4.1 As mentioned in the previous chapter, the majority of the submissions to this review have advocated for structural reform to address the underlying causes of the concerns raised. Three main options have been put forward:

  • one submission has suggested maintaining the status quo and focusing efforts on improving better dispute resolution and management practices throughout the ATO;
  • a small number of submissions suggested establishing an agency separate from the ATO to manage and resolve tax disputes, including litigation, between the ATO and taxpayers; and
  • the majority called for the creation of a separate area within the ATO to facilitate and manage the resolution of tax disputes – some have publicly voiced these views.248

Maintaining the status quo

4.2 One stakeholder expressed the view that due to the positive changes which have been implemented by the ATO over the past 18 months, structural changes may not be necessary as yet. However, it was noted that it is critical for the ATO to ensure that appropriate time and resources are devoted to maintaining the independence and effectiveness of the pre-assessment review processes within the current administrative framework.

4.3 Notwithstanding the positive reception of the ATO's more recent changes, it is also necessary to note that these positive initiatives have been introduced in the pilot stage at the discretion of its senior executives, are available to a limited number of taxpayers and are administrative in nature.

4.4 Moreover, it is important to note that these changes, including the removal of objections from the Compliance Group to the Law Group for the taxpayers with turnover of more than $100 million249 and the introduction of the IR process for taxpayers with turnover of $250 million or more,250 have largely been applied towards the resolution of older cases which had been managed or overseen by senior staff who are no longer with the ATO. It is less clear how effective these processes will be when existing senior leadership within the ATO play a greater role in formulating or approving initial decisions which are subsequently the subject of an IR or objection.

4.5 The IGT considers that the present system is too dependent on administrative discretion which could be substantially altered at any time and is available to a relatively small number of taxpayers. Accordingly, and having regard to the matters set out in the previous chapter, the IGT is of the view that merely maintaining the status quo, notwithstanding that further resources may be directed to improving processes, would not provide longer term certainty and enduring benefits for the community.

A separate agency to manage tax disputes

4.6 The need for independent and objective management and resolution of disputes, for all taxpayers, is critical to maintaining community confidence with the ATO's pre-assessment review and objection processes and the ATO as administrator. However, it has been noted that by definition, internal reviews (such as objections) can never be completely independent of the original decision maker as, ultimately, all decision makers are accountable to the same agency head.251

4.7 The purest and most definitive form of independence as regards ATO decisions would be the creation of a separate agency to manage tax disputes. Like the AAT and the judiciary, a separate agency would not be subject to direction from the Commissioner and would not be beholden to ATO culture, policies or internal decisions. Moreover, it would have no financial dependency on the ATO and would have minimal or no conflicts of interest.

4.8 Some stakeholders, in their submissions to the IGT, have advocated for the creation of such an agency. They have contended that such an agency would yield a number of benefits for taxpayers and for the tax administration landscape more generally as a result of the actual and perceived independence from the ATO. Such an agency would also improve the transparency and accountability of the management of tax disputes as it would report directly to the Government on these issues. More importantly, a separate agency would be able to recruit and retain new staff who, over the longer term, would be less likely to have been affected by any cultural bias or management priorities from within the ATO. It would be able to challenge existing ATO views and assess the merits of litigating cases without any undue influence from the original decision makers.

4.9 It was also noted that if the ATO was already taking steps to separate certain functions, as evidenced by the transfer of certain objections from the Compliance Group to the LD&P Group, then an agency separation would only require a small step beyond what the ATO is already undertaking.

4.10 The Commissioner has, however, publicly rejected such a proposal and provided his view on the matter as follows:

Turning to the appeal process generally, the ATO is not aware of any jurisdiction where the appeals function is conducted by a separate agency from the revenue authority. We do not believe this would be an effective way to conduct a tax review or appeals function. It would add considerable delay and cost to the dispute-resolution process and would not be conducive to promoting a productive relationship between the revenue authority and taxpayers. It would also be inefficient to place a separate function between the revenue authority and the courts as a substitute to an appeals function within the revenue authority.252

4.11 Representatives of the Treasury have also indicated that there is little merit in the establishment of a separate agency provided there is appropriate separation within the agency.253

4.12 The IGT considers that the creation of a separate agency represents the highest possible level of independence (and the perception of independence) in the management and resolution of tax disputes. However, the IGT also recognises that the creation of a new agency presents certain challenges.

4.13 Firstly, the creation of a separate agency would increase the costs for the Government over and above the other options raised, such as the creation of a separate appeals area within the ATO. These costs relate to securing accommodation, corporate services and staff recruitment and may be too high a price for such levels of independence.

4.14 Secondly, where the new agency is largely staffed by transferring relevant personnel from the ATO, there is a risk that the cultural biases and concerns regarding independence may persist. Alternatively if staff are recruited from outside the ATO, it may take time for these new recruits to develop within the new agency and this may lead to delays in the resolution of disputes.

4.15 Thirdly, a separate agency which is empowered to re-examine cases and substitute its own decision for the ATO's decision may overlap with the existing functions of the AAT which currently undertakes merits reviews of ATO decisions. Consequently, taxpayers will effectively have two administrative review forums.

4.16 Finally, it has been suggested that a separate agency would hamper the development of effective feedback loops to improve original ATO audit decisions and that feedback would be more effective where the functions were maintained within the same organisation. This issue is further discussed later in this chapter.

4.17 While there may be challenges to the creation of a separate agency, the IGT does not believe that the suggestion should be immediately discounted. This option should remain open to the Government, to be considered if significant issues persist following full implementation of the ATO's current initiatives as enhanced by the findings of this report, the report of the House of Representatives Standing Committee on Tax and Revenue's Inquiry into Tax Disputes and the Government's White Paper on the Reform of Australia's Tax System.

A separate appeals area within the ATO

4.18 The majority of submissions made to the IGT favoured the creation of a separate group under independent leadership within the ATO to manage tax disputes.

4.19 Current practices and structures in a number of international revenue jurisdictions demonstrate a preference for a separation of the appeals and primary decision making functions.

4.20 As set out in detail earlier in the report, the US's IRS Office of Appeals is responsible for the internal appeals function and is 'an independent organization within the IRS whose mission is to help taxpayers and the government resolve tax disagreements'254 quite distinct from the compliance function. It also offers a mediation service to assist the taxpayer resolve any disputes at the earliest possible point during the audit or collection process.255 Similarly, the CRA also has a dedicated and separate Appeals Branch which also reports directly to the head of the agency.

4.21 New Zealand's IRD manages tax disputes through its DRU which is structurally separate from the audit team.256 It should be noted that although the UK's HMRC does not have a functionally separate internal appeals area, as these are subsumed into the compliance areas, oversight on its settlement and dispute resolution processes is provided by the Tax Assurance Commissioner who reports directly to the Chief Executive of HMRC.257 Such arrangements provide increased public assurance and transparency on the independence of review decision making.

4.22 As discussed in Chapter 2, the ATO historically had an internal structural separation between its primary decision makers and its internal reviewers in the form of the ARG258 until it was subsumed into the different compliance business lines in the 1990s.259

4.23 In a similar vein, the IGT has previously called for the creation of an internal appeals and review group which is separate from the rest of the ATO and reports directly to the Commissioner. In his ADR Review,260 the IGT noted that such a structure would enhance both the actual and perceived independence of officers conducting reviews of primary decisions and, thereby, instil greater public confidence in the ATO as an administrator.

4.24 The need for a separate and distinct internal separation was considered by the Administrative Review Council (ARC) who have stated:

…perceptions that internal review officers are not sufficiently independent of agency decision makers can arise from their physical proximity. Further, if internal review officers have close links with the decision makers whose decisions they review, there is a danger that those internal review officers will lose the objectivity required for undertaking internal review effectively.261

4.25 The IGT continues to be of the view that a distinct group within the ATO should be responsible for the management of tax disputes. The majority of the submissions to this review have also advocated the creation of such a group. The IGT's view and observations regarding the need for such a group and how it can address the concerns raised in the previous chapter are explored further below. For the purposes of the discussion, this group will be referred to as the Appeals Group.

