Conduct of the review
1.1 This is the Inspector-General of Taxation's (IGT) report of his review into the Australian Taxation Office's (ATO) use of early and alternative dispute resolution (ADR). The report is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (IGT Act 2003).
1.2 This review was commenced, pursuant to subsection 8(1) of the IGT Act 2003, following concerns expressed during consultation on the IGT's forward work program which was announced in April 2011. Notwithstanding the ATO's high level commitment to enhancing its dispute resolution framework to resolve tax disputes at an earlier point in time, it was asserted that in practice ATO officers were still reluctant to engage with taxpayers to resolve tax disputes instead preferring taxpayers to challenge decisions through formal channels such as those set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953).
1.3 Stakeholder submissions to the IGT noted that a lack of understanding of dispute resolution techniques on the part of officers at various levels within the ATO, the inability to depart from established procedures and policies in appropriate cases and senior officers not being involved until late in the dispute process all contributed to foregone opportunities for the ATO and taxpayers to address issues in a timely and cost-effective manner without resort to litigation.
1.4 The Commissioner of Taxation (the Commissioner) also requested that the IGT consider undertaking this review pursuant to paragraph 8(3)(b) of the IGT Act 2003.
1.5 Terms of reference for this review were announced on 26 July 2011. Appendix 1 reproduces a copy of the terms of reference and submission guidelines for this review.
1.6 The IGT received a wide range of submissions from a very diverse stakeholder group. The IGT met with interested taxpayers, tax practitioners and their respective representatives bodies as well as legal experts and practitioners across the dispute resolution spectrum.
1.7 The IGT review team spoke with ATO staff involved in litigation to obtain a qualitative understanding of the factors which assist to resolve matters without resort to litigation. In addition, the IGT examined case documents from the ATO's enterprise case management system — Siebel — as well as those specifically requested and provided by ATO staff.
1.8 The IGT also worked progressively with ATO senior management to distil the areas for improvement and to agree on specific actions. The IGT discussed these matters with interested external stakeholders, including members of the National Alternative Dispute Resolution Advisory Council (NADRAC) and the Attorney-General's Department.
1.9 In accordance with section 25 of the IGT Act 2003, the Commissioner was provided with an opportunity to make submissions on any implied or actual criticisms contained in this report.
Structure of the report
1.10 The remainder of chapter 1 defines ADR, considers the current federal government framework and initiatives driving ADR as well as international approaches to dispute resolution.
1.11 The rest of the report is structured as follows:
- Chapter 2 outlines the ATO's current work program in relation to dispute resolution and a number of initiatives which have been implemented or will be implemented in the coming months;
- Chapter 3 examines ways in which the ATO may enhance its early engagement capability with the aim of identifying and addressing issues as and when they arise during the compliance process;
- Chapter 4 discusses when ADR may be appropriate and how it should be initiated;
- Chapter 5 looks at different types of ADR and different types of ADR practitioners and considers when each may be appropriate in a given taxation dispute. This chapter will also outline the need for establishing clear rules of engagement between the ATO and taxpayers when participating in ADR; and
- Chapter 6 examines stakeholder concerns regarding the independence of the ATO's management of objections, its conduct of litigation and the merits of establishing a structural and procedural separation between the ATO's audit and objection/litigation functions.
What is ADR and early dispute resolution?
1.12 ADR is a broad term. It may be used to describe a process involving an impartial person (the ADR practitioner) who assists the parties to resolve issues between them through means other than litigation. On the other hand it can encompass techniques and approaches to prevent and manage disputes without a third party's intervention.1
1.13 Throughout this report, where 'ADR' is used the IGT is referring to those processes in which an ADR practitioner is retained to assist the parties to arrive at a negotiated outcome, unless the specific context suggests otherwise or the where the IGT expressly expands the definition.
- prevent unnecessary disputes;
- reduce the frequency and severity of disputes; and
- ensure that early effective and legitimate resolution of disputes takes place.
1.15 Early dispute resolution is sometimes abbreviated to 'EDR'. However, as the use of the acronym 'EDR' may cause some confusion with External Dispute Resolution processes,4 the IGT has not used this acronym in the report, other than where it is a direct quote from a reference document.
