Winning Cryptocurrency Tax Disputes Against The ATO

When it comes to compliance action, what’s really important to realise is that Australia’s tax system is a self assessment system, which means the onus is on you as the taxpayer to get things right.

To lodge them accordingly, and pretty much, then just leave it up to the ATO to do the regulations, to do the checks and give you the tick off and really not have to go and chase you up for your correct tax liability.

So, really the onus is on you to understand all these various aspects of cryptocurrency as we’ve run through and calculate your gains and losses and report them in your tax return as necessary.

But, that might be a bit above and beyond your certain expertise. Which is then why your obligation is to seek out professional help from people, such as ourselves as accountants, to help you out.

So, if you can do it yourself, that’s all well and good. The tax system certainly allows you to do everything. And if you’re not able to, or you’re not sure exactly what to do right, you’re meant to go out and seek professional help.

Because otherwise if you don’t, pretty much just be considered to be a little bit negligent, one way to put it. If you’re not reporting correctly when you otherwise could have gone out and got professional advice. And if you’re just outright evading tax, avoiding tax, not reporting, there’s very serious implications there, which I’ll touch on very soon.

What happens here?

You’re meant to get your tax return done and report it and get everything correctly. And then from that moment, the ATO processes those tax returns, and in almost all cases they accept those tax returns immediately, unless they do a pre-issue audit.

Why would they do a pre-issue audit? That would normally be because they quickly identify through their systems that you haven’t reported something.

How can they do that? It’s sort of part of their data matching processes that they have in place. So this either kicks in when you lodge your tax return, or sometime over your period of review, which I’ll mention just in a moment.

So, when it comes to data matching, the ATO as the regulator, gets the information from all over the place. We’re aware of this happens, it’s been happening for years and years now. They’re getting information from all over the place income, expenses, mostly around income and gains and assets and stuff. And when it comes to cryptocurrency we know that the ATO get the transaction histories from the Australian exchanges.

So they match them up with your file. Over there at the ATO, not sure exactly how that system works. This is what’s happening, collecting all this data and then when you lodge your tax return they look at that data, run it through their risk assessment systems to work out, okay, do we think Drew has lodged his tax return correctly? If so most likely, tick, yep, no problem. We don’t ever hear anything extra from the ATO. They’ve already issued our notice of assessment and paid our tax or got our tax refund.

But, if through that process something comes up whether through that direct data matching scheme or something else pops up then they might start to inquire.

The ATO has a “period of review” in order to look at your tax affairs and decide whether they need to adjust what you’ve already done.

So, this period of review is somewhere between two to four years or unlimited.

So, two to four years, it depends on your circumstances for that financial year.

So one year, you might have a two year period of review, which means that after you get your notice of assessment from the ATO, which is about a week or two after you lodge your tax return from that time, two years out, the ATO can come back and look at your tax return and adjust it. And so can you. Or, if you’ve got a four year period of review, it’s four years.

So, one year, if you’ve got simple tax affairs such as just a salary earner, yeah, if you’ve just dabbled in some cryptocurrency and made some gains and losses, that’s fine. As long as you’ve reported those, or a small business entity, generally you have a two year period review.

Although, something which can easily kick you over to the four year review, so it’s more complex taxpayers have a four year period of review, but something that can easily kick you over into that would be if you’re a beneficiary of a trust which is not a small business in itself.

So, one of the easiest ways to do that is essentially if you own a trust that’s on the stock exchange. So, ETFs (Exchange Traded Funds), are typically trusts. If you own those, it can quickly within the four year period of review. Which extends the amount of time the ATO has to look at your tax return.

So, say at some point, through this process, if you’re aware of lodging tax return having got something wrong within that time frame, the onus on you as a self assessment system is to go and amend your tax return.

So, at some stage, if you’re just coming along today, you’re here at watching this course and you’re learning about how crypto transactions are taxable events and otherwise weren’t aware of that; and you’ve been doing that from back a year, two, three years ago; the obligation is on you now to go and amend your tax terms and report correctly to fix it up.

