Undisclosed income risks hefty asset betterment assessments

The Federal Court are satisfied with asset betterment principles – a controversial approach the Australian Taxation Office (ATO) takes to determine undisclosed income.

The ATO uses this principle to determine undisclosed income. It is most commonly applied

when dealing with businesses that operate in the cash economy – cafes, bars, laundromats,

etc. The net increase in a taxpayer’s financial position each year is tallied up and compared

with their tax return. Significant discrepancies probably arise from undisclosed income and

are investigated further.

When no supportable explanations exist, an assessment for the undisclosed amount is issued

– often with penalties and interest. And, it is a huge tax thereafter to have that reversed or

even scaled back. A huge task means a very costly task!

An asset betterment calculation is not a concept embodied in the tax law or any rulings.

Despite having no legal basis, the practice has stood up to scrutiny in the courts, even if the

asset betterment calculation is clearly wrong.

Where there are scant records, cash businesses and inconsistent information, an asset

betterment calculation may be the closest approximation of taxable income, notwithstanding

those items in the statement cannot necessarily be forensically linked to real transactions.