3.1 Generally, complexity in the tax system provides fertile ground for disputation156 as it increases uncertainty and costs for both the taxpayer and the revenue authority. For example, unclear provisions in the legislation may lead to taxpayers and the revenue authority developing and maintaining different interpretations of those provisions that may only be resolved by having the matter litigated.157
3.2 The costs of disputes, for taxpayers, may manifest themselves at any stage of the tax disputes process and may take the form of financial, emotional and/or reputational costs. As such costs increase or take hold, taxpayers may become unable or unwilling to maintain a position they may rightfully believe is correct. Such an outcome can have a regressive effect with greater impact on small businesses and individuals. The community expects the ATO to minimise this regressive effect through a sustainable framework that provides robust checks and balances, including effective pre-assessment reviews, to prevent or expeditiously resolve disputes.
3.3 In submissions to this review, stakeholders have observed that in recent years, the ATO has made considerable improvement in their approach to early dispute resolution, mainly in the large business market.
3.4 Submissions, as well as those who testified at the Committee's public hearings, have also highlighted persisting concerns giving rise to unnecessary disputation, including those resulting from:
- unsustainable audit decisions due to a lack of auditor capability, engagement or inappropriate auditor conduct;
- limiting access to pre-assessment reviews (such as the IR process) to only the largest taxpayers and the ineffectiveness of some of these processes;
- the Compliance Group's ability to unduly influence objections officers, such that the process lacks sufficient independence and objectivity;
- inadequate management and independence of the litigation function, leading to unnecessarily litigated cases; and
- a lack of transparency and accountability in relation to settlements.
3.5 The IGT has previously conducted a number of reviews relating to tax disputes, the reports of which are noted in Chapter 2. The IGT has identified underlying themes that permeate many of the concerns raised in relation to those reviews. These themes relate to the ATO's governance and management structure, the key elements of which are outlined in the Tax Forum Submission.
3.6 In analysing the stakeholder concerns in this review, the IGT has also given due consideration to the key themes emerging from previous reviews having regard to the important nature of the Committee's overarching inquiry into tax disputes. The stakeholder concerns and related themes are each considered in turn below.
Audit decisions and conduct
3.7 ATO original decision making in compliance activities has continued to be a concern for taxpayers. This has been explored in a number of earlier IGT reviews including those that have examined the ATO's compliance approach to large businesses and HWIs.158
3.8 It is important that ATO original decisions in audits are robust and are based on a common understanding of each party's view of the facts, evidence and application of the relevant law. Whilst stakeholders have acknowledged recent improvements, the ATO statistics show a level of disputation that cannot be explained solely by taxpayer conduct or occasional ATO officer non-compliance with ATO procedures. This suggests a need for more focused engagement during audits.
3.9 Submissions to this review suggest a number of reasons for unsustainability of initial audit decisions. These include:
- lack of opportunities or willingness for ATO officers to engage;
- auditors lacking necessary commercial knowledge of the industries or entities they are examining;
- auditors lacking technical capability leading to unclear risk hypotheses;
- ATO requests for excessive information to be provided within short timeframes;
- allegations of tax avoidance pursuant to Part IVA of the Income Tax Assessment Act 1936 (Part IVA), fraud and evasion are made without strong bases; and
- perceptions that auditors have adopted an overzealous approach to compliance with a 'guilty until proven innocent' mindset.
Engaging with taxpayers
3.10 Stakeholders have acknowledged the recent support for better and earlier engagement and dispute resolution by ATO senior executives. A range of taxpayer experience has been shared in submissions to this review.
3.11 Stakeholders have cited some positive experiences, mainly in the large business market, which have highlighted the benefit of early and effective engagement, including the ability to refine and discuss risk hypotheses, request the correct information and thereby reduce the overall time taken to complete the audit and minimise the risk of disputes.
3.12 Other examples suggest that, at times, the engagements are overly adversarial and not conducive to effective dispute resolution. The issue may be further exacerbated in long-running cases where changes in personnel may create barriers for engagement due to a lack of familiarity with the history of the case, resulting in delays or unnecessary costs. Certain stakeholders have recounted instances where the ATO had not engaged meaningfully but rather sought to use the engagement to simply identify gaps in the audit case against the taxpayer rather than reconsidering its own position from an independent standpoint.
3.13 Instances where the ATO audit team did not seek to engage with the taxpayer have also been raised. Such instances have led to wide-ranging information requests and the use of formal ATO information gathering powers. The result has been considerable frustration and a rapid escalation of the dispute whereby the taxpayer through its advisers sought the assistance of senior ATO executives to intervene and assist in addressing the matter.
3.14 The above issue is particularly pronounced for non-HWI and small business taxpayers who may not have dedicated client relationship managers or senior ATO personnel contacts whose assistance may be sought. Where these taxpayers are unable to engage directly with the ATO and have few avenues to reach ATO senior staff, they have little choice but to seek external review by, for example, applications to the AAT as a means of bringing the matter to the ATO's attention.
3.15 The above highlights the importance of having a single dedicated area for all taxpayers to escalate potential disputes for expeditious and cost-effective resolution without the need to resort to personal contacts with senior ATO personnel.
3.16 The IGT has previously encouraged both the ATO and taxpayers to engage earlier during the compliance process to achieve a common understanding of the issues in dispute, including what information may assist to resolve these issues.159 Both taxpayers and revenue authorities benefit from full disclosure of relevant facts and issues during the compliance stage, so that a sustainable original decision can be made.160 The ATO has recently noted that there is incentive for both parties to get 'all the facts on the table together so you can both meaningfully look at them' to seek agreement.161
3.17 Stakeholders consider that ATO officers do not possess an appropriate understanding of commercial drivers of businesses which would help them to narrow the issues in dispute.It has been suggested that ATO officers need to appreciate that large businesses will routinely engage in tax planning that is permissible at law and that capable ATO officers are able to distinguish between legitimate tax planning activities and those which offend the law.
3.18 Stakeholders have observed that the lack of commercial understanding is evidenced by the ATO reasoning for some anti-avoidance claims. Examples in this regard include instances where the auditor's alternate postulate as presented to the General Anti-Avoidance Rule (GAAR) Panel was noted to be more expensive and inconvenient to the business and did not generate the commercial benefit of the actual transaction.
3.19 In the IGT review into the ATO's management of transfer pricing matters (the Transfer Pricing review),162 senior ATO executives also acknowledged that, at times, their staff lacked awareness of commercial drivers underlying the transactions being reviewed.163
3.20 Similar concerns have been expressed in relation to ATO officers dealing with HWIs and their businesses. In these examples, the submissions had noted that the ATO officers' appreciation of the taxpayers' business had not substantially improved even after the taxpayers and their advisers provided presentations on the nature of their business.
3.21 Stakeholders have also identified a need to guard against auditors' selection bias particularly in relation to taxpayers with less resources and access to relevant tax expertise, such as small businesses and individuals. The issue is that auditors may assume that simply because a taxpayer has been selected for audit, there must be something awry,164 i.e. they adopt an overzealous 'guilty until proven innocent' approach.
Technical capability and risk hypotheses
3.22 Technical capability is a common theme in both this review and other IGT reviews which have specifically examined large business and HWI compliance approaches as well as transfer pricing.165 More recently, the ATO has also acknowledged to the Committee that within a large organisation, capability may vary between officers:166
When you have a large workforce—and we do have a large auditing workforce in our organisations, many thousands of officers that do that kind of work—then, as with any large system, you do from time to time get variances in performance. That is not to excuse them. It is just an acknowledgement that is a reality when you are dealing with big systems.
3.23 While there is an appreciation that officers may need to be trained to develop necessary skills and expertise, stakeholders are concerned that where developing officers are inadequately supervised in compliance activities, their lack of knowledge leads to protracted audits and disputes which are costly and time consuming.
