6.1 Tax disputes are a feature of any tax system and to some extent reflect the complexities which have evolved. In some instances, disputes serve to support the health of the system by clarifying areas of uncertainty for the benefit of the community. However, there are costs associated with tax disputes for both the ATO and for taxpayers. These costs may be financial, emotional or reputational. Having regard to these impacts and the concerns discussed in previous chapters, the majority of stakeholders have called for improved governance and processes in the management of tax disputes for all taxpayers.

6.2 The importance of a robust governance framework cannot be overstated. The ATO, by necessity, is a monopoly service provider and has considerable power, such as compulsory extraction of money and restricting freedom of movement, which may largely be exercised without the need for a Court order. Therefore, there is a need for robust checks and balances. In the past, the IGT has recommended the establishment of an oversight or advisory Board to bring a diverse mix of expertise into the ATO.418 This recommendation remains relevant having regard to the practices of other OECD jurisdictions as well as those of other agencies in Australia.419

6.3 There is also a need for specific structural reform and a governance framework to address concerns with the management of tax disputes. This has been explored in Chapter 4 as well as the Tax Forum Submission.

6.4 The IGT acknowledges that the ATO has made recent efforts in implementing a more effective approach to minimising disputes, particularly in the large business and HWI taxpayer segments. Such changes are welcomed and necessary to meet changing community expectations of it as a service provider rather than merely administrator and regulator. These changes also mark a stage in the ATO's evolution from one of a managerially directed organisation focused on technical accuracy to an organisation that achieves appropriate technical outcomes in a responsive and equitable manner.

6.5 Notwithstanding the recent positive changes, significant concerns, set out in the previous chapters, continue to be raised and the IGT is of the view that they can only be addressed by structural change, i.e. through the creation of the Appeals Group. The Appeals Group would be a centralised, dedicated and separate internal group within the ATO to manage tax disputes independently for all taxpayers, including conducting pre-assessment reviews, objections and litigation processes and employing ADR as necessary.

6.6 As set out in Chapter 4, the centralisation of the disputes management function through the Appeals Group would yield a number of benefits. Firstly, it would ensure equal access for all taxpayers to effective pre-assessment reviews, without arbitrary distinctions between categories of taxpayers, by providing a singular channel through which taxpayers may seek access where discussions with the compliance team have reached an impasse. An effective pre-assessment review process would operate as quality assurance of the audit decision before NOAs are issued, which can have significant adverse impacts on taxpayers. As discussed in Chapter 3, this is particularly important for small business and individual taxpayers for whom the financial and emotional costs of external dispute management processes, i.e. the court and tribunal systems, may act as a barrier to accessing justice.

6.7 Secondly, it would enhance the actual and perceived independence of the objection process by removing all objections from the Compliance Group. This would assist to enhance community confidence that where objections are lodged, they will be approached with 'fresh eyes' and all matters will be considered without influence from other areas within the ATO, i.e. the LD&P and Compliance Groups.

6.8 Thirdly, the conduct and management of litigation would be enhanced by empowering litigation officers to independently consider the merits of a case, the competing legal positions of the ATO and the taxpayer and determine whether the case should be progressed or otherwise settled. In so doing, the Appeals Group would also provide independent oversight and advice on the ATO's approach to settlements, ensuring that any settlements are in accordance with the existing governance processes and in the best interests of the community. In this role, the Appeals Group would perform a function akin to the Solicitor-General in providing advice on significant matters and would be analogous to the current Tax Assurance Commissioner in HMRC.

6.9 Fourthly, the Appeals Group would provide a centralised resource for the ATO on all dispute resolution matters and, in particular, the use of ADR. The Appeals Group would be well-placed to provide advice and assistance on the use of ADR throughout the compliance and dispute resolution process, including at the above three stages to ensure that the most effective techniques are applied to resolve disputes as early as possible. In addition to providing advice and assistance, the consolidation of the dispute resolution and ADR function within the Appeals Group would increase its profile within the ATO and assist to embed the ATO's intended dispute resolution culture throughout the organisation.

