5.1 Stakeholders raised concerns with the time and cost involved in resolving valuation disputes under the current objection and litigation processes. They were of the view that valuation disputes arose when the ATO and taxpayer were each relying on a different set of facts, assumptions, methodologies or understanding of the applicable law. Stakeholders suggested that these differences could be resolved more effectively by adopting approaches that either:
- assisted parties to obtain a common understanding of the other's positions and the reasons for those positions at the early stages of any compliance activity; or
- where competing views persisted, provide a non-binding opinion or a binding determination from a third party.
5.2 Chapters 3 and 4 of this report have recommended changes to ensure that the above causes for valuation disputes are minimised by a number of means including:
- reducing the need for valuations by use of safe harbours and valuations obtained for other purposes;
- minimising the difference between the ATO's and taxpayers' instructions through, for example, risk assessment of taxpayers' valuer instructions during pre-lodgement processes, adopting a standard instruction template and greater use of an improved MVPR system;
- providing greater taxpayer access to the ATO's instructions to its valuers; and
- accommodating a level of difference between valuations which are primarily attributable to the professional judgement of different valuers.
5.3 The IGT has also already considered dispute resolution and use of ADR in a number reviews, particularly in the IGT's ADR Review where there are particular recommendations aimed at valuation disputes.184 Accordingly, this chapter looks at any remaining improvements that may be made in the valuation context.
5.4 The following section describes a range of dispute resolution approaches before making specific comments on their suitability to resolve valuation-related tax disputes.
Expert valuer conferencing
5.5 Expert valuer conferencing is a process used by the Federal Court to bring the valuers of the opposing parties together outside of the formal court hearing. The conference is designed to seek areas of agreement and articulate the areas of and reasons for any remaining disagreement. The valuers are often requested to reflect these in a written report called the 'expert report'. These conferences may be mediated by a professional mediator.
5.6 The RCF case185 is an example of where an expert valuer conference was ordered by the judge.
5.7 Expert valuer conferencing may also be used by the ATO and taxpayers before litigation. For example, there are a range of dispute resolution mechanisms allowing the taxpayer and ATO officers to meet directly to discuss the facts and issues at hand. These mechanisms include case conferencing and in-house facilitation. Case conferencing usually involves a taxpayer and their advisor meeting face-to-face with ATO compliance and specialist officers.
5.8 In-house facilitation, on the other hand, involves a trained ATO officer, independent of the compliance case, to act as a facilitator to guide a discussion between the ATO and the taxpayer. The IGT recommended such a process in his ADR review particularly for smaller less complex disputes. The ATO has advised that it has implemented this recommendation with some success and it is now employing it in broader contexts.186
5.9 The ATO has a general policy of resolving disputes as early as possible187 and provides specific internal guidance notes on resolving market value issues:
Where appropriate and feasible, all reasonable attempts to resolve issues surrounding market value are to be undertaken at the earliest possible time during an audit or review, before market valuation-related adjustments are made.188
5.10 The ATO's practice statement on ADR contains staff guidance on expert valuer conferencing:
58. The purpose of a valuer conference should be for the experts to explain the information and assumptions used in the methodology and the methodology that both parties have adopted. Even if the valuer conference does not result in agreement between the parties, the ATO personnel should ensure that the valuer conference results in establishing points of agreement and the areas that remain in dispute.189
5.11 As noted earlier, the ATO does not provide specific guidance on granting taxpayer access to the ATO's valuers or conducting expert valuer conferencing during compliance activities.
5.12 In Federal Court proceedings, expert evidence, such as valuation opinions, are often first presented as written reports. The court may make orders limiting the expert's evidence-in-chief to the contents of the expert's written report.190 As noted above, the Court may then order that the valuers of both parties take part in an expert conference. One of the main outcomes of such a conference, besides narrowing issues for dispute, is to facilitate the production of an expert report. As reflected in the RCF case191, the court may order that the expert report be completed jointly by the valuers of both parties.