3.24 An example raised with the IGT outlined instances in which the ATO undertook two separate audits against different entities within the one taxpayer group on the same issue. Whilst the taxpayer believed that the ATO was seeking to apply a particularly ATO precedential view to the matter, the ATO was not transparent in relation to its risk hypothesis and therefore did not request the correct information. During the objection, the ATO officer agreed with the taxpayer that the audit had failed to request the correct information to truly examine the issue. Moreover, the conduct of two separate audits for essentially the same issue resulted in substantially more costs than if the ATO had sought to clarify its position in respect of one case and then applied it to the other case. Although the taxpayer was eventually able to engage directly with senior ATO officers for a more pragmatic approach to managing the audits, this had only occurred after considerable time and expense had been incurred by both parties.
3.25 In another example, the taxpayer contended that the ATO presented three different risk hypotheses concerning transfers of shares, a restructure of share capital and a demerger. The taxpayer considered that the three hypotheses were inconsistent with each other such that if the transfers of shares occurred then the demerger argument could not be sustained. However, the ATO's insistence on presenting all three hypotheses and progressing on this basis resulted in considerable time, cost and stress for the taxpayer, his wife and their business. Taxpayer costs in this matter have thus far exceeded $1 million over a number of years and the taxpayer has been unable to directly engage with senior ATO officials.
3.26 The lack of commercial appreciation and ATO staff capability issues has led to a number of concerns in relation to the ATO's information requests.
3.27 The ATO's approach to information gathering, particularly through its statutory information gathering powers under section 264 of the Income Tax Assessment Act 1936, has been an area of particular concern for large businesses. The IGT had previously considered the ATO's approach to information gathering in the ADR Review,167 the Large Business Review168 and the SME/HWI Review.169 It was also raised as a potential area of review during consultation on the most recent IGT work program. However, having regard to the ATO's more recent updates to its approach to information gathering,170 the IGT considered that there would be greater benefit in allowing the ATO's new approach to be implemented and assess its effectiveness at a later date.
3.28 Nevertheless, information gathering approaches of the ATO remain a significant concern. Submissions made to this review outlined a number of concerns with the ATO's information gathering approach.
3.29 Firstly, stakeholders were concerned that the ATO was inappropriately using section 264 to gather information which did not relate to the taxpayer's taxation affairs, such as information held overseas by the taxpayer's parent company and which was not the subject of the ATO's inquiries.
3.30 Secondly, examples provided to the IGT illustrate that, where audits extended over long periods of time, the ATO's use of information requests were excessive creating additional costs for taxpayers.
3.31 Thirdly, the timeframes allowed for the provision of information are not reasonable and appeared to be based on internal timeframes rather than based on consideration of the complexity and volume of material requested.In some instances, stakeholders have noted that even where extensions have been granted, the ATO has threatened taxpayers with criminal proceedings for non-compliance.
3.32 Fourthly, information requests issued to HWIs can be particularly burdensome with some stakeholders observing that such taxpayers are often issued with requests for the same amount of information as large businesses without the ATO appreciating the time and resources required to respond to these requests and the impact it has on these taxpayers.In one case, the ATO requested receipts for removalist expenses going back 10 years to evidence the taxpayer's principal place of residence.
3.33 Finally, excessive information requests are not confined to large businesses and HWIs and may have particularly adverse effects on individuals and small businesses. As will be discussed in the next section, information requests may be particularly burdensome for individual taxpayers, especially where the ATO does not sufficiently engage with those taxpayers on the scope and reasons for the requested information.
3.34 As stated earlier, the IGT had previously sought to minimise the instances of disputes arising as a result of information requests by recommending that the ATO engage with taxpayers to discuss relevant tax risk hypotheses, the appropriate information to address those hypotheses and identify appropriate sources of information where the documents initially requested may not be available or unduly burdensome to obtain.171
Part IVA, fraud and evasion
3.35 A particular area of concern for stakeholders was the ATO's approach to allegations of fraud and evasion as well as Part IVA, the general anti-avoidance provision. Notwithstanding that the ATO requires its senior officers to review such allegations before they are formally made, stakeholder submissions have outlined a number of issues which are set out below.
3.36 Firstly, stakeholders perceive that the above allegations are made without strong evidentiary bases, are not properly reviewed and are used as a means of extending the periods for amendment, notwithstanding that the ATO has issued a practice statement to guard against such inappropriate behaviour.
3.37 The frequency with which fraud and evasion allegations are made against HWIs has also been a cause for concern with stakeholders.A case was highlighted to the IGT in which the ATO alleged that a HWI taxpayer was seeking to evade taxes by reason of a clerical error made in his tax return.
3.38 Fraud and evasion allegations are extremely serious, due to their criminal connotations, and are difficult for taxpayers to disprove, especially those who are self-represented.172 The IGT previously considered the issue in the SME/HWI Review and made a recommendation that any suggestions of evasion should be internally reviewed by a senior ATO officer and the taxpayer provided with a base level of documentation and evidence which sets out the ATO's reasoning.173 The IGT also recommended that where evasion is considered to be a risk by the senior officer, the matter be referred to the SME technical panel for further action and the taxpayer be notified of the referral to the panel.174
3.39 Secondly, stakeholders remain concerned with the ATO's application of Part IVA to ordinary commercial transactions rather than arrangements which are blatant, artificial or contrived. Such allegations are particularly difficult for taxpayers as they still bear the onus of adducing evidence to argue against the ATO's alternate postulate on matters which may or may not have occurred.
3.40 Thirdly, stakeholders consider that ATO officers are not bringing an independent and objective mind to bear on potential determinations under Part IVA. In one example, the taxpayer highlighted concerns with potential conflicts of interest on the GAAR Panel owing to prior involvement which led to two members of the Panel recusing themselves from consideration of the matter. However, another person involved with the process, an ATO Assistant Commissioner refused the request for a recusal leading to concerns that he was invested in his view and did not objectively consider the taxpayer's arguments.
3.41 In the past, stakeholders have also raised other concerns including the GAAR Panel having no decision making role, the extent to which the ATO decision makers may disregard the Panel's recommendations and the taxpayer and their advisers not being present when the ATO makes its submissions to the Panel.
3.42 The IGT to date has not specifically reviewed the ATO's administration of Part IVA (including the operation of the GAAR panel) although it had been raised as a potential review topic during consultation on IGT's most recent work program. However, given the relatively recent legislative amendments to Part IVA, stakeholders have generally acknowledged that it would be more beneficial to await any resultant changes in ATO administrative practices before the IGT undertook such a review. Accordingly, the IGT may review this area in the future.
3.43 Submissions to the IGT characterise the objections process as a 'frustrating step to the doors of the Court.'This is particularly highlighted by the high rates of litigation being conceded or otherwise withdrawn prior to hearing. In the ADR report, the IGT observed that over 90 per cent of matters filed in the AAT are resolved without hearing.175 Similar statistics were also reported in the ATO's annual report for 2013-14.176
3.44 In particular, these stakeholders were concerned with the lack of independence between the objections function and the original decision makers. Examples raised in submissions suggested instances where the taxpayer perceived that the officer deciding the objection was the same officer who made the original decision or was located within the same team.
3.45 Stakeholders also consider that the ATO's objections function has lacked the necessary level of independence since the dissolution of the ARG in 1994. The IGT has also previously examined the co-location of the compliance and objection functions within the HWI area. One outcome of the merger in this area was an increase in the backlog of objections because the resourcing of compliance activities took priority.177 The risk of such under-resourcing of objection function exists throughout the ATO except where the objection function has been moved out of the Compliance Group.
3.46 The absence of a separate objections area with independent leadership domestically has been compared unfavourably by stakeholders with other jurisdictions possessing these features as part of their internal structure. Specifically, the IRS (United States) and CRA (Canada) both have an appeals branch with their own dedicated direct report to the agency head. Under such arrangements, it is much more difficult to assert that the appeal officers are acting under the direction of the original decision makers.
