Overview of the April 2006 IGT Review

3.1 The 2006 review was conducted by the Inspector-General following a request made by the then Minister for Revenue and Assistant Treasurer for an evaluation of the test case litigation program. The remainder of the review was conducted by the Inspector-General following concerns raised by industry and tax practitioners about the Tax Office's administration of tax litigation arising from the appeal procedures of Part IVC of the Taxation Administration Act 1953 (which deals with taxation objections, reviews and appeals).

3.2 The importance of tax litigation cannot be understated and is magnified in the overall tax system for a number of reasons:

  • Litigation is part of the operation of the broader system of government at a higher level than the tax system itself. As both the practical and symbolic interface between the administrators of the laws and the judiciary in its role of determining how the laws apply, it brings into sharper focus foundational concepts of the broader system such as the right of those affected by government administrative decisions to have those decisions reviewed by a body which is independent of the original decision maker, and other principles of the rule of law.
  • As well as resolving particular disputes, litigation contributes directly to the basis of ongoing administration of the laws, and may lead to the shaping (or re-shaping) of the laws in Parliament.
  • Litigation often involves the more contentious, higher profile issues and engages significant players in adversarial positions. Some cases may be, or have been, perceived as having a flow-on financial impact to large numbers of people in the community.

3.3 The 2006 review found that the principles (or philosophy) which guide the Tax Office's involvement in litigation were not clear nor were they set out in any single Tax Office document. Tax Office statements on litigation indicated that it regarded litigation as an important part of its overall compliance program. The review found that the Tax Office's actual conduct in litigation indicated that its principal philosophy on litigation was that it is a means of validating the Tax Office view and ensuring that taxpayers comply with its view of the law. The review found that this compliance aim for litigation was also, in certain circumstances, overriding Tax Office involvement in activities which might lead to law clarification through objectively testing what the legislation means.

3.4 The review also noted Tax Office statements on litigation indicating that it sees litigation as having a role in clarifying the law in accordance with the Tax Office's view of the underlying policy of the law.

3.5 During the course of the 2006 review, the Inspector-General raised questions regarding the Tax Office's conduct in applying the outcomes of finalised court decisions. An example of such conduct was surrounding the case of Essenbourne5 where the Tax Office publicly stated that the Federal Court's construction of the fringe benefits tax provisions was not correct and was inconsistent with the Tax Office's understanding of the intent of the fringe benefits tax law.

3.6 Just prior to the finalisation of the 2006 review, the Tax Office provided the Inspector-General with opinions it had sought from the Solicitor-General and the Australian Government Solicitor's Chief General Counsel on this issue.6 These opinions are on what constitutes good administration, rather than a matter of strict law. They refer to the rules of precedent and note that it would usually be inappropriate and unwise for an administrative decision maker to depart from decisions of single judges or of higher courts. In these opinions, the Solicitor-General and Australian Government Solicitor's Chief General Counsel set out some clear guidance for the Tax Office on what basis it is entitled to challenge a court decision and how it should proceed if it does so.

3.7 The 2006 review also found that funds available to the Tax Office for its test case litigation program had been significantly underspent over the 10 years of the program. It concluded there was scope to improve the management of the test case litigation program.

3.8 Overall the review concluded that there were a number of systemic deficiencies which confirmed the concerns held by industry and tax practitioners. To overcome these problems, the Inspector-General made a number of key and subsidiary recommendations. The Tax Office agreed with most of the recommendations. Some recommendations were only agreed in principle (such as Key Recommendation 5) and some required consideration by government rather than the Tax Office.

3.9 Of the reports that are the subject of this wider follow-up review, the report into the Tax Office's management of Part IVC litigation is the most recent (finalised in April 2006). Nonetheless, the Tax Office has had well over a year to finalise the implementation of the agreed recommendations.

Implementation of recommendations

Key Recommendation 1

The Tax Office should clearly articulate its corporate philosophy and approach to litigation in a formal and consolidated published policy or guidelines on tax litigation, such as a Litigation Charter.

The Inspector-General considers that this document should state that the primary aim of litigation for the Tax Office is to resolve disputes in a fair, timely and cost-effective manner, consistent with the rule of law.

There should also be community consultation in the development of a published policy or guidelines on tax litigation.

In this document the Tax Office should also affirm its commitment to administer the tax laws, as enacted by Parliament and interpreted by the courts, in an impartial and transparent manner. The Tax Office should also affirm that it will follow the results of finalised court decisions in other similar cases.

There should be wide community consultation in the development of any policy by the Tax Office on whether it should challenge finalised court decisions in certain circumstances. If the result of this process is that the Tax Office still considers that it will challenge finalised court decisions in certain circumstances, then the Tax Office should clearly and fully articulate those circumstances and its associated processes in its formal published policy or guidelines on litigation.

Pending the development of any such policy regarding challenging finalised court decisions, and its publication in a formal consolidated set of guidelines on litigation, the Tax Office should publicly affirm that it will follow the results of finalised court decisions in accordance with the criteria which have been formulated by the Commonwealth Solicitor-General and Chief General Counsel.

Subsidiary Recommendation 7.1

The Tax Office should include, in its comprehensive published policy or guidelines on tax litigation, its philosophy and approach in applying and communicating to taxpayers and the community the outcome of finalised decisions.

Subsidiary Recommendation 7.2

The Tax Office's philosophy and approach in applying and communicating to taxpayers and the community the outcome of finalised decisions should be consistent with its role of administering the tax laws in a fair, timely and cost-effective manner, consistent with the rule of law.

Tax Office Position

3.10 On 21 June 2007 the Tax Office issued a law administration practice statement (PS LA 2007/12 Conduct of Tax Office Litigation in Courts and Tribunals) on its approach to, and conduct of, litigation.

3.11 On 15 February 2007 the Tax Office issued practice statement (PS LA 2007/2 Management of Decisions of Courts and Tribunals) which outlines the procedures for managing all court and tribunal decisions and risks arising from those decisions.

3.12 The Tax Office is also moving to build a 'body' of law administration practice statements which together will form a consolidated published policy or set of guidelines on tax litigation.7

IGT Analysis

3.13 As outlined above, the Tax Office is moving towards a consolidated 'body' of practice statements as its implementation response to Key Recommendation 1. The Tax Office has recently released a practice statement (PS LA 2007/12) on its approach to, and conduct of, litigation.

3.14 The Inspector-General regards full implementation of Key Recommendation 1 as a most important building block for the future management of Tax Office litigation and its role as a fair administrator in the eyes of the community.

3.15 Following the 2006 review, the Full Federal Court in its Indooroopilly decision8 found cause to sternly criticise the Tax Office in relation to its basic role in administration as set by the Constitution. Such criticism is also now part of the context for this recommendation. These criticisms increase the need for the Tax Office to make a clear statement, similar to that set out by Allsop J in the Indooroopilly decision, on its approach to litigation that starts with understanding and accepting its role as distinct from the roles of government, Parliament and the judiciary.

3.16 The Inspector-General's analysis of the progress and quality of the Tax Office's implementation of Key Recommendation 1 should be seen in this context.

3.17 In response to this recommendation, the Tax Office agreed to produce only a practice statement rather than a more substantive publication in the mode of the Taxpayers' Charter. On this point the Inspector-General maintains the view expressed in his 2006 report that:

2.49 The Inspector-General considers that a document of higher status than a practice statement is needed to promote community confidence in the Tax Office's philosophy on litigation. The Inspector-General also believes that this document needs to contain a formal affirmation of the Tax Office's role in relation to litigation as distinct from the roles of Government, Parliament and the Judiciary. Consultation processes for this document (and any accompanying practice statement) also need to embrace the views of the wider community as well as those of the professional bodies.

3.18 Perhaps exemplifying the procedural pitch of a practice statement rather than a more substantive publication, the opening title 'Tax Office approach and philosophy to litigation' is limited to one paragraph in PS LA 2007/12 as follows:

1 The Tax Office conducts and manages its litigation in accordance with its obligations under the law, the Attorney-General's Legal Services Directions 2005 (in particular the Model Litigant Guidelines), relevant Court and Tribunal rules and directions, and other relevant internal and external policies and guidelines. The Tax Office strives to have all disputes brought to finality in a fair, timely and equitable manner consistent with the law. In taxation disputes, the Tax Office argues its cases consistently with its published view of the tax law. The Tax Office recognises that recourse to the Courts and Tribunals not only provides final, fair and independent resolution of disputes, it will in some cases, achieve law clarification benefits for Government and the community.