Jointly instructing separate valuers
5.13 The joint instruction of separate valuers is an approach that allows each party to retain their own valuer but to agree on a common set of instructions for each of them. Such an approach was thought to reduce the scope for different valuation outcomes. Reasonable differences in the resulting valuation could then be attributable to professional judgement, whilst much larger differences could indicate differences in the valuer's approach or methodology which may need further reconciliation.
Jointly appointed valuers or third experts
5.14 During a valuation dispute, it is likely that both the taxpayer and the ATO have each already obtained valuations from their own separate valuers. Both parties may agree to jointly appoint another valuer as a 'third expert' to help break the deadlock.
5.15 Many commercial contracts also include dispute resolution clauses. Where the dispute is in respect of commercial property, the matter may be referred for determination by a valuer chosen by the President of a nominated valuation professional body or dispute resolution association.
5.16 The ATO's Tax Compliance for SMEs publication envisages a similar process:
In relation to valuation matters, both parties may agree on the appointment of a third party expert to either critique or conduct a valuation, and commit to accept the outcome of that process.192
Early Neutral Evaluation (ENE)
5.17 ENE is very similar to jointly appointing a valuer or a third expert as described above. The main difference is ENE usually involves the third party being from a legal background, such as a retired judge. Although any expert may perform the role of the evaluator, the ATO has advised that they have usually used a retired judge.
5.18 The ATO has also advised that ENE is preferred over mediation in high risk valuation disputes. The ATO observed that taxpayers were more comfortable with a process in which a respected independent third party expressed an expert opinion about the relative merits of each case.
5.19 The 'single expert' is appointed by the court to provide expert evidence. One key feature is that neither litigant is generally permitted to present their own expert evidence without the permission of the court as there is a presumption in favour of a single expert witness.193 Such a feature is used in the Family Court194, the Queensland Supreme Court195 and the New South Wales Land and Environment Court.196
5.20 One of the main reasons for the single expert witness system is to avoid 'unnecessary costs arising from the appointment of more than one expert witness'.197 Although unable to present their own expert evidence, litigants may cross-examine the single expert.198 In preparing for such cross-examination, litigants may retain a 'shadow expert' to assist litigants with formulating questions for the single expert.
5.21 These shadow experts do not present opinion evidence to the court which means that they do not owe a duty to the court.199
5.22 The Federal Court has the capacity to implement a single expert witness approach through the application of its 'Court expert' rules.200
5.23 Single experts are also used to settle matters relating to retail shop leases. State laws, such as those in New South Wales201 and Queensland202, require certain valuation tasks in relation to retail shop leases to be conducted by an independent 'specialist retail valuer'. Lessors and lessees reviewing leases on the basis of 'current market rent' are to agree between themselves the appointment of such a valuer to determine the current market rent. Those specialist retail valuers are to be drawn from a list of valuers prepared by professional bodies (in New South Wales) or the Valuers Registration Board (in Queensland).
Concurrent evidence or 'hot tubbing'
5.24 The court practice of concurrent evidence, or colloquially known as 'hot tubbing', is a judicial innovation designed to address some practical difficulties of admitting expert evidence. Experts may give evidence one after another and be sworn in and cross examined and re-examined at the same time. This can be done by putting a question relevant to one subject or issue to each expert in turn until the cross examination or re-examination for that subject is completed.203 This can be contrasted with the usual approach to adducing evidence whereby an expert witness presents their evidence and the opposing party cross-examines them on all issues before the next expert witness takes the stand.