Federal government initiatives
1.16 In 2009, the Federal Government released the Access to Justice Taskforce's report, A Strategic Framework for Access to Justice in the Federal Civil Justice System5 and adopted its central recommendations for a strategic framework to 'guide consideration of future justice reforms and decisions about resourcing to ensure that the justice system is accessible and appropriate.'6
1.17 The strategic framework comprises five principles for access to justice policy-making and methodology to translate the principles into practice.7 One of the methodologies is to ensure that there are clear pathways to fair and equitable outcomes through, amongst other things, a culture change to focus on dispute prevention and resolution and greater use of ADR.8
1.18 In line with the strategic framework, the government has sought to drive a cultural change towards earlier and more effective use of dispute resolution techniques other than litigation. The former Commonwealth Attorney-General, the Honourable Robert McClelland MP, in particular voiced his desire for 'ADR to be seen as built into the fabric of our system of justice' and his encouragement of 'government agencies to move to a "resolution culture".'9
1.19 To facilitate this desired cultural shift towards more active and earlier resolution of disputes on the part of government agencies, the federal government has undertaken a number of initiatives including amendments to the Legal Services Directions 2005 (LSD 2005)10 and the enactment of the Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (AJCLRA Act 2009) and the Civil Dispute Resolution Act 2011 (CDRA 2011) to direct the Commonwealth and private litigants to consider options, including ADR, to resolve disputes prior to commencing litigation.
1.20 Another initiative is the proposed amendment of the Administrative Appeals Tribunal Act 1975 (the AAT Act 1975) in the form of the Access to Justice (Federal Jurisdiction) Amendment Bill 2011 to 'enable regulations to be made to empower the Administrative Appeals Tribunal (the AAT) to impose fees on government agencies that unsuccessfully appeal or defend decisions in proceedings in the AAT.'11
Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (AJCLRA Act 2009)
1.21 The enactment of the AJCLRA Act 2009 demonstrates a concerted effort on the part of government to effect a cultural change in the conduct of litigation so that, at the same time as resolving disputes justly, the following considerations are at the forefront:12
- focussing the Court, parties and their lawyers' attention on resolving disputes as quickly and cheaply as possible;
- reducing the costs of litigation;
- allocating resources in proportion to the complexity of the issues in dispute;
- avoiding unnecessary delays; and
- management of the Court's judicial and administrative resources as efficiently as possible.
1.22 Central to the reforms is the addition of sections 37M (the overarching purpose) and 37N into the Federal Court of Australia Act 1976 (FCA Act 1976).
1.23 Relevantly, subsection 37M(1) of the FCA Act 1976 states:
37M (1) The overarching purpose of the civil practice and procedure provisions is to facilitate the just resolution of disputes:
- according to law; and
- as quickly, inexpensively and efficiently as possible.
1.24 Subsections 37N(1) and 37N(2) of the FCA Act 1976 provide:
37N (1) The parties to a civil proceeding before the Court must conduct the proceeding (including negotiations for settlement of the dispute to which the proceeding relates) in a way that is consistent with the overarching purpose.
37N (2) A party's lawyer must, in the conduct of a civil proceeding before the Court (including negotiations for settlement) on the party's behalf:
- take account of the duty imposed on the party by subsection (1); and
- assist the party to comply with the duty.
1.25 The Court may impose adverse costs orders against a litigating party or their lawyer, personally, pursuant to section 43 of the FCA Act 1976, for a failure to conduct matters in a way which is timely, efficient, economical and in line with the overarching purpose.13
1.26 These reforms impact on all users of the Federal Court of Australia (Federal Court), including the ATO as one of the largest users of the Federal Court system. In particular, while the provisions do not prescribe what the parties and their representatives must do to ensure they act consistently with the overarching purpose, the explanatory memorandum to the Access to Justice (Civil Litigation Reforms) Bill 2009 provides examples of conduct which may be inconsistent and therefore in breach of the duty imposed by section 37N. These include:14
- unreasonably refusing to participate in conciliation, mediation, arbitration or other alternative dispute resolution opportunities, because alternative dispute resolution provides a mechanism for the parties to resolve their dispute early, quickly and cheaply;
- failing to act in good faith in attempting to resolve or narrow issues in the proceedings;
- unreasonably rejecting an offer of settlement of part or whole of the proceeding; or
- pursuing issues in the proceeding that had no reasonable prospect of success. This might include issues that were vexatious or frivolous.
Civil Dispute Resolution Act 2011 (CDRA 2011)
1.27 In 2011, the government enacted the CDRA 2011 which came into operation on 1 August 2011. The CDRA 2011 gives effect to a number of recommendations made by NADRAC in its 2009 report, The Resolve to Resolve — Embracing ADR to improve access to justice in the federal jurisdiction (NADRAC's 2009 report).15
1.28 Specifically, the overall aims of the CDRA 2011 are to:16
- change the adversarial culture often associated with disputes;
- have people turn their minds to resolution before becoming entrenched in a litigation position; and
- ensure that if a matter does progress to court, the issues are properly identified, ultimately reducing the time required for a court to determine the matter.