3.47 Similarly, New Zealand's IRD has a specialist Dispute Resolution Unit (DRU), headed by a direct report to the agency head, the Chief Tax Counsel, who also administers the advisory functions of the IRD. Unlike the ATO, all internal reviews are undertaken by this unit.
3.48 The UK's HMRC does not have a dedicated separate appeals area, however, it has a dedicated Assurance Commissioner who reports directly to the agency head and is responsible for overseeing HMRC's adherence to its litigation and settlement strategy. This direct report is the Tax Assurance Commissioner who also issues a separate annual report on the HMRC's approach to dispute management and settlements. This arguably represents a higher degree of internal oversight and assurance especially as the larger more complex cases are reviewed by this Commissioner along with two other Commissioners.
3.49 Stakeholders also observe that, until recently, all objection decisions were made in the same compliance business line that made the original decision in dispute. As noted earlier, objections for taxpayers with turnovers over $100 million are now undertaken in the RDR business line, which belongs to the LD&P Group instead of the Compliance Group. Despite this separation, there is some concern that the RDR objections function is not sufficiently independent, as the LD&P Group also contains the TCN.
3.50 In this respect, stakeholders have raised concerns that objections officers seeking technical advice from TCN may receive the same advice that underlies the original decisions by compliance teams. TCN is a source of technical advice for the ATO, including the Compliance Group. Structurally, TCN and RDR are ultimately headed by the same direct report to the Commissioner, being the Second Commissioner LD&P Group.
3.51 Examples were raised with the IGT of instances where TCN officers who had provided advice in the original audit were also called upon to advise officers considering the objection, effectively leading to the same outcome. As the ATO is increasingly allocating technical staff, such as LD&P's TCN, to assist the compliance teams with specific taxpayers, particularly in the PGI business line, such occurrences may become more frequent. The ATO has publicly indicated that this should not occur and that TCN officers involved in the audit stage are effectively excluded from involvement in the subsequent stages of the objection.178
3.52 In another case, the taxpayer noted that the Assistant Commissioner who was leading the audit was subsequently transferred to the TCN whereupon they were asked to provide technical advice on the same case.
3.53 Stakeholders have commented that this lack of independence and separation, rather than being a process to determine the correctness of the original decision or the taxpayer's objection, leads to a perception that the objection process is being conducted for the broader corporate purposes of the ATO, such as strengthening the ATO position for subsequent litigation.179 Internal ATO reporting had previously raised concerns that objections officers were re-auditing cases.180
3.54 Concerns in relation to the independence of the ATO's objections function were previously examined by the IGT in his 2009 Review into the underlying causes and management of objections to Tax Office decisions (Objections Review)181 and reiterated again in the ADR Review.182
3.55 The lack of independence and community confidence in the objection process has diminished the latter's role as a key dispute resolution channel for taxpayers as envisaged in the IGT's objections report.183 Notwithstanding this, some stakeholder submissions have highlighted recent positive examples of the effectiveness of the objections process in the large business market. In one such example, the taxpayer noted that it was able to engage meaningfully with the objections officer to identify that the dispute turned on a single technical issue which could benefit from early neutral evaluation (ENE). Following the parties' participation in the ENE process, the ATO accepted the neutral evaluator's advice and allowed the taxpayer's objection in full.
3.56 The IGT considers that the positive examples of how effective the objections process can be in resolving disputes reinforces the importance of ensuring that the process is robust, objective and independent and perceived to be so.
3.57 Stakeholders have observed that there is a lack of robust protocols governing communication between the original decision maker and objections officers. There are no restrictions on objections officers obtaining technical advice from a senior tax counsel within TCN even where that same senior tax counsel gave advice to the audit team which made the original decision in dispute.
3.58 The lack of strong communication protocols has exacerbated stakeholder concerns in relation to the independence of the objection function from the audit area, especially when compared to other jurisdictions where prohibitions against ex parte communication exist. Notably, the IRS has an ex parte rule governing communications between the original decision maker and the appeals branch. The principle of the ex parte rule is enshrined in legislation.
3.59 Whilst the CRA does not have the same explicit ex parte rule, protocols require any communication between the original decision maker and the appeals branch to be 'fair, open and transparent' by ensuring that appeals officers keep taxpayers informed of any discussions with auditors.
3.60 The IRD (New Zealand) has communication protocols in place that prevent other parties, such as taxpayers or the original decision maker, from making direct contact with DRU officers. Communication to and from DRU officers are routed through a liaison office that also ensures copies are provided to the other party.184 The communication protocols are guided by the two principles of 'openness and transparency' and 'maintaining the independence of the [Disputes Review] Unit so that the impartiality of the team considering a disputed matter is not compromised.'185
3.61 While the ATO does issue internal guidance to its staff on the importance of maintaining independence and the perception of independence, this is not accompanied by robust communication protocols or processes. Rather, the ATO has elected to allow its officers to exercise judgment in relation to their conduct and how independence may be maintained and managed. Specifically, it states:
Independence during the review process ensures that tax officers act in an objective and impartial manner, free from any conflict of interest, inherent bias or undue influence. Independence promotes fairness and perceptions of fairness, and minimises the potential for taxpayer dissatisfaction and complaints.
In some circumstances there may be a trade-off between maintaining independence during the review process and the nature and extent to which the reviewer seeks input from the original decision maker. Ultimately, it will be an exercise of judgment on the part of the reviewer.
Contact between the reviewer and the original decision maker provides a degree of continuity and subsequently a better taxpayer experience. Our aim is that taxpayers experience an integrated approach to resolving their dispute. However, this must be balanced with the need to ensure the merits of the dispute are properly re-examined without bias or influence.186
3.62 The absence of strong protocols has given rise to both concerns regarding the lack of independence and the objection process being used for an improper purpose, such as to gather evidence to bolster the ATO position.In Binetter v Commissioner of Taxation (No 3),187 the taxpayer tendered evidence of correspondence passing between ATO officers which suggested that the ATO was using the objection process to gather evidence in anticipation of litigation. Specifically, the correspondence noted:
However, I think that the perception that the matter will proceed to litigation is clearly correct.... With this in mind, we need to consider how best to utilise the objection stage to assist with the finalisation of the matter overall.
It has been a typical pattern for this group of cases to refuse to provide information, and then flood the Commissioner with material at the late stages of litigation. The late receipt of the material is the most disadvantageous to the Commissioner. I would therefore recommend that we use the objection stage fully to try to compel additional evidence from the taxpayer at this early stage.188
3.63 While the judge in that case did not find that the information requests were used for an improper purpose, the matter illustrates that there is at least a perception issue, i.e. communication between ATO officers in these different functions can give rise to perceptions of bias or lack of independence or objectivity and, therefore, there is a need for strong protocols governing such communication.
Challenging the ATO precedential view
3.64 Stakeholder submissions to the IGT note that objections officers' independence is further reduced due to the ATO policy that all ATO officers, including objections officers are bound to follow the ATO precedential view of the law. For example, the ATO's interpretation of a particular legislative provision may be established in a public ruling.189 Where the original compliance decision hinges on the ATO's interpretation and the taxpayer's dispute primarily relates to such interpretation, the objection outcome is unlikely to be different since objection officers are bound to follow it. In these circumstances 'the lodgment of an objection is necessarily futile if the reviewing officer is also necessarily bound by the same public ruling.'190
3.65 The IGT has previously stated in his Objections Review that:
…objection officers should [not] be able to unilaterally re-examine or redetermine the Tax Office view as this will lead to potential inconsistent treatment of taxpayers. Rather, it is appropriate that where challenges are made to the correctness of a Tax Office view, then these issues are promptly escalated to either the Tax Counsel Network or the Centres of Expertise for timely reconsideration.191
3.66 Notwithstanding the existence of an escalation process, submissions made to the IGT during this review have expressed concern that ATO objections officers are not effectively exercising this process to challenge or reconsider ATO precedential views which are incorrect or an exception should exist in the particular case before them.Stakeholders have observed that this can be especially true where officers considering the objections are more junior than the original auditors or the technical officers on whose advice the audit had proceeded.