5.25 During hot tubbing, experts may be called upon to opine on each other's evidence.204 Some of the observed benefits from this approach include:
It enables each expert to concentrate on the real issues between them. The judge or listener can hear all the experts discussing the same issue at the same time to explain his or her point in a discussion with a professional colleague. The technique reduces the chances of the experts, lawyers and judge, jury or tribunal misunderstanding what the experts are saying.205
5.26 The Federal Court, in its submission to the Australian Law Reform Commission, stated that:
It has been the judges' experience that having both parties' experts present their views at the same time is very valuable. In contrast to the conventional approach, where an interval of up to several weeks may separate the experts' testimony, the panel approach enables the judge to compare and consider the competing opinions on a fair basis. In addition, the Court has found that experts themselves approve of the procedures and they welcome it as a better way of informing the Court. There is also symbolic and practical importance in removing the experts from their position in the camp of the party who called them.206
Multi-member tribunal or panel
5.27 As valuation disputes progress, parties may wish to seek a binding determination from a Tribunal or similar body comprised of members with expertise in valuations. Examples of current multi-member specialist tribunals include the three-member Australian Competition Tribunal (formerly Trade Practices Tribunal).207 Such a Tribunal can be distinguished from other dispute resolution approaches by the following key features:
- headed by a judge or former judge as a legal expert;
- independent from the administrator/regulator such as the ATO;
- additional members may be subject matter experts such as valuers;
- the outcome is binding on the parties; and
- appeals may be made to the Federal Court only on matters of law.
5.28 The Administrative Review Council, in their report on the Administrative Review of Patent Decisions, noted considerable advantages in multi-member panel reviews:
There are considerable advantages in having review conducted by a multi- member panel which brings together expertise from a variety of disciplines. The Council believes that members with scientific or technical expertise would assist the Tribunal to appreciate the technical issues involved in a patent decision, while legally qualified members could assist in analysing and resolving any legal issues. It notes that there is a concern that the use of experts may result in cases being judged on the basis of the expert's personal views rather than on the merits of the case. However, the Council considers that it is unlikely that tribunals, particularly multi-member tribunals, would not assess cases on their merits.208
Expert valuer conferencing
5.29 The IGT has previously made a recommendation in his ADR review that, if both parties agree, the ATO should:
… adopt expert valuer conferencing like those utilised by the Federal Court, to ensure that conflicting experts are afforded an opportunity to meet independently and discuss their different expert opinions with a view to resolving or narrowing these differences.209
5.30 Although the ATO has updated its ADR practice statement to include expert valuer conferencing, the IGT notes that taxpayer valuers do not have access to the ATO's valuers until the formal dispute stage.210
5.31 The IGT is of the view, therefore, that the ATO could make greater use of this approach in a less formal way during audit and objection stages of valuation disputes.
5.32 Difficulties in gaining access to the ATO's valuers may stem from the additional costs the ATO may incur in making its valuers available for meetings or conferences. The lack of an explicit ATO procedural framework for ATO officers to respond to requests for such access, especially in a compliance context, may add to these difficulties. The IGT also notes that, unlike the IRS's valuators and HMRC's VOA and SAV valuers, the ATO's valuers do not have the same level of autonomy or authority to directly negotiate a value with the taxpayer.
5.33 The IGT has observed in previous reviews211, that the most effective way to test the views of two experts with differing opinions is to provide those experts with an opportunity to discuss their competing views with each other and reach a common understanding of the strengths and weaknesses of each other's views. Such a process has been found, if not to resolve issues in dispute, to narrow those issues and provide each party with a greater appreciation of the litigation risks.
5.34 This issue arose more specifically in the IGT's Review of the ATO's Management of Transfer Pricing Matters where stakeholders raised concerns that they could not gain access to the ATO's transfer pricing specialists (either internal or external) with the risk that the ATO specialists had provided advice to ATO officers based on incorrect assumptions that the latter had provided. As a result, the ATO agreed to the IGT's recommendation that, with respect to transfer pricing compliance activities, the ATO ensure:
- specialist units engage with taxpayers and their advisers where requested and appropriate; and
- at the outset, taxpayers and their advisers are made aware that they are able to, and how they may request, access to the various specialist units.212
5.35 Private sector valuers who were consulted during this IGT review also observed that, from their experience, ATO-taxpayer disputes may be resolved quicker or narrowed where expert conferencing approaches are used, particularly because taxpayers are likely to better appreciate the independence of the ATO valuers.