Otherwise, what happens is the ATO, becoming aware of these things, will go ahead and, as a first step, they’ll typically just send out a letter to you, or it might be by email these days or through your MyGov account to say, “Hey, we’ve noticed this”.

So, if we’re talking about crypto, it goes, “Hey, we know you were trading on crypto exchanges in this period. And we can see on your tax return that we’re not too sure if you’ve actually reported gains and losses. So we’re going to give you, typically 28 days, to look at your affairs and and adjust it, lodge an amended tax return. If you got everything right, don’t worry about it, it’s all fine. Otherwise, we might do something”.

So, that’s normally the typical first step. And then at some stage after that, if you haven’t done anything and you have not lodged correctly, what the ATO will do is, they might give you, they may give you another warning, or they might directly reach out to you or they might just immediately do a tax office initiated amended assessment.

What that means is, they’ll basically, the information they’ve got, they’ll go, “Okay, what do we think your undisclosed gains are? Profits are?”, And throw that in your tax return, and say “Hey, you owe us tax on this”.

You don’t want to be in that scenario where they’ve done that because all of a sudden it becomes much harder to overturn that outcome.

Okay, so most of the time, essentially you want to get things right at the beginning. If you don’t, and get things wrong, that’s no biggie, don’t amend that, that’s fine; it’s if you’ve done something deliberate and evaded tax, that you’re really getting yourself into trouble here because that’s when the ATO has an unlimited period of review.

Tax evasion, tax fraud, unlimited period.

Big one here is basically, if (if) you had something to report and you haven’t, that’s most likely going to be tax evasion.

Yeah, you haven’t reported or if you reported something and (it’s like) way not wrong. Way not, I should say, it’s completely wrong, and you’re reporting it because you don’t want to pay tax; say, you may hit a million dollars and you’ve only reported a grand, and you know about this, that’s tax fraud.

So the ATO has a unlimited period to look at this. So, might be two years, might be four years, might be five years, might be 20 years. The ATO at some stage they’ll become aware of this and they’ll amend your tax return. And then you’re gonna be up for some serious penalties which I’ll mention soon.

So, essentially, you don’t wanna be in that scenario. You wanna be lodging correctly and getting everything right. And as professionals, that’s why we sit here to make sure you, you legally minimise everything .

(So say) So, if you go through that, if you end up getting reviewed or audited, take that very seriously. If the ATO happens to review or audit you and (and) they do something and you don’t believe it’s right, you do have through the ATO, through the tax law mechanisms, to object to that and then take them to a tribunal and through the court system if you have to. It’s all available there, but ultimately we want to avoid that outcome, of course.

So, let’s say you haven’t reported, you haven’t got around to doing it; whatever mechanism you’re just under yeah, you’re taking a while to report; the ATO eventually is going to come knocking at the door. Not actually physically at the door, but they’re going to be sending letters and say, “Hey, need to lodge”. “You need to do this”. “Final warning”, and you haven’t done anything, boom, they’re going to slap you with a default assessment.

So, that’s when you haven’t actually lodged. So, you haven’t triggered a notice assessment. You also haven’t triggered the period of review because you haven’t lodged. So the ATO (so) at any moment, essentially, as long as they’re giving you those warnings.

What they’ll do here is they’ll use their data matching facilities and everything. And they’ll work out, “Okay, what do we think? What do we think Drew’s income was? He hasn’t reported. What do we think it is? Oh, yeah, we see from exchanges he sold a million dollars worth of crypto. We’ll just put a million dollars of taxable income in Drew’s tax return”. And, then they’re going to issue that notice of assessment.

Being default assessment, I haven’t done my obligations as a taxpayer in this example, they’re going to slap me with a penalty. These penalties can range from 25% of the shortfall in tax, to 50% to 75% and maybe 95%. A huge amount on the penalties. So I can almost essentially double my tax by not (not) paying it correctly.

And then on top of that interest charges. And interest charges from the ATO, huge amount.