Improving availability and effectiveness of pre-assessment review of ATO decisions

4.26 Having regard to the matters previously discussed on the impact of assessments issuing, including for some large businesses who may need to publicly disclose such matters, it is important to have clear and independent processes to reconsider proposed ATO decisions prior to finalisation and assessments being issued. The key benefits of an effective pre-assessment review are:

  • an independent and 'fresh set of eyes' over the initial decision as a form of quality assurance before the dispute escalates;
  • a circuit breaker between auditors and taxpayers where the parties' positions become intractable;
  • engagement with taxpayers to achieve a common understanding of the issues in dispute and identify strategies to address those;262 and
  • to improve fairness, access to justice and address any power imbalances.

4.27 As discussed earlier, the ATO has implemented some procedures to informally review ATO decisions and resolve disputes as early as possible without resort to the objections process or litigation. Some of these informal processes occur prior to the issue of an NOA, such as through direct early engagement between the taxpayer and the ATO audit officers or the IR process263 while others may be applied at any time during the audit and objection processes, such as in-house facilitation264 or the use of different types of ADR.265 Some of the ATO's processes are only used after an NOA has issued but before the period to lodge an objection has expired, such as the administrative reversals process used in relation to data matching and income integrity cases.266

4.28 In addition to examining the purely technical aspects of a case, it has been suggested that considerations of appropriate procedure and conduct, issues of fairness and adherence to the Taxpayers' Charter and other guiding material could also be addressed. The learnings and outcomes from the HMRC experience in recently adopting a statutory internal review function and piloting a facilitation service have indicated that review of cases need not be strictly confined to technical aspects.

4.29 The IGT notes that the availability of pre-assessment review processes accords with current practice adopted in the US where IRS appeals officers also act as mediators in disputes between IRS compliance officers and taxpayers in order to resolve matters before they become 'appeals'.267 Similarly, in Canada, CRA compliance officers and taxpayers are able to escalate matters to the CRA headquarters to assist in resolving any impasse. The New Zealand process moves one step further by legislating the requirements for the IRD and taxpayers to engage and resolve disputes before assessments are issued.268 The process also promotes full and frank disclosure by excluding any evidence not previously raised in subsequent challenges.269

4.30 Stakeholders have expressed concern that, in Australia, the barriers to access certain pre-assessment reviews operate to prevent taxpayers resolving disputes in the most cost-effective and timely manner. Other stakeholders have indicated that dividing cases along monetary lines and applying treatments on purely that basis is unacceptable as cases with low disputed amounts may nonetheless yield significant and complex issues of law and vice versa.

4.31 In the IGT's view, as a matter of fairness and equity, there should be sufficient access to justice for all taxpayers through robust pre-objection mechanisms. This is particularly important for taxpayers who are least able to progress disputes through more formal channels (such as individuals and small businesses). However, there are resource implications for the ATO in extending all available processes to all taxpayers. There is also a potential for taxpayers to use such processes to delay ultimate resolution and assessment of their liabilities.

4.32 The IGT, therefore, considers that the ATO's intended dispute resolution culture should aim at ensuring that its officers are open and responsive to taxpayer requests for engagement. The ATO should work collaboratively with taxpayers to achieve a common understanding of the issues and identify the most appropriate resolution option. Thus, the full range of options should be available to all taxpayers (without arbitrary distinctions) while ensuring that discussions between ATO officers and taxpayers are directed towards selecting the best avenue for resolving a dispute.

4.33 By consolidating all dispute resolution functions within a single, dedicated group, i.e. the Appeals Group, officers would be able to apply the dispute resolution option which is most appropriate having regard to the needs of the case. For example, the IR process may be applied to complex technical legal issues while in-house facilitation may be best used in less complex matters where there may just be a misunderstanding of the positions of each party. By reducing financial barriers and focusing on the issues in dispute, the ATO would be better able to address perceptions of inequity and inconsistency in its dispute resolution approach.

4.34 In addition to the issues of access to these processes, stakeholders have also suggested that the utility of such early intervention and dispute resolution may be enhanced if decisions of the Appeals officers were binding on the compliance team.

Improving actual and perceived independence of the objection process

4.35 As outlined in Chapter 3, since 1 July 2013, objections for large businesses have been dealt with by the RDR business line in the LD&P Group. This arrangement was extended to include taxpayers with annual turnover of $100 million or more on 1 July 2014. All other objections remain within the compliance business line where the original audit decisions are made. This further differential treatment between groups of taxpayers gives rise to concerns that there is unequal and inconsistent treatment.

4.36 The IGT considers that transferring the responsibility for dealing with all objections to the Appeals Group would not only enhance both actual and perceived independence of the objection process but would also ensure equal treatment for all taxpayers. A dedicated network of officers and centralised set of procedures and guidance would need to be developed to deal with objection cases consistently and reduce the risk of arbitrary outcomes irrespective of the category of taxpayers.

Internal tensions between the Appeals Group and other areas of the ATO

4.37 It has been suggested that a structural separation may present some risk of tension between different sections of the ATO. In this respect, the IGT has previously stated that there are benefits arising from such tension:

…a separate appeals and review area may on occasions give rise to internal tensions within the ATO such as auditors' perceptions that 'cases are given away' and reviewers' perceptions that auditors' decisions are not technically robust. The IGT considers that tensions of this nature are not necessarily undesirable in ensuring robust and tested outcomes are achieved, thereby reducing the overall level of taxpayer disputes and the cost to the broader tax system.270

4.38 The IGT remains of the above view. Such tensions when appropriately managed would assist the ATO to build community confidence and address any remaining perceptions of bias by reason of the function remaining within the ATO and not in a separate agency.

4.39 The ATO has also raised concerns that the creation of the Appeals Group under separate leadership would lead to tensions at the most senior levels which would require intervention by the Commissioner. These concerns are addressed later in this chapter.

By-passing the objections process

4.40 The concerns regarding the lack of independence of the objections process have led some stakeholders to consider that it would not yield useful outcomes in all situations and that the parties should have the option to proceed directly to an independent tribunal or court. As described by the ARC:

Opponents of mandatory internal review criticise it as a barrier to access to external review rights. The additional number of steps the applicant must proceed through in order to reach finally external review may mean that persons with meritorious cases will fall victim to 'appeal fatigue'.271

4.41 The suggestion to by-pass the objections process is not novel. It was also previously raised in the Ralph Review272 and such a bypass mechanism aligns with the current processes in the US and the UK.273 The Australian system, like Canada, does not presently permit taxpayers to apply directly to the AAT or the Federal Court.274 As noted earlier, New Zealand has a statutory opt-out of the NOPA process with consent of the IRD.

4.42 It is important to recognise the different purposes of the statutory objections process and pre-assessment processes instituted by the ATO. The objection is a full review and investigation of facts and evidence. Pre-assessment processes are reviews based on existing information only to filter out unsustainable cases which would otherwise proceed to objection. Taxpayers who do not receive a satisfactory outcome during a pre-assessment review process retain the option to object to the ATO decision.

4.43 The IGT considers that, where the pre-assessment review and objection processes offer an effective and independent review of the audit decision, there may only be a limited number of cases where the taxpayer should be able to directly apply to the tribunal or the court for determination. In such rare cases both parties should have agreed or agreed to disagree the facts of the case275 and there should be a fundamental disagreement as to the operation of the law.276

4.44 In order to achieve agreement (or agreement to disagree) on the facts and whether the case genuinely turns on a fundamental disagreement of the law, some degree of engagement between the parties following issuance of the audit decision is necessary. Therefore, as initially recommended in his Objections Review, the IGT is of the view, that once these matters are established, the objection process should be expedited and fast-tracked to external review.277

4.45 There are benefits to co-locating responsibility for litigation (explored further below), objection and pre-assessment review functions. Greater synergies may be realised by, for example, efficiently converting an informal review decision to a formal objection decision and progressing these matters to litigation in appropriate cases.

Safeguarding sustainable audit decisions

4.46 It should be noted that, where effective objection and pre-assessment dispute resolution mechanisms are in place, care must be taken to avoid auditors effectively delegating away their responsibility for making sustainable initial decisions.

4.47 One approach may be to refer matters back to the audit team for reconsideration if new information or evidence comes to light. The benefits of such an approach would be twofold. Firstly, the ATO's audit section would be provided with an opportunity to reconsider their position and to gain experience on the types of information and evidence which may be requested in similar cases in the future. Secondly, this would assist to minimise taxpayers seeking to disengage from the audit team and dealing only with objections or review officers.