3.67 Moreover, submissions have also expressed concern that some audit teams have exploited this approach. In support of these claims, one stakeholder has advised that documents obtained by them, under the freedom of information law, suggested that the ATO audit team had facilitated the issue of an ATO Interpretative Decision to effectively bind the objections officer to an ATO precedential view.
3.68 More recently, the IGT's follow up review into delayed or changed ATO views on significant issues192 identified further concerns which may arise where the ATO view of the law is not clearly communicated. In that report, the IGT examined a case study concerning taxpayers' treatment of Offshore Banking Unit general expenses and the ATO's purported application of a changed view retrospectively notwithstanding evidence raised by taxpayers of prior inconsistent treatment and internal ATO reports noting the inconsistency and prior ATO tacit approval.193
3.69 The matter also became subject of Federal Court litigation,194 which highlighted the limitations of taxpayers' ability to enforce internal ATO administrative processes. This has emphasised the need for the ATO to be clear and transparent in its view of the law and to have robust processes in place to consider the appropriateness of the application of the law to a particular taxpayer's circumstances.
3.70 Submissions have also indicated that even during IR processes, some IR officers have demonstrated a preference to accord with the ATO precedential view (where one existed) and did not appear to consider whether that view properly applied to their specific facts.
3.71 These perceptions have given rise to the view that taxpayers cannot have a fully objective and independent review outside of the AAT or the Federal Court that require resources not within the reach of many taxpayers. This is particularly highlighted by the high rates of ATO decisions which are varied by the AAT or the Federal Court in litigation. As set out earlier in Tables 1 and 2, over a seven year period, the ATO's decision was varied by the AAT or the Federal Court in 75 per cent of all cases which were finalised.
Protection and certainty in the objection process
3.72 The objections process is a mandatory and critical step in the formal Australian tax disputes process. However, in certain cases it may yield no protection or certainty for taxpayers.
3.73 In a particular case raised concerning an audit of a HWI, the ATO issued an amended assessment which adjusted the level of the taxpayer's carried forward losses but did not result in a liability payable for that year.
3.74 The taxpayer lodged an objection against the amended assessment but was advised by the objection team that there were no grounds to object as the amendments did not involve an increase in tax payable. The objections officer noted that they could review the original decision audit material but no binding decision could be issued in respect of the taxpayer's objection. The taxpayer was advised by the objections officer that it could nonetheless claim the loss as a deduction in a later year and that the ATO could revisit the deduction claim in a fresh audit.
3.75 The taxpayer noted that in addition to the lengthy audit, the additional time and costs of pursuing what was ultimately an invalid objection added to the expense of their interactions with the ATO.
By-passing mandatory objections
3.76 Unlike the US and the UK (and to an extent, New Zealand), in Australia, taxpayers require an objection decision to be made (or deemed to have been made) before external review rights in the AAT or Federal Court are enlivened. In the US and UK, taxpayers may by-pass the internal processes and have their matter externally reviewed directly. In New Zealand, taxpayers can seek external review directly from an assessment decision, as formal internal review takes place before the assessment decision.195
3.77 Stakeholders considered that there should be a mechanism whereby the taxpayer could by-pass or 'opt-out' of the ATO review process in order to expeditiously access external review from the AAT or Federal Court. The IGT has previously made recommendations for the ATO to fast-track certain objections where the dispute is in relation to the ATO view of the law and the facts are agreed.196
3.78 Furthermore, in his ADR Review, the IGT recommended that the ATO consult on making use of declaratory proceedings as way of seeking clarification from the Court on a point of law to avoid the associated costs and delay of the Part IVC objections process.197
3.79 During the IGT's Large Business Review, stakeholders raised concerns that the ATO was issuing amended assessments near the end of a self-imposed two year time limit, leaving little time for taxpayers to respond to SOAPs or for the ATO to consider taxpayer responses before issuing the amended assessment.198 As a result, taxpayers submitted that it forced them to use the objection process to 'protect their position' notwithstanding that the ATO's position had not been finalised. This also required the taxpayer to incur additional costs by having to respond to the position paper (SOAP) and prepare the grounds for objection.199
Access to the pre-assessment process
3.80 Taxpayers cannot make an objection until an assessment has been issued to them. However, the issuing of an assessment, as evidenced in the NOA, crystallises a debt due and payable to the Commonwealth which can have significant implications for the taxpayer. These include:
- NOA is conclusive evidence of the due making of the assessment and all of the information contained therein and the taxpayer cannot challenge the assessment save through proceedings under Part IVC of the TAA 1953;200
- NOA will render any other proceedings launched by the taxpayer, such as declaratory proceedings, nugatory and confine them to the statutory regime set out in Part IVC;201
- the Commissioner can pursue debt collection activity notwithstanding a dispute may be on foot202 which in itself may have implications for taxpayers seeking to effectively challenge the assessments;203
- efforts to stay payment of the full debt, such as 50/50 arrangements,204 may still require taxpayers to liquidate assets to make such payments, potentially realising losses for the taxpayer;
- the ATO may apply credits for other taxes against the liability, which may otherwise have been refunded to the taxpayer;205
- the taxpayer begins accruing interest at the GIC rate from the due date for payment on the amended assessment until the debt is paid;206
- such adjustments may lead to taxpayers inadvertently exposing themselves to insolvent trading claims when trying to manage their business and challenging existing ATO liabilities at the same time;
- such adjustments may trigger default clauses in loan and funding agreements with financiers;and
- obligations for certain entities, especially large publicly listed companies, to disclose the tax liability to the market may be triggered,207 which may adversely affect share prices, existing commercial transactions or financing arrangements.
3.81 Implications such as these led the Ralph Review to observe that 'satisfactory resolution of the subsequent dispute offers little comfort for taxpayers faced with these potential impacts on issue of the assessment.'208
3.82 In one example the ATO had unilaterally offset refunds due to the taxpayer against disputed tax debts, leading to the taxpayer not receiving the expected refund notwithstanding that the taxpayer had sought to pay 50 per cent of the disputed debt pending the determination of an objection. Similarly, submissions have expressed concerns against the use of garnishee notices during tax disputes, especially where these were issued against taxpayers' business accounts, effectively hampering business as usual and denying access to necessary funds to challenge ATO decisions.
3.83 Having regard to the manner in which the ATO may approach collateral debt collection action, stakeholders have advocated for an effective pre-assessment dispute resolution process for all taxpayers. These stakeholders point to the processes in the US, where disputes may be reviewed by the Office of Appeals before assessments are issued. In the case of New Zealand, the NOPA process is a legislated pre-assessment process which seeks to resolve the substantive tax dispute before the liability is crystallised. Similarly, Ireland's statutory prohibition against debt recovery of disputed liabilities assists to ensure that taxpayers are not denied the opportunity to effectively challenge the accuracy of the assessment.
3.84 A submission to the IGT indicated that a taxpayer had not progressed matters to either the AAT or the Federal Court because demands from the ATO for the payment of 50 per cent of the disputed debt were prohibitive. Other submissions indicated that the 50 per cent requirement may be particularly onerous where the ATO had issued protective assessments (i.e., those assessments which inflate the amount of tax liability to protect the ATO's position).
3.85 The above international comparisons as well as difficulties faced by taxpayers in Australia, highlight the need for an effective review of the ATO's original audit decisions before assessments are issued. Although the ATO provides such a review for the very large taxpayers, through the IR process, the IGT believes that such pre-assessment reviews should be available to all taxpayers. In fact, small business and individual taxpayers are in greater need of such reviews as they are the least likely to be in a position to take the matter to the next stage and ultimately to the AAT and the courts.