3.19 The Inspector-General considers that this brief statement of itself does not satisfy the first part of Key Recommendation 1 which sought a clear articulation of the Tax Office's corporate philosophy and approach to litigation.

3.20 However, following discussions with the Inspector-General during this follow-up review, the 'Principles that guide our conduct' section of PS LA 2007/12 and PS LA 2007/2 now contains useful clarifications, commitments and consolidations on important points that were missing at the time of the 2006 review. The Inspector-General also notes that the Tax Office has not yet brought together its approach to litigation in a consolidated statement, but that it intends to do so.

3.21 Taken together, these principles express the key Tax Office corporate approaches to litigation and substantially satisfy the Inspector-General's recommendation. In this context, the Inspector-General has also noted a recent strengthening of the Tax Office's public expression of its commitment to the rule of law.9

3.22 The last two paragraphs of Key Recommendation 1 concern the issue of the Tax Office challenging finalised court decisions. As stated above, the Tax Office has issued PS LA 2007/2 outlining procedures for managing all court and tribunal decisions as well as the risks arising from those decisions. The practice statement contains a section (starting at paragraph 83) on the controversial issue of 'Challenging a final court decision'. The section provides that:

… there will be rare instances where the Tax Office will maintain a position that is contrary to an existing Court or Tribunal decision.10

3.23 PS LA 2007/2 states that a decision to not follow a prior interpretation of a court that was not appealed will rest with the Chief Tax Counsel or Second Commissioner (Law).11 The practice statement also outlines the Tax Office view as to the circumstances that must be present and the processes that must be followed before the Tax Office can challenge a finalised decision. The practice statements are consistent with the advice given to the Tax Office on this issue by the Solicitor-General and the Australian Government Solicitor's Chief General Counsel which was provided during the Inspector-General's review.

Implementation Status: Implemented

The Tax Office has done as it agreed and produced two law administration practice statements as its way of implementing the recommendation.

The Inspector-General has examined the content of these practice statements and has discussed them with the Tax Office. The Inspector-General considers that their content substantially covers the issues that he sought to be clarified publicly by the Tax Office.

The Inspector-General remains of the view expressed in his original report that a consolidated publication of a higher profile than law administration practice statements is needed that contains more analysis and discussion of the foundations of the Tax Office's approaches to litigation. The Inspector-General notes that the Tax Office is committed to consolidating the two practice statements in due course and that this will provide another opportunity to produce a more substantial document.

Key Recommendation 2

The Tax Office should establish management arrangements which give a single area of the Tax Office overall responsibility and authority for the management of all aspects of litigated cases.

Tax Office Position

3.24 The decision to move the 'final say' on litigation from the business lines to the new Law Sub-plan was communicated to Tax Office staff in July 2006. Within the Law Sub-plan, the Law & Practice business line is the single area that has overall responsibility and authority for the management of litigated cases. This new arrangement is reflected in PS LA 2007/12.

IGT Analysis

3.25 As discussed in Key Recommendation 1, the Tax Office has recently released a practice statement on its approach to, and conduct of, litigation (PS LA 2007/12). Included in PS LA 2007/12 is an outline of how the Tax Office manages litigation:

  • Legal Services Branch (LSB) manages the Tax Office litigation program and is primarily responsible for managing legal risks to the Commissioner.
  • Tax Counsel Network (TCN) is involved where there is a strategic litigation matter12, or if a matter relates to an existing priority technical issue (PTI).13 In this type of litigation matter, TCN has the 'final say' as to the Tax Office view and the preparation of arguments. However, the level of involvement of TCN is at its discretion.14
  • Business lines have responsibility for:
    • 1providing a statement of facts which cross-references to supporting evidence;
    • 2issuing assessments and amended assessments;
    • 3assessing risks posed to the Commissioner which arise from the litigation; and
    • 4developing a strategy to explain and manage the implications of the relevant court decision, and the associated compliance impact.
  • Where TCN is not involved in litigation, LSB will be the final decision maker on all issues arising in the course of the litigation, including the technical argument and issues relating to the conduct of the litigation.

3.26 The above approach centres on either LSB or TCN managing litigation. Both of these work areas fall under a single body — the Tax Office's Law Sub-plan. However, a close reading of PS LA 2007/12 raises some concerns regarding whether there will always be a single point of authority on all occasions; in particular, the 'continuous role'15 that the business lines have throughout the course of litigation including their responsibility:

… for managing the risk associated with the case and dependent cases.16

3.27 The above concerns are also raised with the provision in PS LA 2007/12 of an escalation process when members of the litigation team are unable to resolve an issue.17 Nevertheless, the creation of the Law Sub-plan as well as the release of PS LA 2007/12 represents a position that is in line with the recommendation.

Implementation Status: Implemented

Shortly following the Inspector-General's original report, the Law Sub-plan was made responsible for all aspects of the management of litigation.

Key Recommendation 3

The Tax Office should introduce risk management techniques to its management of tax litigation issues. It should start this process by defining the scope of the Commissioner's and the Tax Office's legal risk in collaboration with the Australian Government Solicitor (AGS) and counsel engaged by the Tax Office.

Tax Office Position

3.28 The Tax Office considers that all litigation cases are risk-assessed at the commencement of litigation and that risks are reviewed throughout the course of litigation. Nevertheless, the Tax Office is to review current practices to ensure that the proposed consolidated litigation practice statement clearly articulates the factors that underlie its risk management approach. The Tax Office recently (1 July 2007) released practice statement PS LA 2007/16 Risk management in litigation that brings together its risk management approach in litigation.

IGT Analysis

3.29 It is expected that the above PS LA 2007/16 will be included as an annexure to the proposed consolidated practice statement on litigation (discussed in Key Recommendation 1). In summary, PS LA 2007/16 defines the legal risk of the Tax Office (at paragraphs 18-24).

3.30 The Tax Office confirmed in discussions held with staff from the Inspector-General's office that in preparing PS LA 2007/16, collaboration was not undertaken with the AGS or counsel engaged by the Tax Office.18 This represents a failure by the Tax Office to implement one of the major recommendations of the 2003 Behm review.19

3.31 The Tax Office finally sought advice from the AGS late in the course of this follow-up review. The Tax Office has now indicated that it has recently (October 2007) received advice from the AGS regarding the scope of the Tax Office's legal risk.20 The Tax Office recognises however that the advice must still be reviewed by counsel in order to fully satisfy the Behm review requirements. The advice contains a number of recommendations for improvement which the Tax Office is considering. The Tax Office has also committed to review whether any existing documents, including PS LA 2007/16, require updating once counsel has reviewed the advice.21

3.32 PS LA 2007/16 does not indicate that the Tax Office has introduced any new risk management techniques to its management of tax litigation issues. Furthermore, there is a distinct absence in PS LA 2007/16 of the need for the Tax Office to consider risk management from the perspective of the commercial and business environments that taxpayers operate within. As outlined in the 2006 review, the Tax Office must include the risk management techniques used by the ordinary taxpayer.22

3.33 Also, as discussed in subsidiary recommendation 5.1, the level of reporting to the ATO Executive fails to include relevant risk management data such as the total quantum of tax in dispute.23

Implementation Status: Partly Implemented

The Tax Office has prepared a practice statement that brings together its risk management approach in litigation. However, the practice statement does not introduce any new risk management techniques to its management of tax litigation issues.

The Tax Office has also recently sought and received advice from the AGS regarding the scope of the Commissioner and the Tax Office's legal risk. The Tax Office is currently in the process of considering recommendations for improvement by the AGS.

Key Recommendation 4

The formal test case program (defined as the program under which a taxpayer makes a formal application for test case funding in accordance with funding criteria that have been publicised by the Tax Office) which is designed to fund cases which will clarify the law by establishing new legal principles should remain but new arrangements for the management of the test case program are needed. Precedents for an appropriate structure which deliver independence without being overly bureaucratic could be the existing Tax Agents' Boards or the Board of Taxation.