4.48 Similar approaches are adopted in other jurisdictions, such as the US and Canada, where appeals officers who receive new information invite auditors to examine that information and provide their views on the matter. While the decision ultimately rests with the appeals officer, the opportunity for audit officers to consider the new information may assist to streamline the process and ensures that audit officers are not detached from the process or unfairly judged on their original decisions in the absence of pertinent information.

Independence from the ATO advisory function and challenging ATO precedential views

4.49 In addition to the functions previously discussed, the LD&P Group has responsibility for tax law design, litigation and, through the TCN, high level technical advice and setting the ATO precedential view.

4.50 To address concerns regarding a lack of independence at the objection stage, the ATO has recently suggested that it may transfer all objections from the Compliance Group to the LD&P Group. The ATO has stated that 'it would be preferable to provide this separation by moving all objections to [the] RDR area within the LD&P Group.'278

4.51 However, the IGT considers that transferring all objections to the RDR business line alone is unlikely to address all the concerns raised.

4.52 The reasons which were previously outlined concerning co-location and proximity giving rise to perceptions of lack of independence between objection and compliance officers apply equally to the Appeals Group and the LD&P Group respectively. As mentioned in Chapter 3, increasingly, the ATO is allocating technical staff to assist the compliance teams with specific taxpayers, particularly in the PGI business line. It may be possible that the same technical staff or other technical staff in close proximity may provide advice both at the initial decision making process as well as during pre-assessment review and/or the objection process.

4.53 The IGT also believes that the simple transfer of the entire objection function to the LD&P Group will not address stakeholders' concerns regarding objection officers being beholden to the ATO precedential view and unwilling to depart or reconsider its application to the particular facts of the case.

4.54 Furthermore, the IGT has previously observed that where ATO senior technical officers, such as those from the LD&P Group's TCN, have previously been involved in the original audit decision or in setting an ATO view on the particular issue, more junior or less experienced officers may lack confidence to challenge those decisions.

4.55 In this respect, the IGT does not advocate or support the ability of an officer within the ATO to disregard an existing ATO precedential view as this is likely to create uncertainty and inconsistency. However, a transparent and robust approach to questioning and providing feedback for reconsideration of arguably untenable ATO views would aid to better decision making and bolster public confidence in the ATO as a fair administrator. This could be achieved if the Appeals Group was separate from the ATO's advisory function.

4.56 A number of further benefits are to be realised by the separation between the Appeals Group and the LD&P Group. Firstly, the approach would help to ensure the Appeals Group focuses on facilitating resolution of issues by providing a more objective assessment of the likely outcomes of external review, including the likelihood of success and the merits of the ATO precedential view.

4.57 Secondly, it would provide feedback to the LD&P Group regarding any ATO views which need to be reconsidered and ensure that such feedback is clearly documented. In doing so, the relevant officer should inform the taxpayer of the escalation and suspend consideration of the issue until the view has been resolved.

4.58 Thirdly, by ensuring that any decisions to request a reconsideration of an ATO precedential view are made in a centralised area, rather than through disparate business lines, the ATO would be able to maintain a centralised repository of all matters being reconsidered and putting relevant cases on hold. Moreover, where there are internal disagreements as to the correct view of the law between the Appeals Group and the LD&P Group, the matter should be escalated for resolution and if uncertainty persists, then the matter could be fast tracked to litigation and referred to the Treasury for consideration of law change where appropriate.

4.59 It should be noted that separating the Appeals Group from the ATO advisory function aligns with arrangements in international jurisdictions such as the US and Canada.279

Managing ADR and litigation

Championing the use of ADR

4.60 Effective and efficient use of ADR accords with current international best practice as well as whole-of-Government initiatives within Australia.280

4.61 The use of ADR in the tax dispute context was examined in detail in the IGT's ADR Review.281 It should be acknowledged that the ATO has implemented many of the recommendations in that review with some success – this is explored further in the next chapter.

4.62 The ATO's use of ADR is currently managed centrally in the RDR business line. The IGT considers that relocating this function to the Appeals Group would provide a more centralised and distinct ADR function within the ATO, which would bolster its profile throughout the organisation. It would also assist to instil the ATO's desired dispute resolution culture through improved access to ADR expertise, training and feedback.

4.63 Moreover, the Appeals officers would be able to champion the use of ADR through their management of pre-assessment reviews, objections and litigation. Importantly, in recognising that the use of ADR must be flexible to suit the context of the dispute, the ATO/taxpayer relationship as well as other factors, the Appeals officers would be able to advise and facilitate the most appropriate form of ADR to ensure that disputes are efficiently and effectively resolved.

Independent assessment of litigation

4.64 It is important to recognise that litigation is a form of dispute resolution albeit at the extremities of the spectrum and the most costly and time consuming. The use of litigation, therefore, cannot be discounted completely. The creation of the Appeals Group with responsibility for managing litigation would help to address stakeholder concerns regarding the independence of the ATO's in-house litigation function.

4.65 The previous chapter discussed concerns raised by stakeholders and the judiciary282 in respect of the degree of separation between the litigation function and other functions within the ATO, such as audit and objections, and the lack of independent judgment on the appropriateness of advancing certain litigation cases. Particular concern was highlighted in relation to litigation officers reverting to the compliance officers for decisions on settlements or progressing litigation.

4.66 A number of stakeholders, including members of the judiciary, consider that in litigation, both sides benefit from having independent advisers examine the case and objectively assessing its merits. Such advisers should have no vested interest in defending the original decision and should fully and frankly evaluate the merits of the case. However, stakeholders are concerned that this does not occur in the ATO and the compliance officers, or technical officers involved in the original decision making, exercise undue influence over litigation decisions. Examples to this effect have been mentioned in the previous chapter.

4.67 In the US, officers within the appeals section are seen as internal adjudicators between the audit team and taxpayers and they do not undertake litigation. Instead, litigation is conducted by the officers within the Office of Chief Counsel or by attorneys from the Tax Division of the US Department of Justice.283

4.68 Similarly, in New Zealand the Solicitor-General is ultimately responsible for the conduct of all litigation in the name of the Commissioner, assisted by the Tax and Commercial Team in Crown Law.284 The Solicitor-General also has responsibility for appointing Counsel to represent the Commissioner and may also approve members of the IRD's Litigation Management Unit to represent the Commissioner. In Canada, tax litigation is conducted by lawyers located within the Department of Justice285 and, in the UK, HMRC works in conjunction with the Ministry of Justice to classify litigated cases before allocating appropriate personnel to represent the revenue authority.

4.69 Historically, in Australia all Commonwealth litigation was the responsibility of the Commonwealth Crown Law Office, including all tax litigation matters. However, this has since devolved following the rise of in-house government legal officers, the conversion of the Crown Law Office to the Australian Government Solicitor (AGS) and the introduction of competition and contestability in the provision of legal services to Government.

4.70 To an extent, the ATO does seek independent input on its litigated cases through referral of matters to the AGS, other private legal firms or Counsel to conduct litigation. This is especially true for cases concerning large businesses and HWIs, where issues may be more complex and the amounts of revenue in dispute may be higher. However, with the exception of cases which must be referred to the AGS, such as constitutional law matters,286 the in-house litigation section of the ATO retains all discretion in relation to these outsourcing decisions. Therefore, not all litigated matters have the benefit of external independent advice and consideration before litigation is progressed. Accordingly, stakeholders have contended that the ATO appears to have the least amount of separation between the litigation and its other functions, particularly in relation to market segments other than large businesses and HWIs, when compared with some of its international counterparts. The situation is further exacerbated by the ATO's requirement that litigated cases be argued consistently with existing ATO views.

4.71 During the course of this review, the ATO has advised the IGT that it is refreshing its existing litigation practice statement to reflect new criteria on which its litigation outsourcing decisions will be made. Discussions between senior ATO officials indicate that the criteria will include such matters as the complexity of the issue, the complexity of the facts and evidence, the venue of the litigation, whether the case challenges existing ATO views and what would be commensurate to the taxpayer's representation.287

4.72 The IGT supports the need to instil greater public confidence in the independence and accountability of the ATO's litigation function through increased separation from the ATO's compliance and advisory functions. The IGT considers that this may be achieved by the Appeals Group managing the litigation function which would provide a greater level of independence whilst keeping the litigation function within the ATO which has the following benefits:

  • an effective and efficient end-to-end process through improved information requests and evidence gathering, early identification of potential litigation cases and managing downstream activities;
  • provide an independent assessment of the evidentiary risks of cases to be litigated;
  • provide opportunities for the Appeals Group to engage with the LD&P Group on potential impacts of litigation to the operation of the law or the ATO's precedential view whilst at the same time maintaining the necessary degree of independence;
  • ensure consistency of legal propositions and arguments across all tax litigation matters conducted by the ATO; and
  • provide better accounting and consideration of public benefits which may be realised in litigation and to consider appropriate test case litigation funding (discussed in the previous chapter).