6.10 Finally, there are synergistic benefits to be realised through centralising the ATO's end-to-end tax disputes management process. These include:

  • having multiple points at which disputes are reconsidered and learnings captured and fed back earlier in the process to minimise the instances of disputes arising in the future; and
  • enabling early intervention from disputes resolution specialists who may be better able to settle cases or identify significant or test cases to be litigated for law clarification purposes.

6.11 The effectiveness and independence of the Appeals Group in the performance of these functions requires strong leadership through the appointment of a new Second Commissioner, dedicated to lead this area within the ATO. As previously noted, whilst an internal area cannot be truly independent of the organisation, it can be made as independent as possible through separate and distinct senior leadership with specific accountability and reporting requirements. As noted earlier, the tenure and remuneration of the Second Commissioner would be determined by the Government and the Remuneration Tribunal respectively and not the Commissioner.

6.12 The creation of the Appeals Group would also be in line with the majority of submissions received by the IGT during the course of this review, current international practice across a number of jurisdictions as well as IGT recommendations made in earlier reviews and other forums.420

6.13 The IGT has also had the benefit of examining transcripts of public hearings and submissions made by the ATO to the Committee. In particular, the IGT has considered the ATO's concerns regarding the creation of a new Second Commissioner to lead a separate appeals area.421 However, the ATO has discussed and opposed this option together with the option to create a separate agency to handle tax disputes.422 Whilst, the IGT agrees with the ATO position with respect to the latter, the IGT does not believe they have made a compelling case against the former.

6.14 The ATO's concerns with a new Second Commissioner leading the Appeals Group centres around costs, restricted communication and a barrier to effective feedback loops. In the IGT's view, such suggestions of costs and restricted communication do not only apply to dispute resolution but to the demarcation of any function within the ATO. Wherever there is separation between any functions, there will be limits to communication and information exchange. In relation to dispute resolution such separation ensures that taxpayers are perceived to be given genuine reconsideration of their disputes and the organisational framework supports a robust internal culture of dispute resolution.

6.15 The IGT accepts that feedback loops are an important mechanism to improve ATO decision making. However, the creation of the Appeals Group should not diminish feedback loops due to the restricted communication. This is not borne out by the experience in other jurisdictions, such as the IRS, and the IGT further notes that existing arrangements between the ATO and the Treasury demonstrate that ongoing effective feedback can occur even between separate agencies.

6.16 The ATO has also raised concern about tensions between the Appeals Group and other areas of the ATO and the Commissioner effectively having to 'umpire'. The IGT believes that 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.

6.17 The IGT also considers that the Commissioner should not be required to 'umpire' disagreements between the Appeals Group's leadership 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 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. Where disagreements as to the correct view of the law are unable to be resolved at the Second Commissioner level, the matter could be streamlined to litigation for judicial clarification.

6.18 Clearly, the creation of the Appeals Group would require structural change within the ATO. The IGT recognises that structural change may present challenges, and understands that there may be some reticence in that regard. Change takes time to implement, test and embed, such was the experience with the establishment of the IRS Office of Appeals in the early 1990s and the dissolution of the ARG within the ATO during the same time. However, the ATO is currently undergoing a 'reinvention' and the formation of the Appeals Group could be a part of that restructure. Accordingly, the IGT believes that it is an ideal time to implement such a positive step in improving tax dispute resolution in this country.