3.86 It should be noted that the IGT has already addressed some related issues in recent reviews. In particular, in the Review into the ATO's administration of penalties (Penalties Review),209 to mitigate the impact of paying 50 per cent of disputed debts (including associated penalties) when seeking to challenge ATO assessments, the IGT recommended and the ATO agreed not to require taxpayers to pay penalty amounts until the dispute on the primary tax is resolved.210
3.87 The IGT is also currently undertaking a broad review of the ATO's approach to debt collection which, amongst other things, will examine the ATO's processes in relation to the collection of disputed debts.211
The ATO's IR process
3.88 Stakeholders who participated in the ATO's IR process were generally supportive of it. The IGT team engaged directly with those taxpayers and advisers who had participated in the IR process to better understand their experience and seek ideas on potential improvements. Some stakeholders considered that such reviews should be built into the audit process as a form of quality control for the audit rather than as a dispute procedure.
3.89 It is important to appreciate that the IR process has been limited to only twenty large market cases to date and, therefore, it is not possible to ascertain a broad market segment view of the process. However, some stakeholders who participated in the IR process have identified a number of areas for improvement, including:
- the independence of the IR officers;
- the inability to introduce new facts and evidence for consideration;
- the appropriateness of the IR process to resolve disputes that involve such specialised topics as transfer pricing or valuations;
- a lack of clarity about how the ATO deals with internal disagreement and escalations to the Chief Tax Counsel on critical questions of law including, but not limited to, those with strategic or systemic implications;212
- the inability of taxpayers to invite new counsel or advisers to assist in the process where it was suggested that existing advisers may have contributed to the dispute; and
- the weight given to the IR officer's decision with stakeholders being of the view that the process was ineffective where the review's decision is not binding on the ATO.
3.90 Comparisons have been drawn between the above IR process and those of the US Appeals Office, New Zealand's DRU and the Republic of Ireland's internal/external review processes, all of which can issue decisions which bind the respective revenue authorities with few exceptions.
3.91 During the course of this review, the ATO updated its guidance on the IR process to provide clarification on some of the points raised above, such as the instances in which the IR officer may receive new information.213
3.92 Certain stakeholders have raised a more fundamental concern regarding the fairness of the IR process being made available only to approximately 1,250 large businesses with annual turnover exceeding $250 million out of the total taxpayer population of more than 16 million including individuals, small businesses, trusts and self-managed superannuation funds.214
3.93 As a fundamental matter of fairness and equity, effective dispute resolution should be available to all taxpayers regardless of resources. The ATO may justifiably devote more resources to ensure that large taxpayers comply with their tax obligations as the risk to Government revenue is generally significant. However, devoting more resources to the objection process or pre-assessment reviews for large businesses than those for small businesses and individuals is more problematic. The reason is that at such stages, whilst risk to revenue remains an issue, a major goal should be to ensure that taxpayers are treated equitably and a fair outcome is achieved.
3.94 Furthermore, as the ATO's statistics indicate, 96.8 per cent (21,756 out of 22,455) of all objections arising from audits are attributable to small businesses and individual taxpayers.215 Given the significant proportion of disputes attributable to small businesses and individuals, it is imperative that the ATO provides at least the same level of dispute prevention and resolution mechanisms to these market segments including providing access to effective and efficient pre-assessment reviews.
3.95 The IGT notes that certain processes with elements of pre-assessment review are available to individual and small business taxpayers, such as the administrative reversals process for data matching and income integrity cases and in-house facilitation for less complex disputes. However, these processes do not occur prior to NOAs issuing and do not involve a reconsideration of the merits of the case by a person outside of the Compliance Group. For these taxpayers, an early reconsideration of their matter with 'fresh eyes' is critical.
3.96 This is highlighted in a number of highly publicised individual taxpayer disputes. In one case, the ATO had raised a large tax liability against which the taxpayer was unable to have reconsidered afresh by an ATO officer until he inadvertently managed to speak directly with the Commissioner. Following that discussion, a senior ATO officer was appointed to review the matter which led to a significant reduction in his assessment. However, this only occurred after many years of seeking to deal with the ATO and incurring significant costs in the process.
3.97 Moreover, the availability of the above processes would assist to address the risk of some individual and small business taxpayers being reluctant to raise issues or disputes with the ATO. As will be discussed in the next section, whilst cost is a factor in taxpayer decisions concerning dispute resolution, there may be other issues such as fear of being targeted by the ATO in the future.216
Barriers to access to justice
3.98 The AAT and the Federal Court offer avenues for external and independent reconsideration of decisions made by the ATO. As discussed earlier, the AAT is empowered to 'stand in the Commissioner's shoes' and substitute its own decision for that of the Commissioner, whilst the Federal Court may judicially review the legal correctness of the decision that was made.
3.99 However, access to these external avenues is constrained due to the time and costs associated with such challenges. The issue was most recently examined by the Productivity Commission in its Access to Justice Arrangements report which identified that the high costs of litigation may prevent people, particularly small businesses and individuals, from seeking legal remedies, discourage them from seeking legal advice or lead them to settle or withdraw their claims.217 It should also be noted that whilst large businesses and HWIs may have access to more resources than other taxpayers, their disputes typically involve complex issues which often require highly specialised and costly financial and legal advice. Therefore, costs may be proportionally higher and may also act as a barrier for these taxpayers.
3.100 Tax disputes involve significant direct financial and opportunity costs which are incurred both upfront and progressively throughout the dispute. Taxpayers may also be obliged to expend resources to engage tax practitioners and other advisers to work with the ATO on initial risk reviews and audits. Further expenses may be incurred through pre-assessment engagement, objections and ultimately litigation. While it is not possible to precisely assess all the costs incurred by every taxpayer, examples which have been raised with the IGT indicate that these costs may range from hundreds to thousands to millions of dollars, even before the litigation stage.
3.101 Stakeholders have also noted that the cost of litigation may be prohibitive, especially for smaller taxpayers.218 Submissions have also indicated that, in certain cases, the costs of disputes are such that they may be ruinous to the taxpayers who have to bear them. One example highlighted a case in which the costs already incurred, prospects of further costs of challenging the ATO together with the adverse negative health impacts have led the taxpayer to offer settlement with the ATO notwithstanding that they disagree with the ATO's position.
3.102 In the AAT, litigants bear their own costs and cannot recover them from the other party. A 2012 study estimated that personal costs incurred by represented taxpayers in the AAT were between $5,634 and $6,684 in the Taxation Appeals Division. For represented taxpayers using the Small Taxation Claims Tribunal (STCT), the costs were more likely to be between $4,094 and $4,794.219 As the limit for the amount of tax in dispute to access the STCT is $5,000, taxpayers who wish to use the STCT may find it uneconomical to do so if they also wish to obtain professional advice.
3.103 In the Federal Court, successful litigants are unlikely to be awarded the full extent of costs expended. The successful party is usually awarded costs on a party-party basis which generally accounts for only 60-75 per cent of the actual costs.220
3.104 As discussed earlier, costs are further compounded by the ability of the ATO to undertake debt recovery action while matters remain in dispute221 or demand payment of 50 per cent of the disputed debt before recovery action is suspended. This power gives the ATO considerable leverage over taxpayers and has resulted in some instances where the taxpayer was unable to pursue the appeal due to a lack of resources.222
3.105 In addition to the time and cost factors, it is important to recognise that there are other barriers which prevent access to these external forums.