Tax Office Position

3.34 The Tax Office responded to the Inspector-General's recommendation by stating that the responsibility for the establishment of a panel independent of the Tax Office to decide applications for test case funding is a matter for government.24

3.35 The Tax Office confirmed in discussions held with staff from the Inspector-General's Office that it would not provide any comment on whether the establishment of the new Taxation Test Case Funding Review Panel (see below) has provided a new form of management of the test case program.25

IGT Analysis

3.36 In response to the Inspector-General's recommendation for increased independence in the test case funding process, the previous government established the Taxation Test Case Funding Review Panel (Review Panel) in August 2006. Taxpayers that have been unsuccessful in applying for test case funding can request that the decision made by the Tax Office Test Case Litigation Panel be reviewed by the Review Panel.26

3.37 The Review Panel is chaired by the Treasury, with three external members who are independent of both the Treasury and the Tax Office. The Review Panel met only for the first time on 15 December 2006 and therefore the Inspector-General's staff have not reviewed the effect of these new arrangements. Of note, there is no published information available for the general public about either the role or the activities of the Review Panel.

Implementation Status: Implemented

In August 2006 the previous government introduced the Taxation Test Case Funding Review Panel to review unsuccessful applications for test case funding. While this does not represent a new and independent management process for the whole test case program, it provides an avenue for more independent review and therefore addresses the recommendation. The Inspector-General is concerned that there is no published information available for the general public about either the role or the activities of the Review Panel.

Key Recommendation 5

The Tax Office should fund taxpayers' expenses in defending the case in all cases where the Tax Office has been unsuccessful at any stage of litigation, a decision is made to appeal the relevant decision and it is fair and in the public interest for the Tax Office to fund the taxpayer's expenses. The Tax Office should develop and publicise appropriate guidelines for the funding of such cases.

Tax Office Position

3.38 The Tax Office currently funds the costs of taxpayers in small claims where the Tax Office appeals a decision of the Administrative Appeals Tribunal (AAT) or the Small Taxation Claims Tribunal, to protect small taxpayers from the costs of court litigation. Considerations of capacity to pay are relevant to this practice.

IGT Analysis

3.39 The previous government asked the Treasury to consult with both the Attorney-General's Department and the Tax Office in the development of guidelines for funding respondents' costs in appeals against court and tribunal decisions adverse to the Commissioner.27 The work towards reviewing the policy and developing the guidelines is continuing. A timeframe for completing this work appears not yet to have been determined.

3.40 Consideration will be given to whether any changed guidelines emanating from the Treasury review will also need to be included in the proposed consolidated practice statement on litigation.

Implementation Status: Partly Implemented

The Tax Office continues to work with the Treasury and the Attorney-General's Department in the development of guidelines for funding respondents' costs in appeals against court and tribunal decisions adverse to the Commissioner.

Key Recommendation 6

The Tax Office should introduce a standard communication product to communicate the application of finalised court and tribunal decisions. The content of any Tax Office communication should be consistent with its role of administering the tax laws in a fair and objective manner and could include for example:

  • the issues to be decided by the tribunal or court;
  • the implications of the decision on each of those issues;
  • the implications of the decision on the Tax Office view;
  • how the Tax Office will apply and follow the finalised decision;
  • the reasons why the Tax Office will apply and follow the finalised decision in that manner; and
  • whether the Tax Office will be seeking legislative amendments.

Subsidiary Recommendation 7.3

The Tax Office should communicate, in a summarised form, its view of the application of all finalised court and tribunal decisions that involve a question of law within eight weeks of the date of the decision. By implication, this will include all finalised decisions considered by the Full Federal Court, the High Court and by the Federal Court on appeal from the Administrative Appeals Tribunal.

Subsidiary Recommendation 7.4

The Tax Office should also communicate, in a summarised form, its views of the application of all other decisions within similar timeframes, where it involves a priority technical issue or there is significant community interest in the outcome of the court or tribunal decision.

Subsidiary Recommendation 7.5

Following a court or tribunal decision, the Tax Office should promptly make taxpayers aware that the Tax Office's view expressed in a public ruling, determination or interpretative decision may be impacted and that it is under review. It should include identifying the paragraphs that are potentially affected and provide guidance to taxpayers on how they should apply the law until the public ruling, determination or interpretative decision is formally amended or withdrawn.

Tax Office Position

3.41 In response to Key Recommendation 6 and subsidiary recommendations 7.3, 7.4 and 7.5 the Tax Office introduced onto its external website a new communication product advising taxpayers of the implications of adverse and significant court and tribunal decisions.

IGT Analysis

3.42 Following the Inspector-General's recommendation, the Tax Office introduced in October 2006 a new page on its external website containing the Commissioner's response to adverse and significant court and tribunal decisions handed down post-1 July 2006. These responses (the decision impact statements) are required to be published no later than eight weeks after the relevant court or tribunal decision has been handed down. Each decision impact statement includes a discussion of the items recommended by the Inspector-General except for the matter regarding the Tax Office seeking legislative amendment following the handing down of a decision. The Tax Office has consulted with both the Treasury and the National Tax Liaison Group (NTLG) in respect of this last point and has concluded that the decision impact statement format would not include details regarding the Tax Office seeking legislative amendment.28

3.43 The Tax Office has also consulted with the Treasury and has concluded that it would be inappropriate for the Tax Office to include in the decision impact statement format any indication that a matter has been referred to the Treasury.29

3.44 The Inspector-General notes these conclusions and acknowledges that these details regarding the Tax Office seeking legislative amendment or referring matters to the Treasury cannot be included in all cases. However, the Inspector-General considers that for transparency, there is the potential to include in the decision impact statement format a discussion of proposed law changes.

3.45 A summary of the purpose of the decision impact statement is included at paragraph 70 of PS LA 2007/2 which was issued on 15 February 2007 (see Key Recommendation 1).

3.46 The structure of the decision impact statement includes a section outlining how the Tax Office's view (expressed in a public ruling, determination or interpretative decision) is impacted following the handing down of a court or tribunal decision. This includes reference to the items in subsidiary recommendation 7.5 (such as the relevant paragraphs of the particular ruling potentially affected by the court or tribunal decision).

3.47 Also in line with subsidiary recommendation 7.5, PS LA 2007/2 provides that:

If there is any uncertainty surrounding a Court or Tribunal decision the Decision Impact Statement will explain how the Commissioner will administer the law pending any review of a published Ruling.30

3.48 The functionality of the decision impact statement is enhanced for the purposes of subsidiary recommendation 7.5 with the insertion of hyperlinks providing direct access to appropriate rulings or determinations. In addition, these primary documents are correspondingly earmarked to indicate that they are under review following the release of the relevant court or tribunal decision (a link is included that takes the user back to the relevant decision impact statement).

3.49 A further positive initiative is that external parties are given the opportunity to provide feedback to the Tax Office within eight weeks of the publishing of the decision impact statement (the contact officer is invariably the Tax Counsel of the particular case). Once this initial eight-week period has expired, the Tax Office sets up a generic Centre of Expertise (CoE) mailbox for the receipt of external submissions. This mailbox is managed by the National Management Team for the Centres of Expertise — any submission indicating the need for change is referred to the appropriate CoE and business line for consideration.

3.50 In relation to the issue of timeliness, PS LA 2007/2 provides that where it is not logistically possible to publish the decision impact statement within eight weeks, an interim statement should be prepared.31 An example of where this has occurred is the interim statement published on the Tax Office's external website shortly following the handing down of the Indooroopilly decision32.

Implementation Status: Implemented

In October 2006 the Tax Office introduced a new page on its external website containing the Commissioner's responses to adverse and significant court and tribunal decisions handed down post-1 July 2006. These responses (referred to as decision impact statements) include a discussion of most of the suggested matters referred to in Key Recommendation 6 and subsidiary recommendations 7.3, 7.4 and 7.5.

Where possible they are to be published within eight weeks of the date of the decision. Where this is not possible, an interim statement is published.

The introduction of the decision impact statement has been well received by the community, including the NTLG, and is a welcome improvement in updating taxpayers about the application of important court and tribunal decisions.

Implementation of subsidiary recommendations

Subsidiary Recommendation 3.1

The Tax Office should publish a more complete picture of the outcomes of litigation to include information on the proportion of applications for review and appeals finalised without a hearing and the outcome.

Tax Office Position

3.51 The Tax Office case management system for the LSB33 was modified in June 2006 to capture the information required as per this subsidiary recommendation. The Tax Office's 2005-06 annual report reflects these figures.