4.73 The management of the litigation function by the Appeals Group does not preclude the outsourcing of certain functions, such as the 'instructing solicitor function', to AGS or to private firms. In fact, as discussed in the previous chapter, this has significant merit and provides a further degree of independence.

4.74 The IGT acknowledges that some jurisdictions have greater levels of separation in their litigation function, i.e., they may be conducted by another government agency. Such further separation can be considered in the Australian context once the Appeals Group, as described above, has been established for an appropriate period of time and if concerns relating to a lack of independence of the ATO's litigation function persist.

Management and accountability of settlements

4.75 Settlements are an important feature of the Australian tax administration system enabling taxpayers and the ATO to negotiate and resolve their disputes in a cost effective manner without resorting to litigation. However, as mentioned in the previous chapter, appropriate management, accountability and transparency of the settlement process is essential to ensuring Government revenue is protected and public confidence is maintained.

4.76 In Australia, there is effectively no external oversight of the ATO's settlement of tax disputes. Whilst scrutineering agencies, such as the IGT, Commonwealth Ombudsman and the ANAO may conduct reviews into settlement processes or cases, they cannot override a settlement decision.

4.77 Internally, oversight of settlements is managed within the relevant compliance business lines, usually by a panel of senior officers, who can make direct decisions or recommendations on the appropriateness of settlements. For example, the PGH Settlement Panel provides oversight to ensure that settlements are in accordance with the ATO's Code of Settlement Practice, maintain accurate settlement records for that business line and undertake quality reviews of settlement cases after they are completed.288

4.78 The ATO also provides details of its settlement activities through its Annual Report which sets out the pre-settlement amounts, the amount settled and the variance between the two stratified by business line.289 Some stakeholders have suggested that further information on settlements should be published to provide greater transparency and public confidence in the decision making process and the outcome of settlement negotiations. Other stakeholders have cautioned against the publication of too much information as this may remove the confidentiality aspect of settlement negotiations, which could be a major barrier for taxpayers to enter into settlement negotiations.

4.79 The IGT considers that the Appeals Group, particularly if it is headed by a person appointed by the Government rather than the Commissioner, could provide the necessary level of assurance and oversight in relation to settlement decisions to ensure they are consistent, technically defensible and made in accordance with appropriate governance procedures. Such oversight and assurance is particularly important having regard to the increased levels of settlements in recent years.

4.80 Statistics provided by the ATO indicate that over the past five years, it has settled a large number of cases with substantial proportions of the ATO's pre-settlement position in those cases being varied. These statistics are outlined in Table 7 below.

Table 7: Overall ATO settlement statistics 2010 – 2014
Financial Year Number of
settlements
Pre-settlement position
$m
Settled amount
$m
Variance
$m
Variance
%
2013–14 393 5,723 2,617 3,106 54.3
2012–13 339 3,564 2,034 1,530 42.9
2011–12 256 921 482 439 47.7
2010–11 304 2,028 1,281 747 36.8
2009–10 621 1,643 1,095 548

33.4

Source: ATO Second Commissioner Briefing August 2014; Commissioner of Taxation Annual Reports 2009–10, 2010-11, 2011–12 and 2012–13.

Note: Values have been rounded to the nearest whole number. Percentages have been rounded to one decimal place.

4.81 As outlined above, in 2013–14, the ATO reported that it settled 393 cases and varying $3.106 billion which accounts for 54.3 per cent of the pre-settlement position in those cases. While the quantity of settled cases is less than the number reported in 2009–10, the amounts which have been varied have significantly increased from that year (from $548 million to $3,106 million).

4.82 Statistics in relation to large business and HWI settlements are outlined in Tables 8 and 9 below. With the exception of a decline in 2011–12, the number of large business settlements has generally increased. HWI settlement numbers have also increased over the past five years, with the most dramatic increases occurring between 2011–12 (15 cases), 2012–13 (37 cases) and 2013–14 (61 cases).

Table 8: Large Business settlement statistics 2010 – 2014
Financial Year Number of Large Business settlements Large Business settlements
as a percentage of total settlements
%
Pre-settlement position
$m
Settled amount
$m
Variance
$m
Variance from pre-settlement position
%
Large Business variance
as a percentage of total variance
%
2013–14 34 8.7 2,713 1,524 1,189 43.8 38.3
2012–13 28 8.3 2,643 1,646 997 37.7 65.2
2011–12 17 6.6 409 216 193 47.2 43.9
2010–11 26 8.6 1,721 1,124 597 34.7 79.9
2009–10 24 3.9 1,344 904 440 32.7

80.3

Source: ATO Second Commissioner Briefing August 2014; Commissioner of Taxation Annual Reports 2009–10, 2010-11, 2011–12 and 2012–13.

Note: Values have been rounded to the nearest whole number. Percentages have been rounded to one decimal place.

Table 9: High Wealth Individual settlement statistics 2010 – 2014
Financial Year Number of HWI settlements HWI settlements
as a percentage of total settlements
%
Pre-settlement position
$m
Settled amount
$m
Variance
$m
Variance from pre-settlement position
%
HWI variance
as a percentage of total variance
%
2013–14 61 15.5 1,612 632 980 60.8 31.6
2012–13 37 10.9 418 171 247 59.1 16.1
2011–12 15 5.9 240 150 90 37.5 20.5
2010–11 7 2.3 17 9 8 47.1 1.1
2009–10 8 1.3 8 6 2 25.0

0.4

Source: ATO Second Commissioner Briefing August 2014; Commissioner of Taxation Annual Reports 2009–10, 2010-11, 2011–12 and 2012–13.

Note: Values have been rounded to the nearest whole number. Percentages have been rounded to one decimal place.

4.83 When compared with the total number of ATO settlements, those in relation to large businesses and HWI taxpayers represent a relatively small fraction. Across all years, large business settlement cases accounted for less than 10 per cent of the total number of settled cases. HWI settlement cases also represented a small fraction of the total number of settled cases, with the highest proportion occurring in 2013-14 where HWI settlements accounted for 15.5 per cent of all ATO settlements.

4.84 Notwithstanding that the numbers of settlements in these market segments represent only a low proportion of total settlements, the quantum of variances are high. As highlighted in Table 8, the variance in relation to large businesses accounted for the majority of variances in 2009–10 (80.3 per cent), 2010–11 (79.9 per cent) and 2012–13 (65.2 per cent). The remaining years also showed that large business variances accounted for a sizeable portion of total variances for all settlements.

4.85 While not as pronounced as large businesses, the proportion of variances attributable to HWI settlement cases is considerable, particularly in 2013–14 (31.6 per cent). When taken in combination with large business settlements, the statistics show that over the past five years, the majority of settlement variances are attributable to large business and HWI taxpayers.

4.86 The large proportions of settlement variances, in relation to large businesses and HWIs, are to be expected given the generally higher levels of revenue in dispute. However, the high levels of variance may give rise to perceptions of favouritism, especially in circumstances where third party observers are not privy to the reasons for settlement.

4.87 Concerns and allegations of ATO favouritism are not new and were raised in the late 1990s through media reports which resulted in a Senate inquiry into the operation of the ATO.290 As discussed in Chapter 3, similar concerns were recently expressed in relation to the UK's HMRC and its settlement of large disputes.291 Following this experience, the HMRC appointed a Tax Assurance Commissioner, with Prime Ministerial approval, to scrutinise significant tax settlements, oversee the process for all other settlements and provide a separate annual report on these matters. Similarly, the US has a Congressional Joint Committee on Taxation which provides an oversight function on IRS settlements.

4.88 As noted earlier, the IGT considers that the creation of the Appeals Group to oversee the ATO's approach to settlements would provide independent assurance of the appropriateness of this approach. In this regard, it would be analogous to the HMRC's Assurance Commissioner and further accountability may be introduced through specific public reporting requirements.

