A discussion of reasonableness
Reasonableness is a concept that is easy to understand but also hard for most of us to define. It has been used as a legal concept at least since 1856, although arguably it traces its roots to Roman times. This discussion proposes that it is important to consider long before it gets to court. Our context is the usual one – dealing with ATO issues.
To illustrate how reasonableness works, consider the tax agent completing a client’s return who is about to include a claim for a deduction. There are two pathways that they could take. One path has them thinking that if you were the “ATO” would the claim be allowed? Before you complete your client’s tax return to make a claim for an expense deduction do you think about being reasonable? The other pathway would be to just claim the deduction. They may take this course of action because of time constraints, maybe it is what you think your client expects, or what they have told you that they want, or force of habit. A quick consideration of the appropriateness of the claim could be time well spent.
From the ATO’s point of view, is it reasonable to expect that a person has every item documented? It might be desirable but is it practical? Sometimes it is a matter of neglect, sometimes it is an issue of materiality. By materiality I mean that to strictly adhere to every aspect of a regulation may cost the taxpayer more than it is worth. To record every phone call made for a business purpose may cost more than the claim itself. That is not to say that they have not spent the money earning their income.
When “reasonableness” is used
I will step back to the concept. As was said in the opening paragraph reasonableness is a principle that has been utilised by our legal systems for a long time. Often the “reasonable person” is used as a test. A test, to decide an outcome where legislation or legal precedent is not easily applied to a situation. The law of negligence is one of its applications. The question considered is one of “would a reasonable person perform, or not perform, in a particular way?”
A reasonable person
A reasonable person has been represented by some great legal minds as the man/person on the back of the Clapham (London) omnibus. Clapham has been localised as the Bondi Tram (no longer running), or Bourke Street Tram (no longer running with passengers – to return one day). We could say a so-called normal person, but one who can reason, be prudent.
Reasoning does entail some thinking. The person/avatar travelling to work must consider if the thing that they are doing or not doing, is acceptable within a community of like-minded beings. Would they be happy if a particular action (not erecting a barrier at a car race) was not taken to prevent an accident at an event they attended, even though the price of the admittance went up? Would they be happy if unreasonable deductions were claimed by all? This would mean that fewer dollars were available for some greater community good/tax cuts were not available/their pet community project was curtailed.
Why it is an important concept
The importance of reasonableness as a lubricant in the taxation system is highlighted when the alternatives are considered. These alternatives include a strict application of a particular law irrespective of circumstances. Doing this may produce an outcome which would not be intended, nor one which is fair or sensible. Similarly, to apply a penalty to every wrongdoing or oversight, even if it is correct, can be unreasonable. Therefore, the Commissioner of Taxation is given the discretion to remit penalties. At the extremity the alternative would be to have no bounds to a situation. No law is applied, nor is there any standard to apply. The rhetorical issues follow, no one pays tax and what would happen to our society if that were the case?
In this article we think that the use of reasonableness to resolve differences works well outside the courtroom.
Is it reasonable that my meanest or thriftiest client, who would not do their own mother a good turn, claims $299 per year as a gift deduction?
Ts it reasonable that an ATO auditor demands that a client provides evidence that they wash the uniform(s) where a deduction for $50 has been claimed. The evidence may be to provide a video showing the uniforms being washed. The substantiation rules do state:
Claims for laundry expenses that do not exceed $150 can be based on a cost of $1 per load if you wash only your work clothes and 50 cents per load if you wash other clothes together with your work clothes.
Bit tricky that one.
Is it reasonable that a new business that is unable to produce relevant tax returns, Acitivity Statements by the 12th of March is denied JobKeeper payments? Many people do not think that this is reasonable, including people working for the ATO, but these are the “rules”.
More complicated issues such as debt forgiveness
A scenario may be that within a family group of entities a debt is forgiven which was owed by one company in the group to another group entity. This can be a nice arrangement to reduce tax. You can loan money to the company from the profits made by other members of the group and then “forgive” the debt. There is a section of the Tax Act that says that if this is done a dividend equal to the amount forgiven is deemed to have been paid to the lending company.
However, there may be a genuine case where the loan goes bad due to a business situation. In this instance it is necessary to prove certain things to the ATO. These things can include showing that the money loaned has been lost in transactions outside of the group’s activities, that the business was legitimate, that loan agreements in some form existed, including an intent to repay and that there was no hope of recovering the money.
The ATO must exercise reasonable judgment based on facts and evidence whether the debt forgiveness is genuine or not.
Reasonableness is recognised within the Taxpayer’s Charter. The word reasonable is used at key points. One thing that a taxpayer can expect is that the ATO will be fair and reasonable. In turn the ATO expects that a taxpayer will take reasonable care. So, a perspective of how a taxpayer / client regards the claim that they have made. The reasonable person would think through to, how other people in the community could view the claim. The other side of the coin is, has the ATO taken a reasonable stance when dealing with your clients, or your practice, in an audit?
Reasonableness is a lubricant. The sooner it is applied the less friction or stress is experienced by the user. Taking a reasonable position, when there are uncertainties or where discretion needs to be exercised is a sensible thing to do. It establishes solid ground that is difficult to set aside when pressure is applied.
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