The Australian tax system is a self-assessment system. We prepare and lodge your returns, then pay your tax or collect your refund. It is possible to go years or even decades without receiving any enquiry by the ATO. Should an enquiry or audit come your way, you’re likely to be asked for proof around a range of transactions, and not just in relation to tax deductions.
So the question is, have you kept appropriate records to substantiate your transactions?
In relation to an income tax deduction, the rules are relatively well understood. Do you have receipts, log books for the private use of a car, travel diaries, and can prove you actually paid for the expenses?
What about income though?
There is a plethora of ATO data matching for individual and business income, and items like dividend statements, PAYG summaries, invoices raised should all be retained. What if we extend our view of what the ATO may look into though and consider that any third party deposit received into a bank, loan, or credit card account may be queried. Do you have the appropriate records to show what those deposits actually are?
Where a notice of assessment has been raised, the onus of proof is on the taxpayer to prove that such an assessment is excessive or otherwise incorrect.
In a recent case[1] the ATO queried $735,800 of deposits that were received by a trust. The trust held property investments and disclosed its income and expenses from its property investment activities, however the ATO increased its taxable income by $735,800. Unfortunately for the taxpayers, it was not up to the ATO to prove what the deposits were, it was up to the taxpayers to prove what they were and that they were not income.
While it was found that the deposits were not income from the property investments of the trust, the taxpayers could not provide sufficient evidence to prove what the deposits actually were.
Consequently, the taxpayers could not prove that the deposits were not income of the trust, and the assessments stood.
As can be seen from the above case, when thinking about substantiation broader matters must be considered. Particular attention should be given to related party transactions and how they can be proven. The ATO expects that all transactions, including those with related parties, will have supporting documentation. Let’s consider a few scenarios.
Deposits received from overseas are routinely queried by the ATO. Often these are in the form of gifts or loans and therefore would not ordinarily be assessable income. The documentation required to substantiate these transactions can include legal deeds of gift or loan, formal identification of the donor or lender, copies of the donor’s bank statements and other financial records of the donor or lender. This may sound excessive, perhaps even beyond the power of the taxpayer to access, however having these items to prove the substance of the transaction could well be worth the effort to obtain them.
When dealing with inter-entity group deposits, has sufficient evidence been kept to prove what those transactions actually were. The ATO has made various public statements reminding taxpayers that all entities are required to keep appropriate records of their transactions, including those with related party entities.
Some deposits from related party entities may be for the repayment of loans the taxpayer made to the entity. These loans may be recorded in the balance sheet of the entity. During an audit though, the ATO may query the existence of the loan and ask for proof that the taxpayer actually made the loan to the entity. This can be an issue where the loan was made many years ago, so it can be prudent to keep records such as bank statements or otherwise that show how the taxpayer funded the loan to the entity.
The ATO has taken a number of taxpayers to court recently in matters concerning the burden of proof relating to unexplained deposits. In the majority of these cases, the taxpayer has not been able to meet their burden of proof that the deposits are not assessable income.
Should the ATO make enquiries with you in relation to a deposit you must have sufficient documentation on hand to prove that it is not assessable income. This may prevent the commencement of an audit or the raising of an amended assessment, so consider the investment of time up front to gather that substantiation as time well spent.
Please contact Ross Prosper if you have any queries.
[1] CoT v Liang [2025} FCAFC 4