Australia: The winning recipe in tax litigation: what every taxpayer should know

Taxpayers have been successful in a string of recent tax cases. Is it possible to distil from these cases a winning recipe for taxpayers?

Litigation is inherently unpredictable and tax litigation is no exception. Whilst there is no magical formula for winning a tax case, three ingredients hold the key for taxpayer success.

Preparing to go head to head with the Commissioner of Taxation in litigation can seem overwhelming. However, it doesn't need to be. Taxpayers who focus their attention on the three main ingredients of tax litigation - facts, evidence and advocacy - put themselves in the best position to succeed.

The first ingredient, the facts, is where most tax disputes are won or lost. At a very early stage, the taxpayer and its legal team must understand all the facts critical to the case, and the inferences to be drawn from those facts.

This includes recognising the facts that support the taxpayer's case as well as those that may assist the Commissioner's contentions. There will be times when the facts are so unhelpful that proceeding to litigation is not an appropriate course of action.

The second ingredient is the evidence that proves the facts the taxpayer is asserting and (hopefully) disproves the Commissioner's case. In preparing for litigation, the taxpayer should take the time to map out the evidence. This always saves time and money down the track and is best done using an evidence matrix.

The evidence matrix should identify the evidence that supports each element of the taxpayer's case or refutes the Commissioner's case. This method gives a clear view of any gaps in evidence and allows a proper assessment of the taxpayer's prospects of success.

Evidence can be grouped into two categories – the affidavit and oral evidence of witnesses and the taxpayer's business records. The most compelling witness evidence will almost always come from the key decision-makers in the transaction or arrangement that is the subject of the dispute. For corporate taxpayers, this is usually the directors and senior management responsible for the transaction or arrangement. These "key players" are able to provide the Court with insight into the context and state of mind of the taxpayer which is rarely possible through reading documents.

The business records of the taxpayer help to corroborate the witnesses' evidence and paint a clear picture for the Court. Documents also assist in refreshing witness memories of events that may have taken place some time ago. In cases where potential witnesses are unable or unwilling to give evidence, documentary evidence becomes critical.

Despite best efforts, rarely does the evidence give you perfect coverage of the facts. The challenge is to identify any gaps or weaknesses as early as possible and tackle them head-on. For instance, a taxpayer must be prepared to explain to the Court why a key person or document is not available. A Court can easily draw adverse inferences if a potential witness is not called to give evidence and the taxpayer doesn't satisfactorily explain why the witness is unavailable.

The final ingredient in tax litigation is advocacy. Having invested so much time in understanding the facts and gathering evidence, it is imperative the taxpayer's case is presented in the most compelling way possible.

A skilled Counsel will engage with the Court to highlight the critical facts and inferences to be drawn from those facts and how those facts and inferences support the taxpayer's case. The advocate will also monitor the Court's mood and adjust the taxpayer's strategy if necessary.

Written submissions are also integral to case presentation. They must explain how the findings of fact the Court has made in the course of the trial support the taxpayer's arguments and do not support or positively contradict the arguments of the Commissioner.

Well-written submissions will frame the taxpayer's case succinctly, in a way that allows the Court to understand the nub of the issue quickly and why the position the taxpayer is advocating is correct. Written submissions take on greater significance the longer the delay between the hearing and the Court delivering its judgment as the force of the oral submissions naturally diminishes with time.

Taxpayers need to focus on three key ingredients in tax litigation - facts, evidence and advocacy. While risk is inherent in any litigation, focusing on these ingredients will give a taxpayer the best possible chance of serving up a winning case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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