5.36 In the IGT's view, in addition to the implementation of existing IGT recommendation relating to expert valuer conferencing213, the ATO could further promote their use by, for example, updating the current Market valuation for tax purposes publication to outline various dispute resolution mechanisms, including the availability of expert valuer conferencing. Internal staff guidance could also be updated to ensure that ATO officers managing the risk of valuation disputes are better prepared to offer and manage such an approach.
5.37 Whilst the IGT appreciates the usefulness of expert reports in assisting the judiciary to understand the areas of disagreement, they can be costly to produce and their use may not be justified where, for example, the ATO and the taxpayers are still attempting to resolve the dispute without the intervention of a third party.
5.38 The IGT is of the view that the use of an expert report may be justified in circumstances such as where direct expert conferencing has already taken place and areas of dispute remain. However, this must be balanced with the additional cost and time associated in preparing such a report.
Jointly instructing separate valuers
5.39 The IGT is of the view that where taxpayers and the ATO wish to retain their own valuer, jointly instructing these valuers reduces the risk of divergent valuations. The process of agreeing on the instructions beforehand in itself presents a valuable opportunity to identify differences which may need to be reconciled before the respective valuations are undertaken.
Jointly appointed valuers or third experts
5.40 In the ADR review, the IGT had recommended that the ATO adopt a more open process that seeks to accommodate joint appointment of valuers. In these circumstances, the parties were to agree on certain criteria. The ATO agreed with this recommendation and noted that, in their experience with valuation disputes, 'most taxpayers do not wish to share an expert and generally prefer to retain their own valuation expert.'214 In such cases the ATO could consider jointly instructing separate valuers as mentioned above.
Early Neutral Evaluation (ENE)
5.41 The IGT has noted in his ADR Review that:
There is considerable merit in the use of ADR, and in particular early neutral evaluation, in the resolution of valuation disputes which are not resolved through direct discussions between the ATO and taxpayers. In such cases, the IGT considers that the matter should default to ADR prior to the finalisation of an audit, objection or the matter proceeding to litigation.215
5.42 The IGT notes the benefits of the ENE process but the costs may be prohibitive for taxpayers with limited resources where the evaluator is drawn from a specialised or limited pool of experts. Although the ENE process may be the most effective and efficient means to resolve hotly-contested complex factual issues, the ATO could explore more cost effective ways to implement ENE for smaller taxpayers.
5.43 The IGT is of the view that there may be appropriate circumstances in which a tax-related valuation matter may be determined by a single valuer. For example, the MVPR process allows a taxpayer to obtain an original valuation 'through' the ATO. In these circumstances, it may be possible that such a valuation is the only one undertaken for that issue. It is the taxpayer's prerogative, however, to challenge that valuation if they see fit.
5.44 In terms of using valuers as single experts in the litigation context to save costs, the IGT is of the view that such savings may be limited as both parties are likely to incur cost of engaging shadow experts. Furthermore, these shadow experts are not bound by a duty to assist the Court and would not be subject to the same rigour and cross-examination as expert witnesses providing evidence in court.
5.45 The IGT also notes that, although the Federal Court has the discretion to appoint single expert witnesses, its Practice Note CM7 Expert witnesses in proceedings in the Federal Court of Australia focuses on situations where each litigant has retained their own expert witness.
5.46 The IGT notes the benefits of hot tubbing in a litigation context. However, it may not have as much utility during compliance activities or the objection stage, whilst the ATO and taxpayer are seeking to resolve a dispute or potential dispute without engaging any further third parties.
Multi-member tribunal or panel
5.47 The IGT notes the benefits of establishing a multi-member tribunal or panel, however, new legislation would be needed to establish such a new tribunal and, in particular, give effect to the binding nature of its decisions.