IGT Analysis

3.52 Following these system improvements, the Tax Office has included in its 2005-06 annual report a table showing the outcome of cases that did not proceed to hearing during that financial year.34 However, the annual report does not provide a breakdown of the large category of cases settled prior to litigation which were the subject of analysis by the Inspector-General in the 2006 review. Nevertheless, the Inspector-General notes that the Tax Office has recently introduced early resolution reports (see subsidiary recommendation 7.8).

3.53 The Inspector-General considers that there is much potential in the information contained in the early resolution reports to be used to gain a better understanding of why cases are being settled prior to hearing and to improve upstream processes. The Inspector-General believes that this information, together with improvements to be brought about under the Change Program (via the Siebel system35), would allow the Tax Office to undertake a more detailed analysis of settled cases.

Implementation Status: Implemented

Modifications to the Tax Office's case management system have enabled the Tax Office to include in its 2005-06 annual report details regarding applications for review and appeal that have been finalised without a hearing. While this information does not of itself enable the analysis that was undertaken as part of the original 2006 review, the early resolution reports introduced by the Tax Office (as part of its response to subsidiary recommendation 7.8) are a worthwhile alternative.

Subsidiary Recommendation 4.1

The Tax Office should develop practical guidelines for staff on the application of the model litigant guidelines.

Subsidiary Recommendation 4.2

The Tax Office, as part of its public statement on its philosophy and approach to tax litigation, should make taxpayers aware of the model litigant guidelines and that the Office of Legal Services Coordination is responsible for administering the model guidelines, including considering any alleged breaches of the model litigant guidelines. This should also include making taxpayers aware of the model litigant guidelines at the outset of litigation.

Tax Office Position

3.54 The practice statement on the Tax Office's approach to, and conduct of, litigation (PS LA 2007/12), guides both staff and taxpayers on the application of the model litigant guidelines. In addition, the practice statement outlines the role of the Office of Legal Services Coordination (OLSC) in administering the guidelines.

3.55 The Tax Office also referred to its Legal Services/Legal Practice internal website which since 1999 has contained a Legal Practice Note advising staff about the model litigant guidelines. In addition, all briefs to counsel from the Commissioner in tax litigation matters contain copies of the guidelines.

3.56 The Tax Office has experienced delays in developing a process to include the model litigant guidelines together with an outline of the above-mentioned role of the OLSC in all disallowed and allowed-in-part objection decisions. These delays have been due to resource constraints surrounding the implementation of the Tax Office's Siebel case management system.36

IGT Analysis

3.57 As stated in Key Recommendation 1, the Tax Office has recently released a practice statement on the conduct of litigation (PS LA 2007/12) which includes:

  • direction for staff regarding the application of the model litigant guidelines as well as a general outline of the guidelines for taxpayers (paragraphs 12–15); and
  • an outline of how the OLSC is responsible for administering the model litigant guidelines including the consideration of any breaches of the guidelines (paragraphs 19-21).

3.58 The Tax Office has also introduced a new procedure whereby Tax Office staff include the model litigant guidelines and details of the role of the OLSC into all disallowed and allowed-in-part objection decisions. This procedure has been introduced to satisfy the final part of subsidiary recommendation 4.2 with respect to making taxpayers aware of the model litigant guidelines at the outset of litigation. In other words, receipt by the taxpayer of the objection decision (containing these additional outlines) is the point of time when a decision to commence litigation is undertaken.

Implementation Status: Implemented

The Tax Office has recently released PS LA 2007/12 which includes direction for staff regarding the application of the model litigant guidelines as well as a general outline of the guidelines for taxpayers. The practice statement also includes an outline of the role that the OLSC has in relation to the model litigant guidelines.

The Tax Office has introduced a new procedure to include the model litigant guidelines and details of the role of the OLSC in all disallowed and allowed-in-part objection decisions.

Subsidiary Recommendation 4.3

The Tax Office should introduce an escalation process whereby senior tax officers or independent counsel, at the request of taxpayers or their representatives, may administratively review alleged breaches of the model litigant guidelines and departures from the Tax Office's stated philosophy and approach to litigation.

Tax Office Position

3.59 The Tax Office has set out in the practice statement on the conduct of litigation (PS LA 2007/12) the escalation process whereby alleged breaches of the model litigant guidelines and departures from the Tax Office's approach to litigation are able to be reviewed independently.

IGT Analysis

3.60 Paragraphs 19–23 of PS LA 2007/12 provide that persons external to the Tax Office that become aware of alleged breaches of the model litigant guidelines should report the matter to either the Attorney-General or the OLSC. Tax Office staff aware of such breaches can escalate the matter to the Tax Office's General Counsel who will ensure that the matter is investigated, and where appropriate reported to the OLSC.

3.61 Paragraph 29 of PS LA 2007/12 provides that taxpayer complaints regarding the Tax Office's conduct in respect of litigation (other than those types of matters handled by the OLSC) are to be considered by a senior officer, usually the LSB Stream Leader or a member of the LSB Executive.

Implementation Status: Implemented

The Tax Office has recently released PS LA 2007/12 which includes an outline of how breaches of the model litigant guidelines as well as other alleged breaches of the Tax Office's approach to litigation are to be escalated.

Subsidiary Recommendation 4.4

The new area of the Tax Office responsible for the management of all aspects of litigation should establish a formal process under which the terms of existing Tax Office rulings are urgently reviewed either internally by the Tax Office or by outside parties where, during the litigation process, doubts arise as to the correctness of the rulings.

Tax Office Position

3.62 The Tax Office considers that its current practice of escalating issues to the TCN where doubts arise about the correctness of a Tax Office ruling37'… have been working well'.38 However, following discussions with the Inspector-General, the Tax Office has recently decided:

… to develop a more robust process to ensure that rulings will be reviewed urgently during the course of litigation where we [the Tax Office] have accepted legal advice that our ruling is wrong.39

IGT Analysis

3.63 The Tax Office continues to escalate these matters to the TCN in the same manner that occurred during the Inspector-General's original review in 2006. However, as mentioned above, the Tax Office has committed to develop new procedures to ensure that rulings will be reviewed urgently during the course of litigation (where the Tax Office has accepted legal advice that a ruling is wrong). The main part of this change will be to amend existing Tax Office practice statements to reflect that:

  • the issue in question will be escalated to the TCN with a fast-tracked PTI proposal40 (a PTI proposal for these types of cases will always have the highest priority); and
  • the Deputy Chief Tax Counsel (DCTC) will determine the timeframe for resolving the issue having regard to the relevant urgency of the litigation.41

3.64 The Tax Office has also committed to amend PS LA 2005/22 Litigation and priority technical issues in order to document the practice of conceding a matter in litigation at the direction of a DCTC where the Tax Office has received and considered the advice from counsel that a Tax Office ruling is unsupportable.42

Implementation Status: Implemented

Following discussions with the Inspector-General, the Tax Office has committed to develop new procedures to ensure that where during the course of litigation the Tax Office has accepted legal advice that a ruling is wrong, it will ensure that the ruling is urgently reviewed. The Tax Office has detailed the new procedures and implementation is underway.

Subsidiary Recommendation 5.1

The Tax Office should introduce reporting systems under which its Executive is aware of the total state of all Tax Office Part IVC litigation, including the extent to which cases being litigated have produced negative revenue results.

Tax Office Position

3.65 On a monthly basis the LSB provides the ATO Executive with a report outlining:

  • stock of cases on hand;
  • resources used;
  • standards achieved in terms of timeliness and quality; and
  • trends (current month compared to previous month).

3.66 LSB also provides the ATO Executive with a monthly strategic litigation report listing the status of:

  • decisions handed down during the month;
  • new appeals and finalised matters;
  • matters listed for hearing; and
  • the status of cases currently before the courts and the AAT.

3.67 The Tax Office considers that the above report meets current needs but will remain under constant review and refinement in light of the subsidiary recommendation.

IGT Analysis

3.68 The above-mentioned reports fail to include details regarding:

  • the value in monetary terms of the cases on hand;
  • the revenue at risk43; or
  • the tax in dispute.

