises the periods of review that apply in Australia, Canada, New Zealand, the United Kingdom and the United States.
Table 3.1: Time limitation on tax amendments