3.1 Whilst a strong dispute resolution framework and capability is essential, the overarching aim for both the ATO and taxpayers should be the prevention of unnecessary disputes.
3.2 The IGT considers that the ATO and taxpayers should work towards building and maintaining a kind of engagement which minimises the occurrence of disputes by developing a clear understanding of each other's position on the facts, evidence and findings of fact. An outcome of such a process may be the development of clear points of agreement or disagreement (as the case may be) and, in the latter case, an understanding of the reasons for such disagreement.
3.3 In the Large Business review the IGT noted that 'agreeing facts assists in maximising understanding of issues and minimising dispute-related costs and better directs evidentiary needs.'91 The report recommended, amongst other things that:92
... the ATO should implement a process that is designed to:
- establish the facts and issues at the early stages of the audit process, by providing taxpayers with a draft Statement of Facts before conducting significant detailed technical legal analysis;
- provide the taxpayer with an opportunity to clarify and correct the draft Statement of Facts by way of explanation or provision of additional information;
- revise this statement as is considered appropriate; and
- communicate the Statement of Facts (as revised) to the taxpayer, noting particularly where there may be a disagreement as to facts or findings of fact.
3.4 The ATO disagreed with the IGT's recommendation, noting:93
... the ATO position paper includes a statement of the relevant facts (as we understand them) and is provided to the taxpayer for comment prior to us concluding our view. It is developed through progressive consultation and discussion with the taxpayer to assist us in establishing the relevant facts.
3.5 The ATO further noted, inter alia:94
While we appreciate the sentiment and underlying intent of this recommendation, we consider that it reflects a linear approach that does not adequately recognise the complexity of large market casework. It suggests the facts can be established independently of and prior to undertaking our analysis. The facts are not at large. They need to be relevant and that relevance is determined by the legal issues in dispute. Your recommendation 8.8 recognises this.
In the large market context, disputed 'facts' are frequently about conclusions of fact, which themselves are only developed through the technical analysis. It is neither realistic nor practical to suggest that a meaningful Statement of Facts can always be developed in advance of that analysis.
The imposition of a linear approach would present opportunities for the small number of taxpayers and advisers who choose to adopt a less than co-operative stance to engage in tactics designed to delay our teams in being able to settle such a statement.
3.6 The ATO has stated that it adopts a risk-based approach to audits. Relevantly, this approach should ensure that at the earliest interaction between the ATO and the taxpayer, the parties would have a general appreciation of the broad tax law issues that are in contemplation, albeit that this may require more detailed consideration at a later stage depending upon the specific nature of the inquiry or dispute.
3.7 The IGT's recommendation 8.2 in the Large Business review, and his recommendation 3.1 here, are predicated on the understanding that armed with an appropriately risk-differentiated approach to reviews and audits, ATO officers should be able to engage with taxpayers in working together to identify facts and evidence which would either prove or disprove the risks currently the subject of audit or review.
3.8 The ATO has also reported that a significant portion of its active compliance activities are high-volume data-matching exercises in which information received from third parties is matched against individual income tax returns and other income statements with adjustments made in relation to omitted income (for example, bank interest) or over-claimed entitlements.95 Further, the ATO states in a recent publication that, in the 2010-11 year, there were 434,000 audits and reviews which resulted in a liability adjustment, and 17,400 were disputed through objections.96
3.9 Acknowledging that market segments differ, requiring different approaches by the ATO in its active compliance activities, the IGT considers that other than in situations such as the high volume data-matching cases identified above, there is nothing which would prevent the ATO and the taxpayer from achieving a shared understanding of each other's respective positions in cases where detailed legal analysis and application of the law to the facts is required. Such an understanding must stem from the facts and evidence, an identification of any gaps in those facts and evidence and what further information may facilitate a better or clearer understanding of the matter in dispute.
3.10 The IGT is not suggesting that the parties should agree to facts and evidence divorced from the legal context. On the contrary, the ATO's risk-differentiated approach to risk reviews and audits should provide some underlying legal basis or question needing to be tested.
