On 2 June 2014, the then Acting Assistant Treasurer, Senator the Hon Mathias Cormann, referred an Inquiry into Tax Disputes (the Inquiry) to the House of Representatives Standing Committee on Tax and Revenue (the Committee). The Committee adopted the Inquiry and announced that it would consider, amongst other things, 'whether a separate agency should manage ATO [Australian Taxation Office] litigation, whether the ATO should have a separate appeals area, or if current arrangements should continue.' On 11 June 2014, the Committee requested that the Inspector-General of Taxation (the IGT) undertake a review into the large business and high wealth individual (HWI) themes of the Inquiry.
The IGT had previously examined different aspects of the ATO's approach to dispute management and resolution, including objections, settlement, litigation and the use of alternative dispute resolution (ADR). Furthermore, the IGT has also considered the ATO's compliance approach to large business and HWIs in separate reviews. In this review, the IGT has drawn on this body of work, submissions to the current review as well as additional research and analysis including comparisons with the revenue authorities of the United States of America, Canada, the United Kingdom, New Zealand and Ireland.
The IGT has observed that the underlying cause of many concerns raised in submissions appears to be a lack of separation between the ATO's original decision makers and its officers who review such decisions at the request of taxpayers. This has given rise to a lack, or perceived lack, of independence leading taxpayers to believing that their cases were not reconsidered afresh and they were denied a fair hearing.
Accordingly, some taxpayers are of the view that they cannot have their matter objectively reconsidered until they reach the Administrative Appeals Tribunal (AAT) or the Federal Court of Australia. Such view is supported by the ATO's statistics. For example, in 2013‒14, 85 per cent of taxpayer disputes were resolved without hearing when they reached the AAT. While there are a range of reasons for matters being resolved at such a late stage, the high rate of resolution indicates that a substantial proportion of cases are not being appropriately reconsidered by the ATO before the taxpayer invokes external review procedures.
Following earlier IGT reviews, the ATO has embarked on a program of work to improve its compliance and dispute resolution approaches particularly in relation to large businesses and HWIs. As a result, stakeholders have acknowledged recent improvements in the ATO's approach to these market segments. Such improvements include the transfer of the objections function from the Compliance Group to the Law Design and Practice Group for taxpayers with $100 million or more annual turnover and the introduction of a process to review ATO initial positions before assessments are issued for taxpayers with annual turnovers of $250 million or more.
Whilst the ATO's recent initiatives represent a positive step in relation to its management and resolution of tax disputes, there is a need for further improvements which are sustainable over time and made available to all taxpayers including small business and individual taxpayers. These taxpayers are the least likely to be in a position to take a dispute to the AAT or the courts due to the significant financial and opportunity costs incurred both upfront and progressively throughout disputes.
Therefore, the IGT has recommended the creation of a separate and dedicated Appeals Group, led by a new Second Commissioner, to embed the improvements within the ATO structure and provide a framework that is less dependent on the views and ideals of the ATO leadership of the day. It will also bring the ATO more in line with comparable international revenue authorities.
The new Appeals Group would manage and resolve tax disputes for all taxpayers including the conduct of pre-assessment reviews, objections and litigation as well as championing the use of ADR throughout the dispute cycle. The separation from both the ATO's compliance and legal advisory functions would facilitate a fresh and impartial review of the taxpayer's case by empowering officers of the new area to resolve disputes through the most appropriate means, taking into consideration the individual circumstances of the taxpayer, their case and assessment of the ATO's precedential view. Additionally, the new area would ensure that settlements are appropriately scrutinised and in the best interests of the community.
The IGT notes that some stakeholders have suggested the need for a separate agency to be established to manage tax disputes. While the IGT recognises that the creation of a separate agency would represent the highest levels of independence, there are challenges associated with this option, including increased costs and overlap with existing external review bodies, such as the AAT. The IGT believes that this course of action should be considered in future if significant concerns persist following the implementation of the recommended separate Appeals Group.
The IGT has sought to achieve the highest level of independence whilst retaining the dispute management function within the ATO. In this regard, the need for the Appeals Group to be headed by a new Second Commissioner is paramount as such roles are statutorily appointed and their tenure and remuneration is pre-determined by the Government and the Remuneration Tribunal respectively and not the head of the relevant agency. Such an arrangement accords with the views of the International Monetary Fund on the separate leadership of an internal appeals function where organisational and practical separation (such as through a separate agency) cannot be achieved.
While the report has largely focused on improvements to the governance framework for tax disputes, the Committee's terms of reference have highlighted a number of other areas for examination including the collection of revenues due, efficiency, effectiveness and transparency, use and publication of performance information and the legal framework for tax disputes. The IGT has considered and briefly discussed these issues, noting that they have either been examined in prior IGT reviews, will be the subject of current IGT reviews or there are current developments which may impact on these matters and that further time should be afforded before they are examined.
The IGT believes that the appropriate implementation of the recommendation in this review will result in a more efficient, effective and transparent tax dispute management process to which all taxpayers will have equal access and will have confidence that they will be treated fairly and equitably.