The onus of proof and substantiation

If the Commissioner either amends an assessment or issues a default assessment and the taxpayer does not agree with the amount assessed, the onus of proof is on the taxpayer to show that the Commissioner’s assessment is excessive.

Discharging the onus of proof

To discharge the onus of proof the taxpayer must do two things: it must demonstrate that the Commissioner’s calculation is excessive and it must determine what the assessment should have been.

The recent Full Federal Court (FFC) decision in Commissioner of Taxation v Liang [2025] FCA 535 considered the onus of proof. This decision illustrates that when the ATO is of the view that the taxpayer has understated its assessable income and there are amounts in a taxpayer’s bank account where the source is not readily identifiable, the taxpayer must be able to explain the source of all of the funds to the ATO. If this cannot be done, then the taxpayer will not have discharged its onus of proof.

The single judge decision in Liang v Commissioner of Taxation [2024] FCA 535 handed down on 14 May 2024 indicated that it may be possible to discharge the onus of proof without having to explain the source of funds, effectively through a process of elimination, by showing the amounts did not constitute the types of income that are capable of being derived within the entity’s scope of business activities.

The FFC rejected that approach. Paragraph 43 of the FFC judgment states:

As a general rule, a taxpayer proves an amount is not assessable as income under ordinary concepts by proving what the amount represents and demonstrating that what the amount represents is not ordinary income. It would be a very rare instance where a taxpayer was able to prove an amount was not income under ordinary concepts without positively establishing the source and character of the amount. As a matter of logic, it is difficult to prove a negative by proving a series of other negatives unless those other negatives represent the entire universe of possibilities.

Therefore, where a taxpayer needs to show what the assessment should have been for these purposes, or deal with an ATO review or audit to ensure amended or default assessments are not issued, it needs to ensure tax calculations and any positions taken can be explained and substantiated.

The ATO has access to a lot of information, often including bank statements. It is common in ATO reviews and audits for taxpayers to need to substantiate the source of all deposits in their bank accounts, for example, transfers from related entities, and justify the nature of these transactions.

While the Liang case is an extreme example it provides a reminder of the importance of substantiation and record keeping, and to reflect on what documents may one day need to be provided to the ATO.

Appropriate record keeping covers a few aspects, including the types of documents and information that need to be kept, how long documents should be kept and how they should be kept.

What documents need to be kept?

When dealing with businesses, the records that need to be kept are extensive. Records of all transactions must be maintained, specifically:

• any documents related to the business’s income and expenses; and
• any documents containing details of any election, choice, estimate, determination or calculation made including how the estimate, determination or calculation was made.

The ATO website provides detailed examples of the types of records required to be kept.

How long should documents be kept?

Tax legislation generally requires records be kept for a period of 5 years. Effectively this period is longer in many cases as such records might be relevant in calculating the taxable income in later years.

For example, to correctly calculate a capital gain on a disposal of an asset, you will need to be able to substantiate the cost base of the asset, where the original purchase date and incurring of incidental costs may go back many years. Similarly, if you are trying to argue an asset is pre-CGT you will need to be able to support that with appropriate evidence.

If the entity is in losses, it needs to keep the records for a minimum of five years after the income year in which the loss is fully deducted.

While five years is the general rule, there are many other documents we would recommend should be kept for longer. These are documents that should be kept in a permanent file, and include trust deeds, company constitutions, shareholder agreements, documents dealing with the issuing, transferring or cancellation of shares or units, title deeds for properties and loan agreements.

Other documents should also be kept beyond five years, particularly in case of an ATO review, including financial statements, tax returns and business activity statements, family trust elections (FTEs), other elections, trust resolutions and any information regarding significant transactions that the ATO may want to look at in the future. In thinking about these documents it is important to note that some provisions have an unlimited period of review, for example, family trust distribution tax (FTDT) and section 100A..

How should documents be kept?

Documents can be stored in hard copy or electronically. Electronic storage is allowable whether the documents relate to transactions carried out electronically or are reproductions of original paper records. Reproductions of paper records must be a complete and accurate copy of the original documents. Electronic records must be in a form that the ATO can access and understand in order to ascertain a taxpayer’s liability when required. Care should be given when updating and changing IT systems to ensure information remains accessible.

Corporate Act requirements

Companies must also consider the rules under the Corporations Act 2001. According to section 286 of the Corporations Act 2001, financial records must be kept for at least seven years after the transactions covered by the records are complete. Again, documents may be kept in electronic form, but they must be convertible into hard copy.

The ASIC website provides a list of records and documents that a company should have, including:

• financial statements including profit and loss statements, balance sheets, depreciation schedules and taxation returns;
• general ledgers and journals;
• electronic copies of critical documents;
• cash records including cash receipts, records of bank deposits, petty cash books, and cheque butts;
• bank statements and loan documents;
• sales and debtor records;
• invoices and statements received and paid, including correspondence, annual returns, wage records, and superannuation records;
• any unpaid invoices;
• minutes of members or directors’ meetings;
• minutes of resolutions passed by directors or members;
• any relevant registers including a register of members, options, debenture holders, assets or any other relevant items; and
• deeds including deeds of trust, debentures, contracts and agreements, or any inter-company transactions.

If you have any questions regarding the above, or need assistance with an ATO review or audit, please contact us.