6.19 The IGT also notes that, generally, there is some inertia towards change. However, once such changes are implemented and bear fruit, the initial opposition fades and positive outcomes are embraced. In this respect, parallels may be drawn in relation to a number of IGT recommendations which were initially rejected by the ATO, or required substantial persuasion, but ultimately were adopted and resulting successes celebrated by the ATO. The ATO's most recent submission to the Committee423 highlights a number of such examples including:

  • the implementation of the ATO's in-house facilitation program (IGT ADR Review, recommendation 3.6) and IR process (IGT Large Business Review, recommendation 9.3);424
  • earlier and better engagement in person to minimise the extent of disputes arising particularly when the ATO is interacting with individual and small business taxpayers (IGT ECT Review, recommendation 3.5);425
  • improving early identification of potential test cases and adopting a more flexible approach to test case funding (IGT ADR Review, recommendation 4.2);426
  • increasing transparency of ATO decisions by engaging with small business taxpayers before issuing position papers to explain technical positions and why taxpayers have been selected for audit (IGT SME/HWI Review, recommendations 5.2 and 5.4);427
  • making greater use of declaratory proceedings in tax disputes (IGT ADR Review, recommendation 4.3);428
  • reducing timeframes for considering objections (IGT Objections Review, recommendation 4);429
  • improving technical decision making, including by improving auditor access to technical experts and emphasising greater focus on facts and evidence (IGT, SME/HWI Review, recommendation 3.2);430
  • implementing performance measures which focus on the taxpayer experience (IGT SME/HWI Review, recommendation 2.17; IGT ADR Review, recommendation 5.4);431 and
  • developing a dispute resolution charter (IGT ADR Review, recommendation 5.2).432

6.20 A less celebrated change has been the transfer of the objections function for large businesses from the Compliance Group to the Law Group. This recommendation was made by the IGT in the ADR Review and originally rejected by the ATO.433

6.21 The number of past IGT report recommendations which have been implemented and evolved into lasting improvements in the ATO's administration highlights two important points. Firstly, it illustrates the importance of external scrutineering within a transparent system of administration where a different and principled professional viewpoint on improvements may be discussed, negotiated and implemented for the benefit of the whole community. Secondly, it demonstrates that change is not always immediate and that significant and lasting change may require some time to become accepted and the benefits fully realised.

6.22 The creation of the Appeals Group would be an example of such a significant change. The IGT accepts that there may be some resistance at the outset to the change but is confident that such change is necessary to ensure that the benefits presently being initiated are appropriately enhanced and captured within an appropriate legislative framework that will stand the test of time. Such a framework should outline key aims and expectations whilst allowing flexibility to accommodate future needs and requirements.


The IGT recommends that the Government consider legislatively:

  1. creating a separate Appeals Group, which would be headed by a new and dedicated Second Commissioner, responsible for managing tax disputes for all taxpayers, through:
    1. pre-assessment reviews;
    2. objections;
    3. litigation including identifying test cases and providing oversight on settlements; and
    4. facilitating the use of ADR throughout the compliance and dispute resolution process; and
  2. establishing a framework for the development of communication protocols between the Appeals Group and other areas of the ATO to ensure that the Appeals Group is, and is seen to be, independent in its dispute resolution function.

418 Above n 33, p 1.

419 Competition Policy Review (Ian Harper, Chairman) (Draft Report, 2014) pp 62-63.

420 Above n 42, p 107; Above n 33, pp 17-18.

421 Above n 160, p 2; Above n 278, p 4.

422 Above n 278, p 8.

423 Above n 278.

424 Above n 42, recommendation 3.6; Above n 37, (2011) recommendation 9.3.

425 IGT, Review into the ATO's compliance to individual taxpayers – superannuation excess contributions tax (2014) recommendation 3.5. See also IGT, Review into the ATO's compliance to individual taxpayers – use of data matching (2014) p 60; IGT, Review into the ATO's compliance to individual taxpayers – income tax refund integrity program (2014) p 51.

426 Above n 42, recommendation 4.2.

427 Above n 38, recommendations 5.2 and 5.4.

428 Above n 42, recommendation 4.3, pp 61-63.

429 Above n 39, recommendation 4.

430 Above n 38, recommendation 3.2.

431 Ibid, recommendation 2.17; Above n 42, recommendation 5.4.

432 Above n 42, (2012) recommendation 5.2. See also: Above n 30, key recommendation 1.

433 Above n 42, (2012) recommendation 6.1.