It's scary enough to be a small business in Australia with its usual commercial risks, like shopping centre leases, bank lending, employment law, and government at all levels arbitrarily setting new rules.  A scarier possibility is being targeted by the ATO.

That's not just me either, this is actually the conclusion of two official (government) bodies, the Board of Taxation's 'Review of Tax Impediments' in February and the Inspector General of Taxation's 'Management of Tax Disputes' released in March.  (If you would like a depressing read, these are highly recommended).

Both are high-level authorities and these were not light-weight reports.  Even though the language is the usual bureaucratic niceness, they were both scathing of the ATO.

The ATO is required to interpret and implement the laws of the government, it does not make up the laws itself, but where the reports are most critical is of the ATO's behaviour and attitude.  This is the area where we often experience the most problems too.  There can be a difference of opinion between the way of approaching the taxing of a transaction and the way we see it, but unfortunately there is a 'that's it, our way or no way' attitude.  (If we think we're right, we'll recommend objecting to the AAT - the taxpayer wins around 70% of the time).

One example, when applying for ABN's the ATO decides what is an 'enterprise', a view which is often unlike the real world.  If it is a start-up the ATO can refuse to grant an ABN because it is not an enterprise, which it can't be without having an ABN to get under way.  Clear?

Another, many businesses now operate as self-employed contractors.  The ATO says its definition of employment means these cannot be independent contractors.  One of the more stupid rules expects them to have substantial equipment; but consider IT people, a $1,000 laptop and a heap of knowledge.  You only want them to fix the immediate problem and go, not become entitled to penalty rates, holidays and redundancy rules.  Getting the idea?

Some more examples of bully behaviour:

- A Director Penalty Notice can be issued because the ATO has made a retrospective interpretation of a rule.  For example, a Trust can claim superannuation for the principals, but the ATO now disagrees with the claim unless done a certain way.  A DPN is a personal debt for the money owing, and very hard to defend.

- Where there is a dispute, however genuine, the ATO can require the payment of a big part of it before any appeal.  Then you have no money to fund the appeal!  Some of the reasons for their decisions/interpretations are just rubbish and what you'd expect from recent graduates or people with no ides of how the real world operates.  You have to provide huge amounts of information quickly, put up with a 'guilty until proven innocent' mindset, and spend months or even years getting ready for court.

- 97% of all tax disputes involve small business (21,756 cases in the Reports) and often the ATO just won't settle.  However, a new dispute management system for big business allows deals to be cut.  Just not for small business.  I could be cynical but is this about who's got the biggest lawyer?

- Benchmarks used by the ATO may determine whether deductions are excessive or income understated.  The taxpayer must prove the ATO assessment is wrong, which can be hard to do without a lot of data, work, and cost.

So, perhaps now you can see why we suggest taking the cautious approaches we sometimes do.  Certainly, claim what is allowable or avoid tax being applied where possible.  But don't go over 'the line'.

Every dispute with the ATO is costly and stressful.  It is not just the interpretation of the tax law that causes that, but more about the 'oppressive behaviour' of the ATO.  We do not back away from taking on the ATO, in fact we usually win, but it is hard to determine strategy where your opponent is acting unreasonably and what is worse, allowed by law to get away with it.