3.69 This type of information would obviously enable the ATO Executive to monitor the level of revenue tied up with litigation and whether the amounts involved are problematical. The Tax Office confirmed in discussions held with the Inspector-General's staff that the ATO Executive are not provided with reports containing this type of information nor the extent to which cases being litigated have produced negative revenue results (contrary to subsidiary recommendation 5.1).44

3.70 Following the Inspector-General's 2006 review, changes were made to the Tax Office's litigation case management system (MyM) to record the above information (apart from the negative revenue results). As these system changes only arose mid-financial year, the Tax Office decided not to commit to reporting until the start of the 2007-08 financial year.45 The Tax Office's intent to introduce this level of reporting to the Law Sub-plan Executive is stated in the recently released PS LA 2007/12:

LSB also reports to the Law Sub-plan Executive across all litigation work types, including volume trends, resource costs and the amount of revenue at risk.46

Implementation Status: Implemented

The LSB reports on a monthly basis to the ATO Executive on a number of results arising from the litigation program. Reporting of the financial position of the program is currently not provided (nor requested by the ATO Executive47). The Tax Office has stated in the recently released PS LA 2007/12 its intent to provide this level of reporting to the Law Sub-plan Executive. This will result in an adequate suite of reports being provided to the ATO Executive and to senior management.

Subsidiary Recommendation 5.2

The Tax Office should be more transparent in communicating the overall results of its litigation program (including the number and dollar value of cases heard by a court or tribunal, the number and dollar value of cases settled or resolved by other means and the total costs incurred by the Tax Office in resolving all these disputes) to enable the public to assess whether the Tax Office's overall litigation program is being conducted effectively, fairly and with minimum cost.

Tax Office Position

3.71 The Tax Office will examine, in the context of the Tax Office's Change Program, ways to improve the reporting of cases which are litigated, as well as cases that are resolved by other means. Commencing in the 2007-08 annual report, the Tax Office will report the numbers of substantive tax-related court decisions at each level of the judiciary (excluding debt cases).48

IGT Analysis

3.72 The Tax Office is in the initial stage of implementing changes to its litigation case management system (MyM) in order to provide the level of reporting recommended in the Inspector-General's 2006 review. The Tax Office plans to complete this project by the end of 2008.

Implementation Status: Implemented

As part of the Change Program, the Tax Office is working towards the implementation of a new litigation case management system that will enable appropriate reporting to the public of the effectiveness of the litigation program. The Tax Office has already increased the level of its reporting of litigation and its 2007-08 annual report will further expand this to include more detailed information on litigation.

Subsidiary Recommendation 5.3

The Tax Office should ensure that adequate support tools (such as a database of precedents, adequate facilities to interview taxpayers and/or their representatives, and adequate continuing legal education) are developed for Tax Office staff that are responsible for the actual conduct of cases.

Subsidiary Recommendation 5.4

The Inspector-General recommends that a consolidated and up-to-date set of litigation reference material should be developed and made available to all Tax Office staff.

Tax Office Position

3.73 The Tax Office has a number of support tools, including a litigation manual, litigation flow charts and the Significant Issues Litigation Committee (SILC) process49 to provide guidance to legal services staff. The Tax Office has recently updated its reference materials, including practice statements, instruction bulletins and reference manuals which apply to litigation. These materials have been added to internal websites and shared drives for reference by Tax Office staff.

IGT Analysis

3.74 The Tax Office has set up a litigation reference database (the Legal Services Branch Portal) which contains:

  • new developments in litigation practice within the Tax Office;
  • a link to a precedent database;
  • access to core legal reference databases such as CCH, ATP (Thomson), LexisNexis, AustLII;
  • learning and development materials;
  • court lists;
  • links to material relating to specific areas of law — for example settlement procedures to be followed by LSB staff;
  • links to a number of other databases.

3.75 The portal is maintained and updated by a designated research librarian (deployed to LSB).

3.76 A national training coordinator has been engaged to develop, implement and evaluate the learning and development strategy for LSB. LSB staff now have access to an electronic training calendar that contains training opportunities available over the forthcoming three-month period. The calendar focuses on priority topics and assists staff with monitoring their continuing legal education requirements. The functionality of the calendar is supported by additional material provided in the portal regarding forthcoming training opportunities.

3.77 Following the Inspector-General's 2006 review, LSB staff completed a survey that provided feedback on the support tools available to staff. Some key results from the survey include:

  1. around 79 per cent of staff that completed the survey considered that the level of learning and development was satisfactory or more than satisfactory;
  2. 47 per cent of staff that completed the survey considered that support tools in LSB were either inadequate or barely adequate;
  3. 49 per cent of staff that completed the survey considered that interviewing facilities were inadequate or barely adequate.

3.78 In respect of point 2 the Tax Office referred to the implementation of the new portal and in respect of point 3 the Tax Office indicated that the report is currently with the ATO Executive for consideration.50

3.79 The Tax Office has recently (October 2007) advised that it has upgraded interviewing facilities for staff in Canberra and Sydney and that it is committed to doing so in other locations when new fit outs are due.

Implementation Status: Implemented

The Tax Office has developed a sophisticated litigation reference portal that provides LSB staff with access to a wide variety of technical resources. The continued learning and development of staff is now managed on a national level by a designated training coordinator. The Tax Office has recently upgraded facilities for staff in two major locations and is committed to continuing that process.

Subsidiary Recommendation 5.5

The Tax Office should develop a reference document which sets out all of its procedures for handling litigated matters which do not involve priority technical issues.

Tax Office Position

3.80 The Tax Office proposes to develop a single consolidated practice statement which will set out its procedures for handling litigation matters.

IGT Analysis

3.81 As indicated in Key Recommendation 3, the Tax Office intends to develop a consolidated practice statement on tax litigation which amongst other matters is to set out procedures for the handling of litigated matters which do not involve priority technical issues.51 PS LA 2007/12 does not specify particular procedures for non-PTI cases, but a substantial amount of the practice statement appears to cover both PTIs and non-PTIs.

Implementation Status: Implemented

The principles and procedures in PS LA 2007/12 appear to cover both PTI and non-PTI cases in many areas. The Tax Office intends to develop a consolidated practice statement which will include the handling of litigated matters which do not involve priority technical issues.

Subsidiary Recommendation 5.6

The Tax Office's LSB area should develop appropriate file and record-keeping procedures for litigated cases. Processes should also be established to monitor the application of these procedures, to review their effectiveness and to implement any necessary improvements.

Tax Office Position

3.82 The LSB is in the final stages of updating its File Management Protocol (originally released in May 2001). Following the Inspector-General's 2006 review, the Tax Office also developed an internal corporate management practice statement52 regarding the legislative and practice requirements for the management of records (Practice Statement PS CM 2006/9 Records Management — released November 2006).

3.83 The Tax Office has also recently developed a quality assurance (QA) program to monitor adherence to appropriate file and record-keeping procedures for litigated cases. This program also includes the facility to ensure that implementation of necessary improvements is undertaken.

IGT Analysis

3.84 Tax Office staff have recently been provided with training in respect of the revised File Management Protocol. However, the protocol remains in draft form due to minor issues relating to requirements under the Archives Act 1983 (draft advice regarding these requirements has been prepared by AGS and provided to the Tax Office which is now reviewing what needs to be done).

3.85 As stated above, the Tax Office has also developed an internal corporate management practice statement53 regarding the legislative and practice requirements for the management of records. This practice statement has been developed to ensure that the keeping and management of records in the Tax Office occurs routinely.

3.86 In addition, the Tax Office has recently finalised (in October 2007) the development of a QA program and evaluation report for the LSB. The report will include an analysis of file and record-keeping procedures.54 Both the QA program and the evaluation report are now approved for full implementation. Further discussion about this new QA program is provided in subsidiary recommendation 5.7.

Implementation Status: Implemented

The Tax Office is in the process of finalising an update to its file management protocol which is to be adhered to by all staff. An internal corporate management practice statement55 regarding the legislative and practice requirements for the management of records has also been developed following the Inspector-General's 2006 review.

The Tax Office has recently finalised the development of a QA program which will include the review of file and record-keeping procedures used in the LSB. This program is now approved for full implementation.

Subsidiary Recommendation 5.7

The new independent area of the Tax Office that is primarily responsible for the management of all aspects of litigated cases should be subject to formal quality control processes for work conducted by staff of that area.