1.29 The CDRA 2011 applies to all proceedings instituted in either the Federal Court or Federal Magistrates Court, except those which have expressly been excluded.17 Sections 6 and 7 require:
6 An applicant who institutes civil proceedings in an eligible court must file a genuine steps statement at the time of filing the application.
7 A respondent in proceedings who is given a copy of a genuine steps statement filed by an applicant in the proceedings must file a genuine steps statement before the hearing date specified in the application.
1.30 Subsection 4(1A) of the CDRA 2011 provides that a person takes a genuine step to resolve a dispute 'if the steps taken by the person in relation to the dispute constitute a sincere and genuine attempt to resolve the dispute, having regard to the person's circumstances and the nature and circumstances of the dispute.'
1.31 Without limiting the scope of 'genuine steps', the CDRA 2011 relevantly provides by way of example that such steps may include 'considering whether the dispute could be resolved by a process facilitated by another person, including an alternative dispute resolution process'. Further, '[i]f such a process is conducted but does not result in resolution of the dispute [then] consider ... a different process', such as 'attempting to negotiate with the other person, with a view to resolving some or all the issues in dispute, or authorising a representative to do so.'18
1.32 Taxation disputes are generally conducted under Part IVC of the TAA 1953, which provides taxpayers with rights of review to certain ATO decisions. As the Act empowers taxpayers to initiate the exercise of these rights, at first instance, the Commissioner will be the respondent in either the AAT or the Federal Court. Notwithstanding this, as a participant in the litigation, the ATO's conduct will nonetheless be governed by the requirements of both the AJCLRA Act 2009 and the CDRA 2011.
1.33 The CDRA 2011, together with the AJCLRA Act 2009, further supports the desired 'cultural change in civil dispute resolution from adversarial litigation.'19
Legal Services Directions 2005 (LSD 2005)
1.34 As an agency under the Financial Management and Accountability Act 1997, the ATO is bound by the LSD 2005 and the Commonwealth's obligation to act as a model litigant (outlined in appendix B to the LSD 2005).20
1.35 Specifically, the obligation to act as a model litigant in the handling of claims and litigation requires Commonwealth agencies to act fairly and honestly by, inter alia:
2(d) endeavouring to avoid, prevent and limit the scope of legal proceedings wherever possible, including by giving consideration in all cases to alternative dispute resolution before initiating legal proceedings and by participating in alternative dispute resolution processes where appropriate.
2(e) where it is not possible to avoid litigation, keeping the costs of litigation to a minimum, including by:
- not requiring the other party to prove a matter which the Commonwealth or the agency knows to be true;
- not contesting liability if the Commonwealth or the agency knows that the dispute is really about quantum;
- monitoring the progress of the litigation and using methods that it considers appropriate to resolve the litigation, including settlement offers, payments into court or alternative dispute resolution; and
- ensuring that arrangements are made so that a person participating in any settlement negotiations on behalf of the Commonwealth or an agency can enter into a settlement of the claim or legal proceedings in the course of the negotiations.21
1.36 Additionally, paragraphs 5.1 and 5.2 of the model litigant obligation require:22
5.1 The Commonwealth or an agency is only to start court proceedings if it has considered other methods of dispute resolution (for example, alternative dispute resolution or settlement negotiations).
5.2 When participating in alternative dispute resolution, the Commonwealth and its agencies are to ensure that their representatives:
- participate fully and effectively; and
- subject to paragraph 2 (e) (iv), have authority to settle the matter so as to facilitate appropriate and timely resolution of a dispute.
1.37 In line with recommendation 8.4 of NADRAC's 2009 report,23 the former Attorney-General also indicated his intention to amend the LSD 2005 'to require agencies, unless an exemption is obtained, to develop and regularly review dispute management plans requiring appropriate use of ADR.'24
Access to Justice (Federal Jurisdiction) Amendment Bill 2011
1.38 As mentioned earlier, the government recently proposed a new sub-section to be added to section 70 of the AAT Act 1975 which would empower the AAT to impose fees on government agencies that unsuccessfully appeal or defend proceedings in the AAT.
1.39 The explanatory memorandum notes that:25
The purpose of this fee is to provide a financial incentive to promote better primary decision making and early resolution of issues where possible. It is envisaged that, under the regulations, the Tribunal will have the discretion not to impose the fee where a government agency had compelling reasons to proceed to a hearing. Examples of such situations include where new information is provided at the hearing that was not available to the primary decision maker.