3.11 Furthermore, the IGT does not suggest that the parties should seek to agree on all facts and evidence in all cases prior to undertaking detailed legal analysis. As in the Large Business review, the IGT and stakeholders recognise that from time to time, agreeing on facts may not always be clear cut or possible. In these situations the key is to ensure that both parties understand the points of concern or dispute and the nature of evidence or explanation that may be required to persuade the other party to reach agreement on the facts.97 In other words, the parties may agree to disagree but appreciate what is required to reach agreement on facts.
3.12 It should be noted that information on the ATO's website, as referred to in the previous chapter, and on its intranet suggests that the ATO also shares this view.98 For example, the ATO's intranet page entitled 'Engaging with the Taxpayer' instructs its staff that interaction with taxpayers 'provides an opportunity to reach a common understanding or agreement, as early as possible on the facts and issues of the case, especially those that may form the basis of an ongoing dispute.'99 The ATO's dispute risk procedures also make the same point to its staff.100
3.13 Accordingly, the IGT remains of the view that agreeing, or agreeing to disagree, on the facts as early as possible is crucial to achieving early resolution or at the very least narrowing points of dispute. This shared understanding, properly communicated and recorded, is likely to:
- assure taxpayers that their position has been fully considered, even if the parties cannot ultimately agree;
- assist the parties to determine what matters are in contention;
- assist in determining whether these may be addressed by direct discussions or the provision of further information; and
- assist in determining whether engagement in early dispute resolution or ADR may assist to resolve any contentious matters. This should optimally be done at the earliest point in the compliance process.
To foster and encourage an open and continuous dialogue between the ATO and taxpayers during risk reviews and audits, the IGT recommends that, where legal analysis and application of the law to the facts is required, the ATO should, before undertaking detailed analysis and application of the law:
- ensure the taxpayer understands the nature of the ATO's concerns;
- afford the taxpayer an opportunity to present their own understanding of the facts, whether in writing or in conference with relevant ATO officers, or a combination of the two as the case may be;
- at the earliest practicable point in time during the compliance process, clearly communicate its understanding of the facts of a case to the taxpayer; and
- ensure that the taxpayer's view of the facts is concisely summarised in any correspondence, interim audit reports, position papers or other relevant document and, where possible, communicate the reasons why it has disagreed with the taxpayer's understanding of the facts.
Agree in principle.
We agree with the underlying premise that there should be clear and ongoing communication with the taxpayer on both the facts and issues as our thinking develops during a case. We also encourage taxpayers and their advisers to engage in open and continuous dialogue with the ATO at all stages of a matter.
We note that the facts are not at large, particularly in large and complex cases and the relevance of facts is often determined by the legal issues in dispute.1
Nevertheless, we think there is merit in settling the facts as early as possible in any process and we would welcome a draft statement of facts from the taxpayer — given that they are best placed to provide the full facts. Where the taxpayer is willing to work co-operatively with us, we encourage an iterative process both in relation to facts and in the application of the law to those facts.
We note that paragraph 3.9 of the report recognises that, from a practical perspective, a different approach is necessary for higher volume cases. In such cases, we do provide taxpayers with a contact point and the opportunity to talk to us about their case.
1 Gordon, J (2007) Speech to ATO staff on information and evidence gathering.
3.14 In order to ensure that the parties are able to achieve a shared understanding of the facts (in agreement or disagreement as the case may be) at the earliest possible point, it is critical that there is sufficient and appropriate information exchange between the ATO and the taxpayer.
3.15 Submissions to the IGT have noted that where the parties possess sufficient information, this assists them to identify the matters in dispute, agree to those facts which are objectively ascertainable and to more effectively engage in early resolution of disputes or ADR. It was also noted in some submissions that where all relevant information was not available to either of the parties, engagement and discussions (whether directly or through ADR) may serve only to increase the number of interactions without any real outcomes, resulting in additional time and costs to the parties.