4.89 Some stakeholders have also indicated that a heavy oversight function may not be desirable as it may discourage settlements if there is a risk of disclosure of confidential settlement information or potential delays by reason of overly bureaucratic oversight processes. The IGT believes that such concerns may be managed through appropriate information and communication management protocols. Moreover, the centralised management of confidential settlement information would minimise the risk of disclosure by limiting access to smaller pool of ATO personnel.

4.90 In addition to ensuring that settlement decisions are appropriately made, the Appeals Group may, through its pre-assessment review and objections function, identify appropriate cases for law clarification purposes, where there is a public benefit in doing so, and ensuring that these cases are not settled.

Protocols on intra-agency communication to maintain independence

4.91 In the past the IGT has highlighted the concerns raised by stakeholders regarding the lack of independence between different areas of the ATO when reviewing original ATO audit decisions.292 As illustrated in Chapter 3, the lack of restrictions and controls on intra-agency communications can give rise to perceptions of inappropriate and collusive conduct between officers.

4.92 The ATO itself has also recognised the risks associated with such communication but, as yet, has not instituted robust protocols or procedures to address these matters, instead leaving it up to the reviewer's judgment. In this regard, the ATO has noted:293

Contact with the original decision maker should not be used as a substitute for independent re-examination of the dispute. Whilst it is acknowledged that efficiencies can be gained through contact with the original decision maker (particularly in complex disputes) such contact should not be used to replace the reviewer's own understanding and research.

4.93 The issue has been addressed in other jurisdictions most notably the US which has a legislated prohibition against ex parte communications.294 Appeals officers are not permitted to unilaterally contact the original decision makers, and vice versa, without informing the taxpayer and/or their adviser. Whilst not legislated, New Zealand also has strong protocols which redirect communications between the dispute resolution unit officer and the original decision maker through the Office of Chief Tax Counsel to ensure that impartiality is maintained.295 The CRA has also implemented communication protocols between the compliance and appeals areas.296

4.94 Similar restrictions and protocols, if implemented by the ATO, may operate to minimise perceptions of undue influence between different sections of the ATO, particularly the input of audit officers into objections and litigation or policy advisers (such as the TCN) on dispute resolution decisions. It has also been argued that such contact may potentially delay matters as objection officers are unable to draw on existing ATO audit knowledge where cases may be especially complex or have long histories. The IGT considers that objections officers may be able to contact the audit area, in appropriate cases, provided that such contact is fully transparent to the taxpayer. Furthermore, improved documenting of cases and their progress would assist to alleviate the need for intra-agency contact between different functions within the ATO where there is a need to maintain actual and perceived independence.

4.95 The IGT believes that a legislated framework pursuant to which the ATO can establish protocols to manage intra-agency communication would further foster the independence of the Appeals Group from other areas within the ATO. The US model for managing intra-agency communications provides a helpful guide in this regard.

4.96 Stakeholders are generally supportive of the above approach and have drawn comparisons to the use of 'Chinese walls' in large professional services firms where strict protocols are in place to ensure that potential conflicts of interest and perceptions thereof are minimised.

4.97 The ATO has suggested that it was presently in the process of documenting protocols for communication between auditors and objection officers.297 Some time should elapse before assessing whether those protocols assist in reinforcing the necessary independence.

4.98 In addition to having protocols and restrictions on intra-agency communication, stakeholders have suggested that, like professional services firms, there should also be consequences for the ATO officers breaching these protocols and restrictions. The IGT accepts that enforceable protocols and avenues of redress for taxpayers would increase confidence. However, in the US where the restrictions on intra-agency communication are strongest, there is no legislated remedy for the taxpayer where IRS officers breach the ex parte rule. Rather, the IRS has taken a curative approach where breaches are reported internally and the breach is 'cured' by, for example, the taxpayer and their adviser being afforded an opportunity to respond to any communications or information provided.298

4.99 The absence of enforceable remedies in relation to communications between ATO officers touches on the broader issue of enforceable taxpayers rights against inappropriate ATO officer conduct in Australia. The IGT has indicated he will consider these broader issues in his upcoming review into the ATO's Taxpayers' Charter and taxpayer protections.299

Feedback loops and rotation

Feedback loops

4.100 In its second submission to the Committee, the ATO has rejected the creation of a separate agency and a new Second Commissioner on the basis that:

The risks and costs associated with either of these options include increased costs, isolation, lack of feedback loops, reduced confidence in primary decision making and lack of focus on the system as a whole.300

4.101 The IGT accepts that feedback loops are an important mechanism to improve ATO decision making, however, does not believe that the creation of a separate agency or indeed a separate area would lead to a lack of feedback loops. The IGT notes, for example, that as between agencies, the ATO's Integrated Tax Design section collaborates and provides feedback to and from the Treasury on a near daily basis on the effectiveness and operation of existing tax laws and revenue matters more broadly.

4.102 Moreover, examples in other jurisdictions such as the IRS show that even where there is clear separation between audit staff and appeals staff, feedback loops are available and encouraged as a means of enhancing original decision making.301

4.103 The IGT considers that the creation of the Appeals Group would not diminish feedback but would enhance feedback loops by:

  • having a centralised dispute resolution section which would be able to draw on observations for disputes across all ATO business lines and providing feedback from broader viewpoints rather than those narrowly observed in relation to specific taxpayers or market segments;
  • auditors may be more willing to accept feedback provided by a separate and distinct section of the ATO with particular expertise in dispute resolution, objections and litigation; and
  • encouraging greater auditor focus on the initial decision making where they are aware that their decisions will effectively be scrutinised by an independent area.

Rotation of staff

4.104 The IGT also considers there is an opportunity to further imbue best practice across the ATO by rotating high performing staff across the different groups. Such a process is already in train in relation to the ATO's senior executive staff who are moved between different areas of the ATO every three to five years to avoid entrenched cultures and to ensure that they have a holistic view of the office.

4.105 A similar rotation service for other high performing staff would assist to build relationships across different groups within the ATO, ensure that officers do not become entrenched in their views and provide the opportunity for best practices from one area to be implemented in others.

4.106 The ATO has advised that senior executives within the RDR, PGI, PGH and Indirect Tax (ITX) business lines have considered options to embed RDR officers within business line teams to deliver a multi-skilled team to advise on legal risk, foster engagement and resolution of tax disputes in certain cases.302

4.107 The IGT recognises that there may be some issues associated with a rotation process, including the limitations on development of deep tax expertise, a lack of ownership of the work and potential conflicts of interest issues (such as those experienced in the US when compliance staff from so-called IRS campuses are moved into the Office of Appeals). However, these issues already exist for the ATO as part of its business operations and may need to be managed through strategies such as appropriate conflict checks, succession planning and ensuring corporate knowledge is appropriately recorded and accessible.

4.108 Moreover, the rotation opportunities should be appropriately promoted and targeted towards high performing officers to encourage internal competition for these opportunities. Where these opportunities are recognised as key career development milestones, the competition for these roles would ensure that ATO officers apply themselves to their respective areas.

A new Second Commissioner to lead the Appeals Group

4.109 As the IGT and other parties have noted, full independence could only be achieved through the creation of a separate agency which is not subject to ATO management decision making or financial control. As noted earlier, there are challenges to that particular approach. However, independence (both actual and perceived) is critical and in the absence of creating a separate agency, steps should be taken to ensure that the Appeals Group is as independent as possible.

4.110 The International Monetary Fund also supports this approach, noting that where organisational independence is not possible, an acceptable level of independence may be achieved through independent leadership. It has stated that:

…the manager of the appeals office should ideally not have any hierarchical relationship with the decision making managers or be subject to any type of instructions by them, and should be subordinate directly to the head of the office or a third authority (for example, a national appeals office).303

4.111 Separate leadership is also critical in the creation of the Appeals Group as the Government does not have the power to direct the ATO to separate its functions. The only method through which a separate area may be created by the Government within the ATO would be through the creation of a new Second Commissioner which would require legislative change as the TAA 1953 currently limits the number of Second Commissioners to three.304

4.112 In the Tax Forum Submission, the IGT had previously recommended, amongst other things, the appointment of an additional Second Commissioner to lead a separate appeals and review area.305 This provides the highest level of independence while retaining the appeals function within the ATO for a number of reasons.

4.113 Firstly, whilst the proposed Second Commissioner would report to the Commissioner, his or her tenure and remuneration are determined by the Government and the Remuneration Tribunal respectively.306

4.114 Secondly, a dedicated new Second Commissioner would ensure independence and accountability of decision making, separate from the current Second Commissioners who presently lead the other groups within the ATO.