3.106 Firstly, there may be an imbalance of bargaining power and experience. As the Productivity Commission has observed:
The effectiveness of the adversarial system is premised on parties being on an equal footing, but this is not always the case. Differences in the bargaining power of litigants are most evident when comparing the two extremes — self-represented litigants and well resourced, repeat users of the system, such as governments and big businesses.223
3.107 The ATO is one of the largest Government agencies which, by necessity, has monopoly power and significant resources. Accordingly, it is considered to have considerable advantage over the vast majority of taxpayers, particularly small businesses and individuals, when dealing with legal disputes.
3.108 Secondly, the taxation and superannuation system is extremely complex and may operate as a barrier to access justice. This is especially true of taxpayers who are self-represented and who may not be able to articulate their positions to sufficiently raise concerns in relation to ATO decisions.
3.109 Thirdly, there is a concern that taxpayers who challenge ATO decisions feel that they will be targeted and may therefore be the focus of more intensive action in the future.224
3.110 Finally, there are reputational issues associated with litigation which often play out in a public forum. For many HWIs and large businesses, the potential for adverse reputation risks will have a direct bearing on decisions in relation to tax risk positions being adopted.225
3.111 Thus, while some taxpayers may appear to have the option of seeking legal redress against ATO decisions in external forums, they may feel that they are not in a position to do so. Accordingly, it is particularly important in such cases that there are appropriate internal mechanisms to have the decisions independently and objectively reconsidered.
Management of litigation
Reducing litigation levels
3.112 Efficient dispute management is generally typified by early engagement and timely use of ADR. A lack of these two elements usually results in protracted disputes, unnecessary litigation, mounting costs and frustrations.
3.113 Following the implementation of IGT recommendations relating to settlements and dispute resolution, the ATO has reported both a general increase (with the exception of a decline in 2011–12) in the number of settlements across all market segments as well as an increase in the number of pre-litigation settlements. These statistics are set out in Table 5 below.
Source: ATO website; Commissioner of Taxation Annual Report 2013–14.
3.114 As Table 5 indicates, the proportion of settlements occurring before litigation has increased from 53 per cent in 2010–11 to 64 per cent, 72 per cent and 77 per cent in the three years which followed. These increases suggest that the ATO is becoming better at early engagement and the use of ADR, leading to more efficient and effective resolution of disputes.
3.115 However, during this review, examples have again been raised with the IGT which suggested that cases were unnecessarily progressing to litigation where simple factual matters were eventually unearthed which resolved the matter. In one case, involving luxury car tax, the question of whether the taxpayer had appropriately quoted its Australian Business Number at the time of importing (and therefore, whether the taxpayer was in fact liable for the tax) was not discussed until the Federal Court Scheduling Conference whereupon the matter was withdrawn.
3.116 Statistics published by the AAT and the Federal Court,226 in Table 6 below, also suggest that cases are still progressing to litigation where a dispute should not have arisen or should have been resolved at an earlier stage. Table 6 shows that the numbers of filings in the AAT (excluding the STCT) have increased over the past five years. In the STCT, the filing of small claims (less than $5,000 or reviews of decisions not to release taxpayers from tax debts) increased dramatically between 2010–11 and 2011–12. While there has been a decrease in the past two years, filings in the STCT remain above 200.
3.117 In the Federal Court, Table 6 shows that the numbers of filings have fallen from 171 in 2009–10 and 235 in 2010–11. However, over the past three years, there appears to be a year-on-year increase in the number of filings with 130, 140 and 160 being filed in 2011–12, 2012–13 and 2013–14, respectively.
|Financial Year||Number of tax matters
filed in the Federal Court
|Number of tax matters
filed in the AAT (excl STCT)
|Number of tax matters
filed in the STCT
Data source: Federal Court of Australia and the Administrative Appeals Tribunal
3.118 Notwithstanding that the numbers of filed litigation cases has generally increased, statistics also indicate that the majority of these matters were finalised without hearing. In the AAT, for example, the ATO reports that 85 per cent of matters were finalised without hearing in 2013–14.227
3.119 Whilst it is not possible to reconcile the numbers of matters resolved before hearing and litigation cases filed (owing to differences in the way disputed cases are reported by the ATO, AAT and Federal Court and the long-running nature of some litigated disputes), the combination of increased filings in the AAT and Federal Court and higher incidence of matters resolving without formal hearings suggest that there is room for improvement in terms of early engagement and resolution. This aligns with the stakeholder concerns discussed earlier that some ATO officers remain reluctant to engage and taxpayers have ongoing difficulties in identifying appropriate senior technical personnel to discuss more complex issues until taxpayers bring the matter to litigation.
3.120 A more defined framework for the management of disputes, including through appropriate escalation channels for taxpayers, who are unable to engage with ATO audit officers, would greatly assist to improve efficiency with which the ATO resolved disputes and avoid matters proceeding to litigation unnecessarily.
Independence of the litigation function
3.121 Submissions to the IGT's review also commented that the ATO should outsource its instructing solicitor function to the private sector. Stakeholders have commented that it is ideal for there to be a separation between the client and the solicitor, as the solicitor can provide impartial advice and appropriately brief Counsel.
3.122 Concerns regarding the necessary degree of independence of the ATO's in-house solicitors has been raised previously in the Federal Court:228
It is a matter of concern to me in this case that the objective detachment which is an incident of a truly independent solicitor acting for the Commissioner has not been apparent. That is not in any way to criticise counsel but, rather, to emphasize the singular importance of an independent solicitor acting for a client. That role is to act as something of a reality check for a client. Where a solicitor is in house, and [the Australian Taxation Office Solicitor] has that status, there is a risk which must constantly be guarded against of client capture. I was left to wonder on the hearing of this application, having regard to the material before me, whether that particular phenomenon had occurred here.
3.123 Similar concerns have also been expressed in submission to this review, noting that ATO litigation officers representing the Commissioner at the AAT or the Federal Court often had to revert to the business line before decisions could be made on the progress of litigation. The influence of the compliance business lines has given rise to further concerns that the ATO's litigation is not empowered or able to bring an independent mind to bear on the merits of a litigation case.
3.124 The influence of the compliance business line over the appeals process has also been raised with the Committee in its public hearings with a tax practitioner witness noting:
More particularly—and more close to heart for me in attending to the appeals in the tribunal—the business line should have zero input to the appeal process. They are not witnesses to anything. They bring nothing to the factual matrix, and they should not be part of that process at all. But they seem to dictate the appeal process and appeal decisions in the tribunal, in terms of what the appeals officer does, and I think that is just plainly wrong.229
3.125 During this review, a case example has been brought to the IGT's attention which illustrated the influence of the ATO's business line over the litigation function resulting in an appeal being lodged against Counsel's advice that the prospects of success were poor. In addition, the case also highlights a potential breach of the Legal Services Directions 2005. Further discussion of this is set out in Chapter 5.
3.126 Stakeholders also commented that the ATO appears to lack a key senior decision maker who is responsible for all litigation in the ATO. It has been suggested that the absence of ownership of litigation decisions by a senior officer within the ATO makes it easier for the Compliance Group to exercise control over the process.
3.127 In addition to costs incurred by taxpayers discussed above, the early resolution of disputes and the ATO's management of litigation also has a direct bearing on its own legal expenditure which can be very significant.
3.128 The ATO has reported that in 2013–14 it incurred $100,508,314 in legal expenditure.230 This amount represents a decrease from the prior year total of $106,147,281 but is higher than the $96,323,087 reported in 2011–12, respectively.231 In each of 2011-12, 2012-13 and 2013-14 financial years, the ATO reported that Part IVC litigation expenditure was $43,864,684 (45.5 per cent of total legal expenditure), $44,346,431 (41.7 per cent of total legal expenditure) and $38,744,755 (38.5 per cent of total legal expenditure) respectively.