Tax Office Position

3.87 The Tax Office has recently finalised the development of a more structured QA process for litigation work completed by the Tax Office's Law Sub-plan.

IGT Analysis

3.88 As mentioned in subsidiary recommendation 5.6, the Tax Office has recently developed a QA process and evaluation report which is in line with existing quality processes including the Tax Office's proposed Integrated Quality Framework (IQF).56
The Tax Office has commenced the program including using the evaluation report.57

3.89 A 'memorandum of understanding' has been signed that establishes an evaluation process for cases where AGS is involved.

Implementation Status: Implemented

The Tax Office has recently finalised the development of a revised quality control program for litigation work completed by the Law Sub-plan. This program is now operational.

Subsidiary Recommendation 6.1

The Tax Office should establish appropriate governance arrangements to allow appropriate oversight by the Tax Office's Executive of all litigated cases which it funds. These governance arrangements should distinguish between cases where the Tax Office has obtained no external advice on its decision to fund the case and those where it has obtained, and followed, that advice.

Tax Office Position

3.90 The Tax Office currently reports this information on a monthly basis to the Priority Technical Issues Committee (PTIC) which is chaired by the Second Commissioner (Law).

IGT Analysis

3.91 The above-mentioned report to the PTIC provides the following details on a year-to-date (YTD) basis:

  • total number of litigated cases that have been provided with test case funding;
  • total costs relating to test case funding that have been submitted to the Tax Office's LSB for payment (the amount paid so far by LSB is also provided);
  • a break-up of the types of cases that have received funding that remain on hand. These cases are further categorised into those cases where the Tax Office obtained external advice on its decision to fund the case and those for which it did not.

3.92 The report also provides a case summary for each matter decided by the Test Case Litigation Panel during its most recent meeting.

Implementation Status: Implemented

The Tax Office has implemented a reporting procedure to ensure that its Executive is updated on the litigated cases that have received funding. The report also distinguishes between cases where the Tax Office obtained external advice regarding the decision to fund and those for which it did not obtain external advice.

Subsidiary Recommendation 6.2

The Tax Office should take steps to clearly notify the community of the existence of funding arrangements for cases which fall outside the formal test case program and the other rules for funding Tax Office appeals against AAT decisions and appeals to the High Court. It should notify the community of the types of cases that it will fund in this way and of the circumstances in which this funding has been and will be used by the Tax Office.

Tax Office Position

3.93 Commentary on the different types of cases funded was included in the booklet titled Test Case Litigation Program, published in April 2005. However, the Tax Office is in the process of reviewing funding policy with both the Treasury and the Attorney-General's Department. Following completion of the project, the Tax Office undertakes to revise the above-mentioned booklet to incorporate the level of information required in the subsidiary recommendation.58

IGT Analysis

3.94 As discussed in Key Recommendation 5, the Tax Office is currently working with the Treasury and the Attorney-General's Department to review funding policy and to prepare relevant guidelines. A timeframe for completion of this work appears not yet to have been determined.59 Completion of the project will enable the Tax Office to revise its above-mentioned booklet to incorporate the level of information recommended by the Inspector-General.

Implementation Status: Partly implemented

The Tax Office continues to work with the Treasury and the Attorney-General's Department to review funding policy and to prepare revised guidelines. The Tax Office has undertaken to revise its Test Case Litigation Program booklet to incorporate the level of information required under the subsidiary recommendation.

Subsidiary Recommendation 6.3

The Tax Office should ensure that where it funds cases under its general administrative powers, the method of funding (such as the basis and timing of funding) provided is consistent with that which is provided under the formal test case program. This would be to ensure that litigants who achieve funding for law clarification purposes are not disadvantaged when compared with litigants who have achieved Tax Office funding of their case for purposes other than law clarification.

Tax Office Position

3.95 The Tax Office's response to the Inspector-General's 2006 review was that it does not draw any distinction in its funding practices based on whether the application was commenced by a taxpayer application or funded by the Commissioner because an important case was involved.60

IGT Analysis

3.96 The Tax Office has also confirmed to the Inspector-General that it funds all cases in the same fashion as those that are accepted by the Test Case Panel.61

3.97 As discussed in Key Recommendation 5 and subsidiary recommendation 6.2, the Tax Office is currently working with the Treasury and the Attorney-General's Department to review funding policy and to produce revised guidelines.

Implementation Status: Implemented

The Tax Office has affirmed to the Inspector-General its commitment to fund all cases in the same fashion as those accepted by the Test Case Panel. The Tax Office has also stated that any changes to funding guidelines will reflect this principle.62

Subsidiary Recommendation 6.4

The Inspector-General recommends that any new arrangements for administering the formal test case program should involve making publicly available to taxpayers an annual report on the operations of its processes for funding cases. This report should at a minimum contain the following:

  • an annual assessment of the degree to which test cases funded by the relevant body have achieved the aim of law clarification;
  • details of the extent to which the budget for test cases has been spent; and
  • details of the number of test case applications made, the number granted and the number rejected, with broad details of the reasons for the rejections.

Tax Office Position

3.98 The Tax Office approach is to make publicly available the details of funded cases in either its annual report or another publication.63

IGT Analysis

3.99 The Tax Office has included in its 2005-06 annual report64 an outline of the degree to which each case funded under the test case litigation program has contributed to law clarification.

3.100 Also included in the annual report is total expenditure for the program. However, this information does not enable the public to ascertain the extent to which the budget for test cases has been spent. The Tax Office maintains its view that there is no specified budget for or cap on expenditure on test cases and that it has a commitment to fund all cases accepted by the Test Case Panel.

3.101 The remaining information recommended by the Inspector-General has been appropriately included in the annual report.

Implementation Status: Implemented

The Tax Office has included in its 2005-06 annual report the minimum level of information recommended by the Inspector-General. A brief description of law clarification is provided against each test and significant case and a brief review of Test Case Panel activity is also provided.

Subsidiary Recommendation 6.5

The Inspector-General recommends that the current exclusion of tax avoidance cases from the AAT adverse appeal funding arrangements be removed. The Tax Office should develop guidelines which allow funding for the costs of an appeal to be provided to taxpayers in cases involving alleged tax avoidance where the AAT determines that there was no such tax avoidance, the taxpayer wins their case and the Tax Office appeals against that AAT case to the Federal Court.

Tax Office Position

3.102 In the agreed response to the subsidiary recommendation, the Tax Office stated that tax avoidance cases will not be automatically excluded where it is fair and in the public interest to fund an appeal.65

IGT Analysis

3.103 As discussed in Key Recommendation 5, subsidiary recommendation 6.2 and subsidiary recommendation 6.3, the Tax Office is currently working with the Treasury and the Attorney-General's Department to review funding policy and to prepare revised guidelines.

Implementation Status: Not implemented

The Tax Office continues to work with the Treasury and the Attorney-General's Department to review funding policy and to prepare revised guidelines.

The above Tax Office position does not alter its current view that cases involving tax avoidance will generally not be funded. The Inspector-General maintains its view that where a taxpayer has been successful in a matter before the AAT which included testing of the issue of tax avoidance, adverse decision funding should not be denied where the Tax Office decides to appeal. Unless the new guidelines clearly adopt the position recommended by the Inspector-General, the Tax Office approach to this issue will continue to be unfair.

Subsidiary Recommendation 6.6

The Tax Office, when describing a case as a test case or leading case in any communication whether to taxpayers individually or to the public at large, should clearly indicate:

  • whether it has funded the case and if so, its reasons for funding the case;
  • whether or not the case is expected to determine the tax disputes of taxpayers in similar circumstances;
  • if the case is expected to determine other disputes, the nature of the other disputes that will be determined by the case and the nature of disputes that the case is not expected to determine; and
  • that the above are subject to the actual findings of the relevant tribunal or court.

Tax Office Position

3.104 The Tax Office is setting out the issues being tested under the test case litigation program in its annual reports so that the community, and in particular the tax profession, are aware of the legal issues that have been or are sought to be tested. The Tax Office has also advised the NTLG of the outcome of test case applications (without reference to the names of taxpayers) as well as the issues being funded.

3.105 The Tax Office has a practice of writing to taxpayers when a lead case will likely deal with an issue that may resolve the particular circumstances of their case.

3.106 After a case is finalised, a decision impact statement is prepared with the intention of advising taxpayers of the Commissioner's reaction to the case and to give guidance on how the Commissioner will apply the decision more broadly.

