Reason for the review
1.1 On 2 June 2014, the then Acting Assistant Treasurer, Senator the Hon Mathias Cormann, referred an Inquiry into Tax Disputes (the Inquiry) to the House of Representatives Standing Committee on Tax and Revenue (the Committee).1 The Committee adopted the Inquiry and announced that it would consider, amongst other things, 'whether a separate agency should manage ATO [Australian Taxation Office] litigation, whether the ATO should have a separate appeals area, or if current arrangements should continue.'2
1.2 On 11 June 2014, the Committee sought the assistance of the Inspector-General of Taxation (IGT) and requested3 that the IGT review the large business and high wealth individual (HWI) themes of the Inquiry. The ATO defines large businesses as those with annual turnover exceeding $250 million and HWIs (also known as highly wealthy individuals) as those controlling more than $30 million or more in net wealth.4 For the purposes of this review, the IGT has adopted the ATO's definition and consulted with the Committee to ensure that the spectrum of taxpayers would be canvassed by either the IGT or the Committee.
1.3 The IGT accepted the Committee's request and issued terms of reference on 19 June 2014 which reproduced those of the Inquiry.5
Summary of stakeholder concerns
1.4 In response to this review, stakeholders have acknowledged recent improvements in the ATO's handling of tax disputes. However, they have also highlighted a range of ongoing concerns including:
- difficulties with ATO conduct during compliance activities relating to information requests, position papers and a lack of early ATO engagement when signs of dispute emerge;
- a lack of independence of the objections function;
- specific issues with the ATO's 'internal independent review (IR) process' to review ATO position papers for large business taxpayers;
- the unavailability of the pre-assessment reviews, such as the above IR process, to all taxpayers;
- a lack of independence of the litigation function from the compliance function, leading to unnecessary litigation; and
- a lack of transparency and accountability in relation to settlements.
Focus of this review
1.5 The management of tax disputes, or aspects thereof, have been the subject of a number of previous IGT reviews which has led to recommendations being made directly to the ATO to improve its processes and approach. The ATO has agreed and taken steps to implement the majority of these recommendations.
1.6 Given the earlier IGT reviews on this subject matter and the ATO's response, as well as resourcing and timeframe constraints, the IGT has determined that it would be most beneficial in this report to consider whether recent improvements could be enhanced and embedded through appropriate structural change. The IGT has also considered specific improvements such as providing a framework to enhance original decision making to reduce disputes and to place a greater emphasis on fairness and timeliness.
1.7 While the IGT has been requested to undertake the review with a specific focus on the large business and HWI themes of the Inquiry, some comparison with other market segments are inevitable. In doing so, the IGT has drawn from his earlier reviews, submissions to this review and to the Inquiry as well as public hearings conducted by the Committee. The IGT has also used examples raised in submissions made to this review to illustrate ongoing concerns relating to systemic issues previously examined in earlier reviews.
1.8 Additionally, it should be noted that whilst the majority of disputes within the large business and HWI market segments tend to arise in relation to active compliance activities such as audits and risk reviews, disputes may also arise in the context of other ATO actions or 'products' such as private rulings or Advance Pricing Agreements in the transfer pricing sphere.
Structure of this report
1.9 Chapter 2 provides background by examining the historical development of the administrative framework for the management of tax disputes within Australia as well as more recent changes in the ATO including those arising from previous IGT reviews. This chapter also makes comparisons with certain overseas revenue authorities.
1.10 Chapter 3 identifies the existing problems with the current system of administering tax disputes and highlights the need for reform.
1.11 Chapter 4 considers the different options for reform, including independence through appropriate structural separation between the main functions of the ATO, namely: compliance, law interpretation and appeals including objections. In doing so, the IGT draws on overseas practices as well as the Australian experience in arriving at the recommendation for reform.
1.12 As the focus of this report is on the potential benefits of structural change, certain specific issues outlined in the Committee's Terms of Reference, as adopted by the IGT may be dealt with in greater detail in other current or future IGT reviews. For completeness, discussions on these other issues have been consolidated within Chapter 5 of the report.
1.13 Chapter 6 consolidates the IGT's observations and sets out the recommendation for reform to Government.
2 House of Representatives Standing Committee on Tax and Revenue, Parliament of Australia, 'Inquiry into tax disputes launched' (Media Alert, 6 June 2014).
3 Inspector-General of Taxation Act 2003 para 8(3)(d).
4 Commissioner of Taxation, Annual Report 2013–14 (2014) p 58-59.
5 Copies of the Terms of Reference together with the Committee's Media Alert are provided in Appendix 1.