3.129 Having regard to the high levels of costs and the significant impacts on taxpayers, it is essential that litigation is appropriately managed and resolution is effected as early as possible to ensure that the parties are not exposed to the unnecessary expense. To an extent, the Federal Court's Tax List Directions introduced in April 2008, and subsequently re-issued as Practice Note TAX1, seeks to reduce unnecessary expenses by ensuring the parties clearly articulate the reasons for litigation and the questions needing to be put to the Court.232
3.130 In the ADR Review, the IGT sought to ensure that the ATO and taxpayers adopted this collaborative mindset early in the process to consider appropriate options and channels to resolve the dispute and minimise the cost exposure in litigation through achieving a common understanding of the areas of disagreement and exploring alternatives, such as declaratory proceedings.233
Test case litigation and law clarification
3.131 Concerns have also been raised with the ATO's administration of the test case litigation funding program. In particular, stakeholder submissions have raised concern regarding the apparent inconsistency with which such decisions are made, including denying well-resourced taxpayers access to funding notwithstanding that those cases were intended to clarify the law for the benefit of the broader community. While it is acknowledged that the ATO does provide funding on a number of cases each year where there is a public benefit in testing the issue, submissions to the IGT on this and earlier reviews have indicated difficulty accessing such funding and inconsistencies in the ATO's decisions in this regard.
3.132 The issue was explored in the IGT's ADR Review234 in which the IGT outlined concerns regarding the cost implications to taxpayers whose cases are used for law clarification without funding. Those concerns remain relevant for this review.
3.133 Following publication of the ADR report, further concerns were raised with respect to the ATO's approach to test cases. In particular, concern was raised in instances where the ATO obtained its desired outcome and ceased to further fund appeals which the taxpayer may lodge.235 The IGT had previously expressed the view that funding should be provided to ensure that the highest level of judicial clarification may be sought on ambiguous technical issues. To do otherwise would not deliver the full benefit of judicial clarification from a taxpayer perspective. Indeed, it would serve as a further example of the power imbalance in the ATO's favour and a barrier for taxpayers accessing the justice system.
3.134 The ATO is presently undertaking consultations to update its test case litigation program and the criteria for funding. This was recommended by the IGT in his ADR Review.236 As at the date of this report, that consultation is still in its early stages and no material is yet available for review.
Transparency and accountability of settlements
3.135 The IGT had previously reviewed aspects of the ATO's approach to settlements and made a number of recommendations to improve, amongst other things, the ATO's approach and conduct, decision making and reporting on settlements.237 During the course of the review, the ATO also released its refreshed Code of Settlement and accompanying practical guide238 which seeks to provide more streamlined advice and guidance on the ATO's settlement approach.
3.136 Stakeholder submissions to this review have acknowledged that in recent years, the ATO has adopted a less rigid and more commercial approach to settlement of tax disputes which has been largely welcomed by taxpayers, including large businesses. However, whilst the ATO's increased willingness to enter into settlements has been welcomed by stakeholders, it has also given rise to some concerns.
3.137 Firstly, stakeholders have expressed concern that increased settlements may lead to fewer cases being litigated and therefore a lack of certainty may emerge in the long term with fewer instances of judicial clarification, resulting in ATO-issued guidance and advice becoming the predominant source of interpretation of tax law.
3.138 Secondly, it has been suggested that a certain degree of tension between taxpayers and revenue authorities supports the health of the system by ensuring that contentious issues are challenged and judicially tested. Where this does not occur, it may give rise to a 'pendulum' effect in which higher levels of settlements may lead to taxpayers adopting riskier positions which are ultimately sought to be clawed back through more intensive compliance activity and litigation.
3.139 Thirdly, there are some stakeholder concerns that a lack of transparency and monitoring of ATO settlement decisions may give rise to perceptions that the ATO's approach has been more of a 'horse trade' and not based on cogent legal advice on technical merits and risk of litigation.Stakeholders have also suggested that perceptions of favouritism or inconsistency may also emerge as was the case in the UK.239 However, stakeholders have also noted that the proper management of settlements should not be overly bureaucratic or unnecessarily hamper the settlement process.
3.140 Finally, where settlements are not adequately overseen, the settlement process may be improperly used by some ATO officers to achieve outcomes which are inconsistent with settlement principles and the ATO's approach to early resolution of disputes. For example, in the Review into aspects of the Tax Office's settlement of active compliance activities (Settlements Review),240 the IGT observed that settlement offers were made which were inconsistent with the ATO view being developed simultaneously.
3.141 Another example which was contained in a submission to this review involved a taxpayer lodging an objection during which the objections officer acknowledged that the legacy issues were complex and had no further application on future transactions. Accordingly, the objections officer and the taxpayer entered settlement negotiations to resolve the matter. While an 'in principle' agreement was reached, the taxpayer received a call from a senior audit officer who had sought to intervene and withdraw the negotiated settlement. The matter was ultimately resolved but only after the taxpayer escalated the matter to the highest levels within the ATO.
3.142 In another case, the taxpayer submission noted that the ATO had sought to use suspensions of debt collection as leverage for the settlement negotiation process and that following the taxpayer's rejection of a proposed settlement, the ATO commenced recovery proceedings of the disputed debt.
The need for reform
3.143 As noted earlier, the ATO, by necessity, is a monopoly service provider with considerable power. These powers need appropriate checks and balances.241 This is reflected in the stakeholder concerns raised in relation to the increasing centralisation of functions within the ATO, in comparison with other overseas jurisdictions. Addressing such concerns and ensuring there are appropriate checks and balances requires the establishment of a strong and sustainable governance framework.
3.144 The IGT had previously noted, in the Tax Forum Submission, that governance is a key lynchpin in any tax system as 'the approach of tax administrators has a direct bearing on policy implementation and taxpayer confidence through application of fairness, certainty, transparency, minimisation of compliance costs and reduction in unnecessary complexity.'242 The IGT also set out an integrated package of options to develop a more effective and comprehensive set of governance arrangements for the ATO, including:243
- Establishment of a management board (such as those of an advisory or supervisory nature) to bring into the ATO a diverse mix of expertise and experience including information technology, human resources, finance and communication.244
- Appointment of additional Second Commissioners from the private sector to diversify the ATO Executive Committee, inject a wider range of experiences and perspectives and also provide intelligence on trends in corporate governance and taxation risks. These additional Second Commissioners to be appointed to lead the more contentious areas of the ATO, including one as head of a separate appeals area.
- Enhancement and centralisation of the ATO scrutineer function to provide a single port-of-call for taxpayer grievances with tax administration, be they specific disputes or systemic issues. A more co-ordinated approach to ATO scrutiny would also minimise duplication and the cost of external scrutiny.
3.145 Since that submission was made, the Government has announced that it would transfer the current tax complaints handling function from the Commonwealth Ombudsman to the IGT.245 Moreover, some of the most senior ATO executives have been appointed from the private sector, including the current Commissioner who has 'promised to change the culture of the ATO' and has embarked on initiatives towards that end.246
3.146 The preceding discussion in this chapter has highlighted a number of major issues permeating all stages of the tax disputes process and reaffirmed the importance of robust governance and oversight. Whilst recognising that there have been substantial improvements made in more recent years, stakeholders have also observed that the present system is too dependent on the views and ideals of ATO senior executives of the day.247
3.147 The extent of the influence of a few individuals on the ATO approach and culture has been likened to a benevolent dictatorship whereby such individuals are afforded discretion to act in the best interests of the community. However, such an approach is untenable in the long term as there is no safeguard or framework within which desirable approaches and processes may be embedded. The views of the current senior executives may change or they may be replaced by others with different views.
3.148 Accordingly, the majority of submissions made to the IGT, in this review, have advocated structural reform to the management of tax disputes such that enduring benefits are realised and there is less dependence on the views and ideals of the ATO leadership team of the day. As previously noted, the IGT has had the benefit of collective experience drawn from a range of his earlier reviews as well as this review. Based on this experience, the IGT supports the need for structural reform and a key governance framework. Such a framework needs to have built in accountability such that key performance indicators and management outcomes are measured against delivery.