3.107 Further to these steps already taken, the Tax Office will develop and implement a codified practice that will communicate to the community any pending litigation that it is hoped will provide law clarification for the broader community. In line with the recommendation, the proposed communication strategy will relate to lead and test cases. The Tax Office will identify the name of the lead or test case, as well as the issue, but due to secrecy requirements, will not disclose whether or not the case has been test case-funded. The requirement under the first dot point of the recommendation, that is, that the Tax Office should indicate whether it has funded the case and if so, its reasons for funding the case, will not be dealt with under this strategy, but will continue to be dealt with through the Tax Office's annual report. The annual report will also continue to provide details of the cases that have been funded or agreed to be funded, as well as the issue that has been or is to be tested.

3.108 The Tax Office will implement a codified practice to communicate to the community via its Tax Office website (similar to the decision impact statement process):

  • the law clarification that the Tax Office is seeking from a case;
  • that there is no guarantee that the case will produce the law clarification sought;
  • that litigation underway may have consequences for some taxpayers;
  • the issue that the Tax Office expects a case to resolve;
  • the significance of the issue;
  • the types of other disputes that could be resolved depending on the specifics of the court decision.

3.109 The Tax Office considers that the above satisfies the subsidiary recommendation.

IGT Analysis

3.110 The Tax Office commenced recording in its 2005-06 annual report the details of the cases that had been funded or agreed to fund, as well as the issue to be tested.66 However the detail provided failed to address the second, third or fourth points in subsidiary recommendation 6.6.

3.111 The introduction of decision impact statements (discussed in Key Recommendation 6) has provided taxpayers with an overview of test case or lead case decisions within generally eight weeks of the judgement date. However, a review by the Inspector-General of all decision impact statements published in the 2006-07 financial year revealed that content relating to the third point of the subsidiary recommendation has not been provided.

3.112 To address these matters, the Tax Office has committed to implement the above-mentioned practices to ensure that the level of information espoused in the subsidiary recommendation is provided to taxpayers and the public at large.

Implementation Status: Implemented

By committing to implement additional communication practices, and given the work already done to communicate details of funded test cases, the Inspector-General considers that the Tax Office has substantially implemented subsidiary recommendation 6.6. The Tax Office has detailed its plans for completing implementation.

Subsidiary Recommendation 7.6

Where the Tax Office can readily identify how a finalised court or tribunal decision will impact a particular class of taxpayers then taxpayers should not be expected to hold their objections or disputes in abeyance indefinitely pending lengthy Tax Office internal processes for amending or withdrawing public rulings, determinations or interpretative decisions.

Subsidiary Recommendation 7.7

The Tax Office should implement processes to ensure that objections and disputes on hand involving a public ruling, determination or interpretative decision under review as a result of a court or tribunal decision are handled and resolved in a timely manner. This could require the resolution process being led by senior tax officers who are able to make a decision based on the current law (the law as interpreted by the courts) rather than the existing Tax Office view.

Tax Office Position

3.113 The Tax Office agreed with subsidiary recommendations 7.6 and 7.7 in principle and in October 2006 introduced the decision impact statement system to set out how the Commissioner would administratively apply the law as handed down by the courts or tribunal. The workings of the decision impact statement system have been outlined in PS LA 2007/2.

IGT Analysis

3.114 The decision impact statement template contains a section explaining how the Commissioner will administer the law pending any review of a published ruling or determination (following the handing down of the relevant court or tribunal decision). For example, the decision impact statement following the handing down of the Indooroopilly decision67 stated that the Tax Office would:

  1. not be appealing the decision; and
  2. be reviewing FBT assessments associated with outstanding employee benefit arrangement cases affected by the decision.

3.115 The Inspector-General's staff reviewed documentation evidencing senior tax officers directing staff to administer in accordance with recently released decisions as opposed to existing Tax Office views. This type of conduct, together with the development of the decision impact statement system to drive change following the handing down of significant decisions, represents a practical example of the Tax Office's approach in line with subsidiary recommendations 7.6 and 7.7. However, the Inspector-General considers that the Tax Office should also commit to this type of timely action by including appropriate procedures in PS LA 2007/2. This would reinforce with the community the Tax Office's commitment to the implementation of the subsidiary recommendations.

3.116 The ATO contact officer specified in the decision impact statement, invariably the Tax Counsel involved in the relevant case, has corporate responsibility for the progress of any administrative change outlined in the decision impact statement. This can include providing technical leadership to the business line that will arrange for the administrative change to occur. Put simply, the decision impact statement provides the impetus for change so that cases on hand are administered accordingly and are resolved without waiting for the amendment of rulings and other Tax Office views.68 The timeliness of this process is enhanced because of:

  1. the time limits set for the publication of a decision impact statement (as outlined above in subsidiary recommendation 7.3); and
  2. the above-mentioned management of change undertaken by the designated contact officer whose name is listed on the decision impact statement for members of the public to contact in the event of delays.

Implementation Status: Implemented

The introduction of the decision impact statement system has provided the Tax Office with an impetus to promptly administer taxpayer matters in line with recently released court or tribunal decisions. A senior tax officer, invariably the Tax Counsel for the particular case, is assigned responsibility to drive changes in administrative practice.

The Inspector-General considers that the Tax Office should also publicly commit to this type of timely action by including appropriate procedures in PS LA 2007/2.

In summary, the Tax Office has given effect to the spirit of the subsidiary recommendations.

Subsidiary Recommendation 7.8

The Tax Office should develop uniform corporate governance processes to deal with the identification, consideration and feeding back to all appropriate areas of the Tax Office of any non-technical issues arising from the conduct of litigation with the aim of improving the quality and efficiency of litigation through better upstream processes.

Tax Office Position

3.117 Included as part of PS LA 2007/2 is a procedure requiring a post-decision meeting to be convened within five business days of the handing down of an adverse or partially adverse decision, to consider (amongst other matters) any non-technical issues arising from the conduct of the case.69 For cases that do not proceed to hearing, the Tax Office has recently developed a reporting system to capture any learnings from the litigation process.

IGT Analysis

3.118 The above-mentioned post-decision meeting required under PS LA 2007/2 is conducted via the SILC process. Under this process:

  • the LSB officer must feed back to the business line (through the relevant business line litigation coordinator or steering committee) any non-technical issues which are relevant to their operations that might improve the Tax Office's litigation process;
  • similarly, the business line or other members of the litigation team should feed back to LSB any non-technical issues that might improve the quality of LSB's role in the litigation process.70

3.119 For cases that do not proceed to hearing, the Tax Office has recently developed a new reporting system to ensure that feedback about the litigation process is captured and then referred to the cross-business line objections taskforce for consideration. This involves the completion of an early resolution report (ERR) which includes an analysis of (amongst other things):

  • whether the litigation phase could have been avoided; and
  • implications for the business line's audit or objections processes.

3.120 Put simply, the ERR process is to capture:

  • any learnings from the litigation process;
  • any problems that arose during the case; and
  • any systemic problems identified in the process.

3.121 Training on the use of ERRs was provided to relevant areas in the Tax Office in March and April 2007. ERRs are prepared by the LSB officer in collaboration with the relevant litigation team at the final SILC. As at July 2007, only a dozen ERRs had been prepared.71

3.122 In July 2007, the Tax Office advised that it was still finalising the process for the review of ERRs at the cross-business line objections taskforce level. It is proposed that following this review process, any identified systemic problems are to be addressed through the implementation of changes to litigation processes. The ERR is also to be provided to business line litigation coordinators who are to discuss identified problems with business line officers (that is, with a view to improving the performance of these original decision makers). In October 2007, the Tax Office advised that this process was now in place.

3.123 Also in response to the Inspector-General's subsidiary recommendation, the Tax Office introduced in November 2006 a quarterly workshop whereby executives from TCN (Strategic Litigation) and representatives from the business line work as a team to review and improve the operation of litigation processes.72 A wide variety of areas relevant to the litigation process are covered as part of this review.

3.124 Also in October 2007, the Tax Office has completed the development of a QA program whereby on a quarterly basis an executive team (one senior executive from LSB and one from each business line) is to review a sample of litigation cases to assess the contribution of business line officers towards the completion of the case.