5.48 The Administrative Appeals Tribunal (AAT) currently has the capacity to convene multi-member panels containing technical specialists and already operates panels with members that have expertise in the fields of 'accountancy, aviation, engineering, law, medicine, pharmacology, military affairs, public administration and taxation.'216 Therefore, the AAT could more readily convene a specialist panel some members of which may be valuers. The current AAT membership, however, has limited expertise in the field of valuations and there would be costs associated with expanding the current AAT membership to include valuation expertise.
The IGT recommends that the ATO:
- ensure that it facilitates taxpayer requests for expert valuer conferencing on competing valuations to reach a common understanding of inputs and methodologies used by each valuer, the resulting valuation and the reasons for it;
- make taxpayers aware that they can request expert valuer conferencing as mentioned at (a) above; and
- in its guidance relating to valuations, update the range of dispute resolution approaches that may be used to include joint instruction of separate valuers, joint appointment of valuers and expert valuer conferencing.
In relation to 5.1(a) – Agree
In relation to 5.1(b) – Agree
In relation to 5.1(c) – Agree
The ATO agrees that more may need to be done to improve awareness and facilitate access. Taxpayers may already request expert valuer conferencing. Paragraphs
57-59 of Practice Statement PS LA 2013/3 Alternative Dispute Resolution (ADR) in ATO Disputes covers the process of expert valuer conferencing to discuss how their different valuations were obtained.
184 IGT, Review into the Australian Taxation Office's Use of Early and Alternative Dispute Resolution (July 2012) Recommendations 4.4 and 4.5. See also IGT, Review into Aspects of the Tax Office's Settlement of Active Compliance Activities (December 2009), where the ATO agreed to Action Item 24 to review settled valuation cases to identify and test early dispute resolution opportunities for valuation cases.
185 Above n 161 at .
189 ATO, Alternative Dispute Resolution (ADR) in ATO disputes, PS LA 2013/3 (1 August 2013) paras -.
190 Federal Court Rules 2011 r 23.15(c).
191 Above n 161 at .
193 New South Wales Law Reform Commission, Expert Witnesses, Report 109 (2005) para [4.36].
194 Family Law Rules 2004 r 15.49.
195 Uniform Civil Procedure Rules 1999 (Qld) r 429H.
196 Uniform Civil Procedure Rules 2005 (NSW) r 31.19-54; See also Justice Peter McClellan, 'Expert Witnesses – The Experience of the Land and Environment Court of New South Wales' (Paper presented at the XIX Biennial LAWASIA Conference, 20 March 2005) p 12.
197 Family Law Rules 2004 r 15.42, see also Uniform Civil Procedure Rules 1999 (Qld) r 423(c).
198 Family Law Rules 2004 r 15.50; Uniform Civil Procedure Rules 1999 (Qld) r 429H(7).
199 See Federal Court Practice Note CM 7 Expert witnesses in proceedings in the Federal Court of Australia.
200 Federal Court Rules 2011 r 23.01.
201 Retail Leases Act 1994 (NSW) s 31.
202 Retail Shop Leases Act 1994 (Qld) s 28.
203 Federal Court Rules 2011 r 23.15(f)-(g).
204 Federal Court Rules 2011 r 23.15(h).
205 Steven Rares, 'Using the “Hot Tub” – How Concurrent Expert Evidence Aids Understanding Issues' (12 October 2013) para 4.
206 Australian Law Reform Commission, Managing Justice: A Review of the Federal Civil Justice System, Report No 89 (2000) para [6.117].
207 The Copyright Tribunal of Australia is another similar specialist Tribunal which, like the Australian Competition Tribunal, is administered by the Federal Court of Australia.
208 Administrative Review Council, Report to the Attorney-General Administrative Review of Patent Decisions, Report No 43 (1998) para [2.41].
211 IGT, Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices (September 2011) para [9.45].
216 Administrative Appeals Tribunal, Annual Report 2012-13 (2013) p 14.