4.115 The IGT notes that a number of other jurisdictions, including the US and Canada, have separate appeals areas, the head of which directly reports to the Commissioner. For example, the IRS Chief of Appeals leads the Office of Appeals307 while in Canada, the Appeals function is performed under the leadership of the Assistant Commissioner of Appeals, both of whom report directly to the relevant Commissioner or Agency Head.308 Diagrammatic representations of these organisational structures are contained in Appendix 4.

4.116 Thirdly, a new Second Commissioner could be appropriately empowered to ensure that the appeals function is sufficiently resourced and not eroded by competing demands on budget allocations. This would avoid previously observed circumstances in which the ATO had insufficiently resourced its objections area to appropriately consider the disputes generated by shifting compliance focuses.309

4.117 Fourthly, a Second Commissioner who also directly reports to the Commissioner would provide high level assurance to the Commissioner regarding the ATO's management of disputes and settlements and provides greater transparency and accountability of original ATO decisions. In this regard, the role would be analogous to that of the Tax Assurance Commissioner in HMRC who provides advice and oversight on settlements. Stakeholders have also compared the proposed role to that of the Solicitor-General, who provides advice and assurance on matters needing to be litigated and those which can be settled. Such assurance is particularly important having regard to the increased levels of settlements in recent years.

4.118 Finally, the separate leadership of the Appeals Group is critical to maintain a robust culture for staff so that they are sufficiently empowered to independently consider taxpayer cases and achieve a fair outcome for taxpayers and the ATO. Such a culture would assist the ATO to address stakeholder perceptions of an overpowering compliance function which the IGT has previously observed can give rise to undesirable behaviours such as 'seeking to wear down the applicant by avoiding resolution of the issue.'310

4.119 The ARC has also noted the importance of independent senior leadership in creating additional organisational distinction between internal review officers (such as those in the Appeals Group) and original decision makers as well as developing and promoting a robust culture:

…it is important that agencies are organised so that internal review officers are distinct from primary decision makers. There are several reasons for this. If internal review is seen as a truly distinct aspect of agency decision making, that will help to promote within internal review sections the culture that their role is to undertake a genuinely fresh reconsideration of decisions. It will also give internal review the credibility within agencies necessary to enhance its normative effects.311

and

The Council also considers that the promotion of an appropriate culture within internal review sections would be greatly assisted if formal responsibility for internal review lay with a senior agency executive, such as a deputy secretary. That effect would be strengthened if the role of that senior departmental executive was combined with formal responsibility for overseeing the promotion within the agency of the general effects of review tribunal decisions on the quality of the agency's decision making.312

4.120 The ATO has expressed concerns that a consequence of creating the Appeals Group under a new Second Commissioner would be 'the Commissioner spending time “umpiring” disputes and opinions between different areas of the ATO when this could be done at the second commissioner level, at less cost and in a more timely way.'313

4.121 The ATO's concerns in fact highlight the need for even clearer delineation between the many different functions which are currently subsumed within it. The IGT considers that the creation of the Appeals Group, supported by clear protocols for the management of disagreements between different ATO groups, would assist to better streamline case decision making, rather than having matters prolonged and protracted owing to unclear ownership and responsibility.

4.122 The Commissioner should not be required to 'umpire' disagreements between the Appeals Group and other areas of the ATO beyond what may presently be required as between the Second Commissioners for the Compliance and LD&P Groups. In any event, in the majority of cases, the Second Commissioner of the Appeals Group would be the final decision maker with respect to the resolution of a dispute. In rare cases, where for example, there are disagreements, as to the correct view of the law between the Appeals Group and the LD&P Group, and they cannot be resolved at the Second Commissioner level, the matter could be fast tracked to litigation and referred to the Treasury for consideration of law change where appropriate.

4.123 As previously recommended by the IGT, where the new Second Commissioner with appropriate expertise is appointed from outside of the ATO, this would have the added benefit of further diversifying the insights amongst the ATO's most senior executives.314

Appointment to a dedicated role

4.124 Whilst the TAA 1953 provides for the number of Second Commissioners, their tenure and their powers under the taxation legislation,315 it does not specify the roles that these Second Commissioners will have in respect of the ATO. This decision rests with the Commissioner who has complete control over the ATO's organisational structure.

4.125 In the past, the IGT has observed the shifting roles of Second Commissioners between the different Groups (or sub-plans as they were then known) particularly between the Compliance and Law sub-plans of the ATO. There is, therefore, a risk that if an additional Second Commissioner is created without a dedicated legislated role, their ability to lead the Appeals Group may be compromised if the Commissioner is able to reallocate them to a different leadership function.

4.126 The IGT therefore considers that the new Second Commissioner should be appointed to specifically lead the Appeals Group with such further powers to independently review ATO decisions, manage litigation and settlements as is necessary.

4.127 In this way, the new Second Commissioner would be able to discharge the duties of their office and lead the Appeals Group without concern that any adverse or unfavourable decisions made by them would result in a diminishing of resources to their area or a transfer of roles to other areas of the ATO. Such an approach would be analogous to the independence of other statutory appointees, where fixed statutory terms provide assurance that their roles may be discharged without concern that unflattering or unfavourable decisions would lead to their dismissal or affect their remuneration.

4.128 The creation of a dedicated Second Commissioner would be similar to the processes adopted by the US Congress in statutorily prescribing that the restructuring of the IRS include an independent Appeals function.316

4.129 In addition, where a Second Commissioner is appointed to a dedicated role, the Government could ensure that they discharge the duties of their office by legislating the expectations of that office together with appropriate reporting requirements.

4.130 It has been noted that 'what gets measured gets done'317 and accordingly, where the Government seeks to imbue fairness, equity, transparency and accountability in the management of tax disputes, such criteria and expectations should be legislated for the new Second Commissioner so that it forms a key part of the structural governance framework that cannot be later changed or modified.

Implications for the ATO structure

4.131 To bolster the actual and perceived independence of the proposed Appeals Group, it would be ideal for its officers to be recruited from outside the ATO. These officers should also have strong tax experience and knowledge to effect an efficient transition. However, the IGT acknowledges that in the short term this may not be possible and it is likely that existing ATO personnel from other areas may also be allocated to the Appeals Group.

4.132 As discussed above in relation to creating a separate agency, the transfer of existing staff from other areas of the ATO potentially gives rise to those risks which have been identified in previous IGT reviews regarding ATO officer biases and capability,318 including those which resulted in the ATO discounting views which were contrary to its position319 or potential bias where the ATO seemingly appeared to have endorsed certain practices for some taxpayers but not for others.320 To mitigate such risks, appropriate training for all officers who enter the Appeals Group (whether they are recruited externally or from within the ATO) should be provided to assist those officers develop appropriate technical expertise and cultural mindset as is the case with the IRS Office of Appeals. Over time, the appropriate management and promotion of the Appeals Group, capability building and the acquisition of new staff would aid to minimise the risk of persisting biases and undesirable behaviours.

4.133 The creation of the Appeals Group, therefore, will have implications for the existing ATO structure and would require a reallocation of the ATO workforce to accommodate the different functions. This could be a part of the restructure or 'reinvention'321 that the Commissioner is undertaking. As part of such 'reinvention', he has already made some structural changes including redefining the three sub-plans into overarching groups, transferring corporate services from the LD&P Group to the People, Services and Systems (PS&S) Group and shifting the management of certain objections from the Compliance Group to the LD&P Group.

4.134 To illustrate the potential staffing impacts of the Appeals Group on the existing ATO structure, the IGT has set out the current workforce arrangements within the ATO and applied some estimated staff ratios to illustrate new arrangements which could follow the creation of the Appeals Group.