3.149 The options for reform are explored in the next chapter.
156 Victor Thuronyi and Isabel Espejo, 'How Can an Excessive Volume of Tax Disputes Be Dealt With?' (Tax Law Note, International Monetary Fund, December 2013) p 6.
157 IGT, Review into Improving the Self Assessment System (2012) p 125. See also: Ibid.
158 Above n 38, pp 24-25; Above n 37, p 127.
159 Above n 38, recommendations 5.2 and 5.4; IGT, Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters (2008) recommendation 5.
160 Commonwealth, Parliamentary Debates, House of Representatives Standing Committee on Tax and Revenue (16 July 2014) p 10.
161 Ibid, p 12.
162 IGT, Review into the ATO's management of transfer pricing matters (2014).
163 Ibid, pp 175-200.
164 Commonwealth, Parliamentary Debates, House of Representatives Standing Committee on Tax and Revenue (29 October 2014) p 1.
165 Above n 162; Above n 37; Above n 38.
166 Above n 75, p 2.
167 Above n 42, p 28.
168 Above n 37, p 87.
169 Above n 38, p 93.
170 ATO, 'Our Approach to Information Gathering' (November 2013) .
171 Above n 42, recommendation 3.2; Above n 37, recommendation 7.2; Above n 38, recommendation 5.2.
172 Commonwealth, Parliamentary Debates, House of Representatives Standing Committee on Tax and Revenue (16 October 2014) p 21.
173 Above n 38, recommendation 3.3, p 58.
175 Above n 42, p 39.
176 Above n 4, p 75.
177 Above n 38, p 77.
178 Above n 75, p 12.
179 John Hyde Page, Submission 22 to the House of Representatives Standing Committee on Tax and Revenue, Inquiry into Tax Disputes, 25 July 2014, p 4.
180 'Review of interpretative advice as part of the SM&E pipeline', a report commissioned by and prepared for the ATO's SME Executive, June 2011, pp 15–19 as cited in Above n 38, pp54-56.
181 Above n 39.
182 Above n 42, p 100
183 Above n 39, pp 86, 119-120.
184 IRD, 'Managing communications associated with a dispute referred to the Adjudication Unit' (10 February 2006) .
186 Above n 72; ATO, The Online Resource Centre for Law Administration, PS LA 2003/9, 28 August 2013.
187 Binetter v Commissioner of Taxation (No 3)  FCA 704.
188 Binetter v Commissioner of Taxation (No 3)  FCA 704 at .
189 Above n 77, para .
190 Law Institute of Victoria, Submission 8 to the House of Representatives Standing Committee on Tax and Revenue, Inquiry into Tax Disputes (4 July 2014) p 20.
191 Above n 39, p 12.
192 IGT, Follow up review into delayed or changed ATO views on significant issues (2014).
193 Ibid, pp 16-21.
194 Macquarie Bank Limited v Commissioner of Taxation  FCA 887; Macquarie Bank Limited v Commissioner of Taxation  FCAFC 119.
195 Tax practitioners in New Zealand have also expressed concerns about the inability of taxpayers to unilaterally opt-out from the legislated pre-assessment dispute procedures. See: New Zealand Law Society and New Zealand Institute of Chartered Accountants, Joint Submission to Inland Revenue, Disputes: A Review – an Officials' Issues Paper, July 2010 (Wellington, 3 September 2010) p 24.
196 Above n 39, recommendation 3.
197 Above n 42, recommendation 4.3.
198 Above n 37, p 125.
200 Income Tax Assessment Act 1936 s 177; Taxation Administration Act 1953 Sch 1 s 350-10.
201 Platypus Leasing Inc & v Commissioner of Taxation  NSWCA 399.
202 Taxation Administration Act 1953 ss 14ZZM and 14ZZR.
203 See for example: Denlay v Commissioner of Taxation  FCA 307 at .
204 See ATO, Collection and recovery of disputed debts, PS LA 2011/4 (December 2014) para .
205 ATO, Offsetting of refunds and credits against taxation and other debts, PS LA 2011/21, 1 April 2011, para .
206 ATO, Remission of shortfall interest charge and general interest charge for shortfall periods, PS LA 2006/8 (28 August 2014) para .
207 See for example: Corporations Act 2001 s 674.
208 Above n 31, p 120.
209 IGT, Review into the ATO's administration of penalties (2014).
210 Ibid, recommendation 2.2(a).
211 IGT, Review into the ATO's approach to debt collection (2014, in progress).
212 ATO communication with the IGT, 12 November 2014.
213 Above n 66.
214 Above n 4, p v.
215 ATO, Submission 10 to the House of Representatives Standing Committee on Tax and Revenue, Inquiry into Tax Disputes (4 July 2014) p 40.
216 Above n 164, p 5.
217 Productivity Commission, Access to Justice Arrangements (2014) pp 123-124.
218 Binh Tran-Nam and Michael Walpole, 'Access to tax justice: How costs influence dispute resolution choices,' (2012) 22 Journal of Judicial Administration 3, p 3
219 Ibid, p 26. The study estimated the costs of an unrepresented litigant to be $2,484 in the AAT and $1,994 in the STCT.
220 Above n 217, p 455.
221 Taxation Administration Act 1953 ss 14ZZM and 14ZZR.
222 Denlay v Commissioner of Taxation  FCA 307.
223 Above n 217, p 17.
224 Above n 164, p 5.
225 Catriona Lavermicocca and Jenny Buchan, 'Role of reputational risk in tax decision making by large companies' (Working paper delivered 11th International Conference on Tax Administration, 5 April 2014).
226 Federal Court of Australia, Annual Report 2013–14, p 152; Administrative Appeals Tribunal, Annual Report 2013–14, p 28; Administrative Appeals Tribunal, Annual Report 2012–13, pp 30-31; Administrative Appeals Tribunal, Annual Report 2011–12, p 26.
227 Above n 4, p 75.
228 Deputy Commissioner of Taxation v Prentice (Trustee)  FCA 1535 at .
229 Above n 164, p 2.
230 Above n 4, p 114.
231 Commissioner of Taxation, Annual Report 2011–12 (2012) p 102; Commissioner of Taxation, Annual Report 2012-13 (2013) p 156.
232 Federal Court of Australia, 'Practice Note TAX1' (1 August 2011) .
233 Above n 42, pp 37-38 and 61.
234 Above n 42, pp 51-59.
235 Commissioner of Taxation v Greenhatch  FCAFC 84; Greenhatch v Commissioner of Taxation of the Commonwealth of Australia  HCATrans 104.
236 Above n 42, recommendation 4.2.
237 Above n 40, p 2.
238 ATO, Code of Settlement, PS LA 2015/1 (15 January 2015); ATO, 'Code of Settlement' (15 October 2014) ; ATO, 'A practice guide to the ATO Code of Settlement' (15 October 2014) .
239 National Audit Office (UK) Settling large tax disputes (2012) p 12.
240 Above n 40, pp 25-26.
241 House of Representatives Standing Committee on Tax and Revenue, 2013 Annual Report of the Australian Taxation Office (March 2014), pp 32-33.
242 Above n 33, p 1.
244 See also: Competition Policy Review (Ian Harper, Chairman) (Draft Report, 2014) pp 62-63; Organisation for Economic Cooperation and Development (OECD), The Governance of Regulators (2014) p 69.
245 Australian Government, Budget 2014–15 Budget Paper No 2 (2014) p 217. See also: Tax and Superannuation Laws Amendment (2014 Measures No. 7) Bill 2014 sch 2.
246 Chris Jordan, 'Reinventing the ATO – building trust in Australia's tax administration' (speech delivered to the 11th International Tax Administration Conference, 14 April 2014).
247 See for example: Above n 172, p 16.