Implementation Status: Implemented

The Tax Office has incorporated into PS LA 2007/2 the requirement for a post-decision meeting (a SILC) to be convened within five business days of the handing down of an adverse or partially adverse decision, to consider matters (including non-technical issues) arising from the conduct of the case. Feedback from this process is provided to both LSB and the litigation team for incorporation into work practices.

For cases that do not proceed to hearing, the Tax Office has recently developed the ERR system to ensure that feedback about the litigation process is captured and then referred to the Tax Office's executive-level for action. The Tax Office is still finalising the process by which this executive level review is undertaken.

Also in response to the subsidiary recommendation, the Tax Office has introduced a workshop held on a quarterly basis whereby executives from LSB, TCN and each business line review the operation of litigation processes. Following on from these workshops, recommendations are forwarded to the Provision of Written Advice Steering Committee for consideration.

In summary, the Tax Office has very recently established a series of processes to identify issues arising from the conduct of litigation. Part of this involves the provision of feedback to appropriate areas so as to improve litigation processes.


5 Essenbourne Pty Limited v Commissioner of Taxation (2002) FCA 1577.

6 These opinions are included in Appendix 4 of the Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation.

7 Tax Office report on the implementation of Inspector-General recommendations — June 2007.

8 Commissioner of Taxation v Indooroopilly Childrens Services Pty Ltd [2007] FCFCA 16.

9 'The rule of law: a corporate value', speech by Michael D'Ascenzo, Commissioner of Taxation, to the Law Council of Australia rule of law conference, Brisbane, 1 September 2007; and updated corporate Tax Office publications.

10 PS LA 2007/2 (at para 83).

11 Ibid.

12 'Strategic litigation' refers to litigation that leverages compliance through clarification of the law in key high-risk areas. Strategic litigation also includes cases where law clarification opportunities are not the primary objective, but the other risks to the Commissioner are sufficiently severe as to warrant a strategic corporate response. Strategic litigation is the wider term and will include all priority technical issue litigation (PS LA 2005/22 Litigation and priority technical issues — at para 6).

13 A priority technical issue (PTI) is a technical issue that 1) requires resolution by way of the formation and/or application of the Tax Office view of the law and 2) has been ranked as having a priority 1, 2 or 3 through the Tax Office's PTI process.

14 PS LA 2007/12 (at para 52).

15 Ibid (at para 61).

16 Ibid (at para 58).

17 Ibid (at para 40 — escalation can be up to the level of the Chief Tax Counsel).

18 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) 16 April 2007

19 In 2003 the Tax Office's Chief Tax Counsel commissioned a major review (the Behm review) of its internal management of legal risk, including the management of the risks associated with its conduct of litigation on Part IVC matters.

20 ATO Minute 19 October 2007 (at p 2).

21 Ibid.

22 Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation (key finding 5.2 at p 83).

23 This absence of appropriate risk management was prominently identified in the Inspector-General's 2006 review (Review of Tax Office Management of Part IVC Litigation — Inspector-General of Taxation (at 5.46)).

24 Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation (at 6.190).

25 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 March 2007.

26 Unsuccessful applicants to the Tax Office Test Case Litigation Panel are notified in writing. Included in the notification is an outline of how taxpayers can request a review of the decision by the Taxation Test Case Funding Review Panel.

27 Review of Tax Office Management of Part IVC Litigation — Minister for Revenue and Assistant Treasurer Press Release — 7 August 2006.

28 Interview with the Principal Legal Advisor, Strategic Litigation (Tax Office) — 12 June 2007.

29 This decision was made following the Tax Office's official response to the Inspector-General's 2006 review which stated that it would consult with the Treasury as to whether the decision impact statement format should refer to a situation where a matter has been referred to the Treasury (Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation (at 7.65)).

30 PS LA 2007/2 (at para 71).

31 PS LA 2007/2 (at para 69).

32 Commissioner of Taxation v Indooroopilly Childrens Services Pty Ltd [2007] FCFCA 16.

33 Known as 'Mind your Matters' (MyM).

34 Tax Office Annual Report 2005-06 (Table 4.6 at p 222).

35 Siebel is the system the Tax Office is rolling out to manage all client dealings in a consistent manner. In summary it comprises three main parts that will work together as one entire system — client relationship management, case management and work management. As a 'front-end client service' system to manage all client related work, Siebel will work with the Tax Office's 'back-end processing system, Integrated Core Processing (ICP)

36 The Tax Office is undergoing a staggered implementation of the new Siebel Case Management system designed to allow its officers to more effectively manage client cases whilst working in conjunction with other Tax Office systems (such as the Client Relationship Management system).

37 This practice is provided for in practice statements PS LA 2005/22 Litigation and priority technical issues and PS LA 2003/10 The Management of Priority Technical Issues. This practice has also been restated by the Tax Office in a draft practice statement titled 'Tax Technical Litigation in the Federal Court' and a further draft practice statement titled 'Briefing Counsel' that are also to form a part of the consolidated practice statement on tax litigation (referred to in Key Recommendation 1).

38 ATO Minute 13 September 2007 (at p 3).

39 Ibid.

40 A 'PTI' (priority technical issue) is an issue of an interpretative nature that requires a prioritised approach to resolution. Put simply, every possible assistance is provided to ensure that the issue is promptly resolved. The Priority Technical Issues Committee which is chaired by the Second Commissioner (Law), meets on a six-weekly basis and provides guidance and direction in the management of PTIs within the established corporate framework (including monitoring and intervention as required to ensure timely resolution).

41 ATO Minute 13 September 2007 (at p 3).

42 This would be an exception to the general principle that the Tax Office argues its cases consistently with its rulings — ATO Minute 13 September 2007 (at p 3).

43 ATO Minute 19 June 2007 (at p 2).

44 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 April 2007.

45 ATO Minute 19 June 2007 (at p 2).

46 PS LA 2007/12 (at para 75) — released 21 June 2007.

47 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 April 2007.

48 ATO Minute 13 September 2007 (at p 3).

49 SILCs are convened by the LSB officer at every critical stage of all court and tribunal matters. Other attendees at the SILC will vary depending on the business line involved and the strategic importance of the cases, but are likely to include relevant officers from the Tax Office business line, CoE and the TCN.

50 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 April 2007.

51 Tax Office report on the implementation of Inspector-General recommendations — June 2007.

52 Corporate Management Practice Statements (PS CM) are endorsed Tax Office corporate policy and must be followed by Tax Office employees. Each PS CM is supported by corporate management procedures and instructions which detail requirements and processes for implementing the policy.

53 PS CM 2006/9 Records Management.

54 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 23 October 2007 (the approval of the use of this report was given by the LSB Executive on 23 October 2007).

55 PS CM 2006/9 Records Management.

56 The Integrated Quality Framework (IQF) is a set of quality management principles and activities currently being developed which are to be based on the Australian Business Excellence Framework and Australian Standard ISO 9001:2000 (the international standard regarding quality management systems). The purpose of the IQF is to ensure that the Tax Office produces work of a consistently and sustainably high standard. Specifically included in the list of products to be governed by the IQF is litigation.

57 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 23 October 2007.

58 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 April 2007.

59 Interview with the Secretary of the Taxation Test Case Funding Review Panel — 12 June 2007.

60 Review of Tax Office Management of Part IVC Litigation (2006) – Inspector-General of Taxation (at 6.65).

61 ATO Minute 13 September 2007 (at p 3).

62 Ibid.

63 Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation (at 6.199).

64 Tax Office Annual Report 2005-06 (at pp 222-3 and at appendix 5).

65 Review of Tax Office Management of Part IVC Litigation (2006) — Inspector-General of Taxation (at 6.216); Interview with the Senior Tax Counsel , Strategic Litigation (Tax Office) — 16 March 2007.

66 Tax Office Annual Report 2005-06 (at pp 277-279).

67 Commissioner of Taxation v Indooroopilly Childrens Services Pty Ltd [2007] FCFCA 16.

68 Interview with the Senior Tax Counsel, Strategic Litigation (Tax Office) — 16 April 2007.

69 PS LA 2007/2 (at para 46).

70 PS LA 2007/2 (at para 46).

71 Interview with the Principal Legal Advisor, Strategic Litigation (Tax Office) — 9 July 2007.

72 These quarterly workshops are chaired by the Tax Office's Senior Tax Counsel, Strategic Litigation.