Current ATO Structure

4.135 As set out in Figure 1 below, the ATO is currently divided into three main groups, each of which is led by a statutorily appointed Second Commissioner.322 During the review, the ATO was unable to provide up to date staffing figures and their respective functions due to the ongoing implementation of its corporate reviews. The IGT therefore has made reference to published staffing figures as set out in the ATO's 2013–14 Annual Report.323

Figure 1: Current ATO structure
Commissioner of Taxation
Second Commissioner Second Commissioner Second Commissioner
Compliance People Services and Systems Law Design and Practice
Aggressive Tax Planning 223 ATO Corporate 699 Integrated Tax Design 196
Compliance Support & Capability 140 ATO Finance 462 Review and Dispute Resolution 244
Indirect Tax 1,800 ATO People 1,110 Tax Counsel Network 218
Private Groups and High Wealth Individuals 1,444 Business Reporting & Registration 264    
Public Groups and International 1,407 Client Account Services 4,585    
Serious Non-Compliance 533 Customer Service & Solutions 1,338    
Small Business and Individual Taxpayers 2,221 Debt 1,798    
Superannuation 1,087 Enterprise Solutions and Technology 2,032    
Tax Practitioner and Lodgment Strategies 1,268 Office of the Commissioners 13    
    Service Delivery Support 201    
TOTAL 10,123 TOTAL 12,502 TOTAL

658

Source: ATO.

4.136 The Compliance Group currently incorporates the ATO's business lines which manages its investigatory function, including all audits and reviews. It also manages all objections for taxpayers with turnovers less than $100 million and is responsible for issuing advice (in consultation with the TCN in certain cases). Each compliance business line also has internal technical case leadership teams which provide advice to the teams as well as law design and policy teams which interface with the LD&P Group and other stakeholders on key law design issues.

4.137 The PS&S Group is presently responsible for delivering the ATO's corporate, information technology and human resources services. Moreover, it has oversight of the Debt business line which manages debt collection in respect of all taxpayers and maintains the current call and contact centres within the ATO.

4.138 The LD&P Group has responsibility for law design input through advising and liaising with the Treasury and is also responsible for providing technical advice and settling the ATO precedential view of the law through the TCN. The LD&P Group also has responsibility for the RDR business line.

Proposed new ATO structure

4.139 The introduction of the proposed new separate internal group, i.e. the Appeals Group, may result in a shifting of some of the above functions, many of which are presently within the Compliance Group, to more closely align ATO activities with its compliance, appeals/litigation and policy/technical advice functions. Such a realignment would entail a redistribution of staff to ensure that each new area is sufficiently resourced to meet the challenges they face. Figure 2 below provides an illustration of a potential restructure and separation of functions within the ATO.

4.140 As the numbers in Figure 2 are drawn from those contained in Figure 1, the same caveat applies in relation to the completeness and accuracy of the present staffing levels within the ATO. In order to estimate the potential Full-time equivalent (FTE) staffing shifts as a result of the structural change, the IGT drew from the PGH Line Plan 2013–14, which was the only ATO business line plan that provided an indicative breakdown of the different functions within that line. Based on that Plan, the IGT notes that within the PGH business line:324

  • 65 per cent of staff undertake active compliance work (e.g., audits and risk reviews);
  • 12.7 per cent are responsible for interpretative advice work (including issuing of rulings and dealing with objections) — as the Line Plan did not provide a further breakdown of these functions, the IGT has assumed that half
    (6.35 per cent) are allocated to objections and the other half are responsible for providing advice to taxpayers;
  • 10 per cent are in risk management and intelligence;
  • 1 per cent undertake policy work;
  • 1.25 per cent undertake legal and law assurance work; and
  • the remaining 10 per cent provide support and other functions specific to the PGH business line.

4.141 The IGT has applied the above ratios to the ATO FTE figures to provide an indication of the potential staffing changes. These are set out in Figure 2 below.

Figure 2: Proposed new ATO structure
Commissioner of Taxation
Second Commissioner Second Commissioner Second Commissioner Second Commissioner
Compliance People Services and Systems Law Design and Practice Appeals
Aggressive Tax Planning 190 ATO Corporate 699 Integrated Tax Design 196 Review and Dispute Resolution 244
Compliance Support & Capability 119 ATO Finance 462 Tax Counsel Network 218 BSL Interpretative Assistance (Objections) 642
Indirect Tax 1,531 ATO People 1,110 BSL Legal and Law Assurance 227    
Private Groups and High Wealth Individuals 1,228 Business Reporting & Registration 264 BSL Interpretative Assistance (Advice) 642    
Public Groups and International 1,197 Client Account Services 4,585        
Serious Non-Compliance 453 Customer Service & Solutions 1,338        
Small Business and Individual Taxpayers 1,889 Enterprise Solutions and Technology 2032        
Superannuation 924 Office of the Commissioners 13        
Tax Practitioner and Lodgment Strategies 1,078 Service Delivery Support 201        
Debt 1,798            
TOTAL 10,408 TOTAL 10,704 TOTAL 1283 TOTAL

886

Source: IGT constructed from ATO Annual Report 2013–14, PGH Line Plan 2013–14.

4.142 Based on the functional separations within the PGH Business Line, the above table provides an indication of the potential staff movements which may need to be made to give effect to the proposed Appeals Group. The change will necessarily see a movement of both the taxpayer advisory (e.g. rulings) and objection functions within the ATO.

4.143 It is noted that the proposed staffing figures for the Appeals Group are significantly lower than those in the Compliance and PS&S Groups. It is appropriate that the Compliance and PS&S Groups should have the largest proportions of staff as they are responsible for the largest sections of the taxpayer community.

4.144 As fewer cases progress through towards pre-assessment reviews, objections and ultimately litigation, it is expected that Appeals Group would have a smaller number of staff. This is in line with staffing levels in other revenue authorities. For example, data from the US shows that in 2013, the IRS Office of Appeals only had 811 FTE staff which is 0.93 per cent of the entire IRS workforce. This contrasts with 12,270 revenue agents, 8,724 tax examiners, 4,748 revenue officers325 and approximately 2,000 National Taxpayer Advocate (the IGT's counterpart) officers.326

Technical advice and dispute resolution within Compliance Group

4.145 The IGT envisages that with the introduction of the Appeals Group, the ATO's Compliance Group will continue to undertake audits and retain high level technical advisers to guide audit staff on matters not requiring reconsideration of the ATO precedential view or policy issues. Moreover, each business line should have dedicated groups and contacts to facilitate and drive dispute management and resolution. These teams could operate in collaboration with the Appeals Group to receive, consolidate and develop feedback into improved processes and procedures.

4.146 The IGT is aware that such initiatives are already occurring in some business lines such as the PGI business line where a dedicated Dispute Prevention and Resolution team has been established to drive dispute resolution. This team works in collaboration with the RDR business line to instil better dispute resolution practices in PGI through an appropriate feedback communication strategy, making available facts and evidence clinics and providing broader communications on disputes and resolution techniques.327

Transfer of Debt business line

4.147 The IGT also considers that a transfer of the ATO's debt collection function to the Compliance Group could better streamline the taxpayer experience. The IGT is aware that the ATO has begun implementing similar actions with audit staff in the ITX business line undertaking debt and payment discussions during audits.328

4.148 The linkage between compliance activity and debt collection was examined and considered in the IGT's Settlements Review329 which noted at the time that the ATO could improve the linkage between the two functions so that debt collection officers were more responsive to taxpayers seeking to re-engage on tax liability issues to ensure that correct amounts were raised.330

4.149 The IGT has also previously noted the role of debt in the tax dispute resolution context. In particular, submissions made to the IGT's ADR Review suggested that one of the reasons a taxpayer may initiate or progress a dispute was to defer or manage payable tax debts owing to their financial circumstances.331

4.150 In the current review, as in the IGT's ADR Review,332 issues concerning the use of collateral debt collection action, while disputes as to the underlying assessment were on foot, have been raised. Stakeholders have expressed concern that the ATO's use of its powers in relation to debt collection and recovery actions may unfairly hamper the ability of taxpayers to properly prosecute their challenges to assessments.333

4.151 Moreover, inefficiencies are created for both the ATO and taxpayers where multiple proceedings are on foot in different forums for the recovery of debts on the one hand and challenging underlying assessments on the other. This situation may arise as taxpayers initiate tax proceedings in either the AAT or the Federal Court, while the ATO may initiate debt recovery proceedings in different State courts.

4.152 The movement of the Debt business line to the Compliance Group would allow for earlier and more holistic engagement in relation to tax and debt disputes. As noted by the IGT in the ADR Review, the ability of taxpayers to engage on both the technical tax and debt collection issues through a single port of call provides a more efficient and effective forum to resolve all issues within a dispute.334

4.153 It should be noted that the IGT is currently undertaking a broad review of the ATO's approach to debt collection which will consider further debt collection issues.335

Law design and taxpayer advice

4.154 Under the proposed new structure, the LD&P Group would continue to interact and advise the Treasury and the Government on new tax law design and will also, through the TCN, be responsible for developing the ATO precedential view.