They’re not at the interest rate you’d get if you’re putting money in the bank, they’re much higher. You’re going to be owing the ATO a lot in penalties and interest charges and in very rare instances threat of imprisonment, but that’s (like) really serious implications, which I’m sure anyone here watching, watching the online course, shouldn’t have to worry about that because you’re going to be lodging correctly.

So, you don’t want to (you don’t want to) get in this situation.

Default assessments. The ATO is aware of these (these) unreported income, when they slap in there, they’re not going to give you like any benefits of tax concession.

In the example, I had a million dollars of sales, but I could have got the CGT discount. They’re not going to give it to me. They’re not going to give me that 50% discount. They’re going to bang it on there.

Failing that, they might just see that, “Hey, Drew’s gone out there. He’s (he’s) bought a yacht or he’s bought a house and he doesn’t have a mortgage on it or whatnot”. And they don’t have direct crypto and transactions. Because maybe I sold that million dollars on (on) an overseas exchange and they don’t have that direct information at this stage. Maybe in the future they will because they do data matching across (across) countries at times. But say they do this, say “Drew, he’s got a million dollars of assets and he’s got (he’s got) no loans, no liabilities, but he’s only been earning only a small amount through the years. Where’d he get this million dollars from? Doesn’t seem like he’s inherited any money or whatnot. That must be undisclosed income”.

So, what they do here is called an “asset betterment” test.

Basically, they go, “Oh, Drew’s got this million dollars of assets, hasn’t disclosed this, he must have got this income. Let’s slap that in his tax return. And he’s gotta pay tax on it. Plus he’s gotta pay basically double the amount because of penalties and interest”.

So, hugely worrying outcome there. So, you don’t wanna be in this land where the ATO’s done this because if the ATO do these type of assessments, man, it is hard to overturn them.

It’s not only, do I now have to prove that they’re wrong, so I might be able to prove they’re wrong, I might be able to go, “Hey, I didn’t have a million dollars of income, there were some costs related to those; it’s actually only $800,000 and I should get the CGT discount”. The courts might themselves go, “Ah, yep, we agree with you, but, you actually haven’t shown us 100% what is correct”.

So, if I’m not able to, dot my I’s, cross my T’s, and show, prove, what is 100% the actual outcome and what should have been put in there, the default assessment will stand.

Okay. There, the onus is so heavily on me, now the obligation on me, to prove 100% what was correct and if I can’t do that, the system will basically say, “Tough luck”.

And, (you now) that’s there because I didn’t get around to doing my tax return, doing it correctly. So, if I’d done everything right from the beginning, gave it my best crack; I might have got something slightly wrong, but as long as I’ve given it my best crack and taken the necessary steps to the larger gains, some more professional help you probably should get, because of that error of margin there, and the possible tax shortfall. As long as I’ve done everything as best I can, I’m okay. But if I haven’t, then I could be subject to huge penalties or interest charges. So as I mentioned, they can range from 25% of the short tax to 95% plus interest plus possible imprisonment. So you don’t want to end up in those scenarios.

So essentially, what’s the point of this? The point of this is, self assessment system, as we mentioned earlier, all your various different taxable outcomes and events which mentioned throughout the course, we’ve got to work, look at tax residency, full Australian tax resident, worldwide income, worldwide profits, gains and losses on worldwide assets to report and meet those. Those conditions, and really need to be doing that each and every year to work through this.

Some people I know come to us at times and it’s “Oh, I need to do this, need to lodge these tax returns, but I’ve made losses”. Still if you’ve made losses. Overall throughout your events, you still need to lodge those tax returns, there.

And, it would be really important for you to do that because eventually, I’m hoping at least for yourself, I’m sure you are, that you’re going to make some gains in the future. You’re going to want to use those losses to offset the gains in the future.

The onus is on you to get this right, and if you do need help with that you seek out professional help.

So there you have it. That’s the ATO’s tax compliant action that they can have. So all the best with that. And yeah, if you do need help, reach out to accountants like Munro’s to help you with this.