1.40 The bill further reinforces the government's commitment to instilling a dispute resolution culture and reaffirms the obligation of all federal agencies to seek alternate means of resolving disputes before initiating or progressing litigation.26
International approaches to dispute resolution
1.41 The federal government's initiatives generally accord with international efforts to embed a culture of dispute resolution rather than litigation in the public service.27 'With companies and government increasingly seeking to reduce costs and streamline processes, tax litigation holds less and less appeal; there is a growing recognition on both sides that an alternative approach to resolving disputes is needed.'28
1.42 Moreover, the need to maintain working relationships after a dispute is resolved has led to revenue authorities implementing initiatives to address tax disputes outside of litigation.29
1.43 Internationally, a number of different initiatives to resolve tax disputes without litigation have been identified. For example, in 2001, the US Internal Revenue Service (IRS) launched the Fast Track Settlement (FTS) process for large corporate taxpayers. Briefly, the FTS involves negotiations between the IRS and large taxpayers which are facilitated by an officer from the Office of Appeals, an independent dispute resolution unit within the IRS. The program has seen significant success with 86 per cent of cases being resolved and the appeal timeframes being reduced from 684 days to 84.30 The IRS also has a number of other initiatives aimed at resolving disputes early including Fast Track Mediation, Early Referral and Post Appeals Mediation.31
1.44 Similarly, the New Zealand Inland Revenue Department's (IRD) structured approach mandates a conference between the IRD and the taxpayer where the IRD does not accept the taxpayer's contentions in response to a Notice of Proposed Adjustment. The purpose of the conference is to enable the parties to 'identify and clarify facts and issues and allow any disputed facts to be resolved. A conference provides an opportunity for the parties to state the facts and define the issues clearly and concisely.'32
1.45 As will be discussed in Chapter 3, the United Kingdom's Her Majesty's Revenue and Customs (HMRC) agency recently launched two dispute resolution pilots aimed at resolving large and complex cases and disputes involving small and medium enterprises through facilitated discussions (and ADR, if necessary) without resort to litigation.
1 National Alternative Dispute Resolution Advisory Council (NADRAC), National Principles for Resolving Disputes and Supporting Guide, Canberra, April 2011, viewed on 1 February 2012, p. 65.
3 ibid., p. 5.
5 Attorney-General's Department, A Strategic Framework for Access to Justice in the Federal Civil Justice System, Canberra, 2009, viewed 10 November 2011.
6 ibid., p. 61.
7 ibid., p. 62.
8 ibid., p. 64.
9 R. McClelland MP, Attorney-General, Speech delivered at the ADR in Government Forum, 4 June 2008, Canberra, viewed on 21 June 2011.
10 Justice M. Kellam, Welcome Address to the ADR in Government Forum, 4 June 2008, Canberra, viewed on 21 June 2011, p. 2.
11 Explanatory memorandum, Access to Justice (Federal Jurisdiction) Amendment Bill 2011, p. 66.
12 Explanatory Memorandum, Access to Justice (Civil Litigation Reforms) Amendment Bill 2009, p. 3.
13 Modra v State of Victoria  FCA 240.
14 ibid., para. 30.
15 NADRAC, The Resolve to Resolve - Embracing ADR to improve access to justice in the federal jurisdiction, 2009, Canberra, September 2009, viewed on 27 June 2011.
16 ibid., p. 4.
17 Part 4 of the Civil Dispute Resolution Act 2011 (CDRA 2011).
18 See paragraphs 4(1)(d), (f) and (g) of the CDRA 2011, respectively.
19 Explanatory Memorandum, Civil Dispute Resolution Bill 2010, p. 3.
22 ibid., p. 25.
23 NADRAC, above n. 15, p. 120; Australian Law Reform Commission, Managing Justice, ALRC Report 89 (2000) Recommendation 69, p. 478.
25 Above n. 11.
26 On 29 March 2012, the Senate Legal and Constitutional Affairs Legislation Committee recommended that the Senate pass the Bill. See: Senate Legal and Constitutional Affairs Legislation Committee, Access to Justice (Federal Jurisdiction) Amendment Bill 2012 [Provisions], March 2012, Canberra, viewed on 20 April 2012, p. vii.
30 ibid., p. 75.
31 S. Thomas, 'Overview of ADR Options at the IRS', Journal of Consumer and Commercial Law, Vol. 10, No. 3, pp. 126 - 129.