4.155 Moreover, the LD&P Group could also assume responsibility for providing advice to taxpayers through the current private rulings process and other relevant advice documents.

4.156 There are benefits to ensuring that the responsibility for developing public and private binding advice is consolidated. As the IGT has previously observed, disputes may arise where public rulings are issued which are inconsistent with existing private rulings.336 In particular, such occurrences have given rise to allegations of so-called ATO 'U-turns' where the ATO proposes to apply changes to perceived longstanding views retrospectively.337 Often these perceptions are based on existing private rulings.

4.157 By consolidating the responsibility for both managing public and private ATO advice within the LD&P Group, the IGT believes that the ATO would be able to better manage the risk of such inconsistencies occurring in the future.

Dispute resolution and litigation

4.158 As set out earlier in this chapter, the IGT considers the Appeals Group would incorporate the existing RDR business line and have responsibility for the management of pre-assessment reviews, objections and the litigation function. Moreover, under the leadership of a new Second Commissioner, the Appeals Group would provide oversight of the ATO's approach to settlements and the Second Commissioner would adopt an assurance role in this regard with separate reporting requirements.


248 Robert Jeremenko, 'Tax disputes and the ATO – change on the way?' Taxation in Australia Vol 49(4) p 189.

249 Above n 58.

250 Above n 66.

251 ARC, Better Decisions: Review of Commonwealth Merits Review Tribunals (1995) p 122.

252 Above n 160, p 2.

253 Ibid, p 3.

254 IRS, 'Appeals' (6 October 2014) <www.irs.gov&gt;.

255 Ibid.

256 Above n 119.

257 HMRC, 'Message from Edward Troup, HMRC's Tax Assurance Commissioner' (undated) <http://www.hmrc.gov.uk/adr/edward-troup-message.htm&gt;.

258 Above n 6, pp 166-167.

259 Commissioner of Taxation, Annual Report 1993-94 (1994) pp 10 and 11.

260 Above n 42.

261 Above n 251, p 122.

262 Above n 218, p 3.

263 Above n 66.

264 ATO, 'Facilitation Process' (14 October 2014) <www.ato.gov.au&gt;; Above n 42, p 44.

265 ATO, 'Alternative dispute resolution – an overview' (27 May 2014) <www.ato.gov.au&gt;.

266 IGT, Review into the ATO's compliance approach to individual taxpayers – income tax refund integrity program (2014) p 82; IGT, Review into the ATO's compliance approach to individual taxpayers – use of data matching (2014) p 75.

267 IRS, 'Appeals Mediation Programs' (11 June 2014) <www.irs.gov&gt;.

268 Above n 119.

269 New Zealand Inland Revenue Department, Disputing a Notice of Proposed Adjustment (2012) p 9.

270 Above n 42, p 106.

271 ARC, Internal Review of Agency Decision Making (2000) p 16.

272 Above n 31, p 148.

273 HM Revenue and Customs, 'Appeals and Tribunals – an overview for agents and advisers' (undated) <www.hmrc.gov.uk&gt;; United States Government Accountability Office, Government Accountability Office report: Tax administration: Compliance: Appeal feedback Project (19 April 2006) p 6.

274 Above n 269; Canada Revenue Agency, Resolving your dispute: objection and appeal rights under the Income Tax Act (undated) <www.cra-arc.gc.ca&gt;.

275 Above n 31, p 148.

276 Above n 42, p 50.

277 Above n 39, p 14; Above n 42, p 101.

278 ATO, Submission 10.2 to the House of Representatives Standing Committee on Tax and Revenue, Inquiry into Tax Disputes (19 November 2014) p 8.

279 Above n 97, IRM 1.1.6; Treasury Board of Canada Secretariat, 'Organization: Canada Revenue Agency' (26 January 2012) <http://www.tbs-sct.gc.ca&gt;.

280 Above n 42, pp 3-8.

281 Above n 42.

282 Pacific Exchange Corporation Pty Ltd v Commissioner of Taxation [2009] FCA 1155 at [58]-[59]; Deputy Commissioner of Taxation v Prentice (Trustee) [2011] FCA 1535 at [26].

283 Above n 97, para 1.1.6.1; US Department of Justice, 'About the Tax Division' (undated) <www.justice.gov&gt;.

284 IRD, 'Protocols between the Solicitor-General and Commissioner of Inland Revenue' (2009) para [5.1].

285 Department of Justice, 'Various roles of lawyers at the Department of Justice' (30 April 2013) <www.justice.gc.ca&gt;.

286 Legal Service Directions 2005 Appendix A.

287 ATO communication with the IGT, 17 July 2014.

288 ATO communication to the IGT, 17 July 2014.

289 Commissioner of Taxation, Annual Report 2009–10 (2010) p 31; Commissioner of Taxation, Annual Report 2010–11 (2011) p 106; Commissioner of Taxation, Annual Report 2011–12 (2012) p 93; Commissioner of Taxation, Annual Report 2012–13 (2013) p 58.

290 Four Corners, 'Reviews & Inquiries into the Australian Taxation Office' (30 June 2003) <www.abc.net.au&gt;; Senate Economics References Committee, Interim Report on the Operation of the Australian Taxation Office, Canberra, 10 November 1998.

291 Above n 239, p 19.

292 Above n 39.

293 Above n 72.

294 Internal Revenue Service Restructuring and Reform Act 1998 (US) para 1001(a)(4).

295 Above n 184.

296 Anne-Marie Levesque, 'Appeals Branch' (Presentation delivered at the Toronto Centre Professionals Group Seminar, Canada, November 2013) <www.canadiantaxlitigation.com&gt;.

297 Above n 75, p 12.

298 Above n 97, IRM 8.1.10.5.6.

299 IGT, 'New IGT work program' (2014) <www.igt.gov.au&gt;.

300 Above n 278, p 4.

301 Above n 97, IRM 8.1.1.5.1.

302 ATO communication with the IGT, 17 July 2014.

303 Above n 156, p 26.

304 Taxation Administration Act 1953 s 4.

305 Above n 33, p 16.

306 his is the case for all statutory appointees.

307 IRS, 'Today's IRS Organization' (28 April 2014) <www.irs.gov&gt;.

308 IRD, 'Office of the Chief Tax Counsel' (9 December 2004) <www.ird.govt.nz&gt;.

309 Above n 38, pp 77-80.

310 IGT, Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters (2008) p 39.

311 Above n 251, p 122.

312 Ibid, pp 122-123. See also: Administrative Review Council, Internal Review of Agency Decision Making (2000).

313 Above n 277, p 8.

314 Above n 33, p 16.

315 Taxation Administration Act 1953 ss 5 and 6D.

316 Internal Revenue Service Restructuring and Reform Act of 1998 §1001(a)(4).

317 Above n 75, p 15.

318 Above n 310; Above n 37; Above n 38.

319 IGT, Review of the Tax Office's management of complex issues – case study on research and development syndicates (2007) p 45.

320 Above n 192, p 20.

321 Above n 246.

322 Taxation Administration Act 1953 s 4.

323 Above n 4, pp 130-131.

324 ATO, 'Private Groups and High Wealth Individuals Line plan 2013–14' (internal ATO document, 2013) p 28.

325 IRS, 'SOI Tax Stats - Personnel Summary, by Employment Status, Budget Activity, and Selected Type of Personnel - Databook Table 30' (5 March 2014).

326 Treasury Inspector General for Tax Administration, A Statistical Portrayal of the Taxpayer Advocate Service for Fiscal Years 2005 Through 2009 (2010) p 4.

327 ATO communication to the IGT, 16 October 2014.

328 See for example: ATO, 'Indirect Tax AC SME/Micro and cash economy guidelines for the collection of outstanding debt and lodgment' (internal ATO document, 12 November 2013).

329 Above n 40.

330 Ibid, pp 29-30.

331 Ibid, p 93.

332 Ibid.

333 Taxation Administration Act 1953 ss 14ZZM and 14ZZR; Denlay v Commissioner of Taxation [2013] FCA 307.

334 Above n 42, p 93.

335 Above n 211.

336 IGT, Review into the delayed or changed Australian Taxation Office views on significant issues (2010); Above n 192.

337 Ibid.