3.16 Unlike commercial litigants, the ATO is not a direct contracting party to the underlying transaction which may give rise to tax consequences and is sometimes required to investigate the transaction many years after the fact. As a result, the ATO relies on information obtained from taxpayers or third parties in its audit and review processes to assist it in arriving at a decision, assessment or determination.
3.17 Where the necessary information is not obtained, this can lead to technical decisions at the audit stage which are unsustainable. The ORR's sample of 145 objections cases revealed that in 72 of these, the appropriate information had been obtained at audit, 60 in which the ATO review team considered that the appropriate information was not obtained and 13 in which judgment was made regarding the information being obtained.101
3.18 The ATO's ORR examined 58 cases in which taxpayer objections were allowed in full and 50 cases in which the objection was allowed in part. The ORR found that in cases where objections were allowed in full, the assessor was of the view that in 31 cases the appropriate information was not obtained at audit and in 38 cases further evidence was provided by the taxpayer.102
3.19 In relation to cases where the objection was allowed in part, the assessors formed the view that in 23 cases the appropriate information was not obtained at audit and in 35 cases further evidence was provided which led to the objection being allowed in part.103
3.20 Importantly, the ORR noted that in almost all cases in which the appropriate information was obtained at audit, there was evidence of ongoing communication between the ATO and the taxpayer104 which potentially presents more opportunities for achieving a shared understanding.
3.21 Another source which may shed more light on information exchange between taxpayers and the ATO is the Early Resolution Reports (ERR).
3.22 The ATO has, for a number of years, maintained and analysed ERR which seek to capture information as to why the Commissioner conceded a case, why the taxpayer withdrew a case or why the matter settled prior to a court or tribunal hearing.105 The ATO considers that analysis of the ERRs will assist in identifying systemic issues and relevant insights which may be applied to improve, amongst other things, 'focus on ensuring that tax officers endeavour to resolve disputes at the earliest opportunity with the aim of minimising future litigation.'106
3.23 An ATO analysis of the ERRs for the 2010 financial year noted that taxpayers providing evidence late (after lodging an appeal) remains a significant reason for finalising litigation cases prior to hearings. The analysis found that, as a result of more evidence being provided, the ATO settled or conceded approximately 40 per cent of all non-scheme107 cases before a decision from a court or tribunal was handed down. In 63 per cent of these cases, the evidence had been previously requested before the litigation stage and in a further 29 per cent of cases, the taxpayer provided totally new, unexpected evidence.108
3.24 Statistics provided to the IGT by the ATO for the 2011 year showed that 77 non-scheme litigation cases were finalised prior to hearing as a result of further information being provided by the taxpayer to the ATO. This represents 43 per cent of all matters finalised prior to hearing. Of these, 42 cases (or 55 per cent) involved the taxpayer providing additional facts or evidence previously requested by the ATO and the remainder (45 per cent) were instances where the taxpayer provided new or unexpected information to the ATO.
3.25 At the IGT's request, the ATO also made available the text of the ERRs in relation to a random sample of cases which were conceded or otherwise settled prior to hearing in the AAT. A review of these provides some greater insight to some of the reasons why new information is provided, or requested, at the litigation stage. In a number of cases, it was clear that at the litigation stage, the opportunities created by the AAT case conferences enabled the parties to better understand the matters in dispute and to focus efforts on obtaining the appropriate information.
3.26 In one example, the taxpayer disputed a decision to disallow input tax credits due to the taxpayer being unable to produce tax invoices to substantiate the claims. At the litigation stage, consideration was given to alternate documentation which may be used to substantiate the claim. Through discussions between the ATO litigation and objections officers with the taxpayer and his tax agent, a settlement was reached to allow credits which could be substantiated with other information.
3.27 Submissions to the IGT also note that many matters settle following the filing of the taxpayer's evidence and prior to the hearing. Generally, it is agreed that dispute resolution processes will only work if the ATO and taxpayers communicate and exchange information about the facts and matters in dispute earlier so as to address misunderstandings and misconceptions. The same principle applies to situations in which the parties seek to achieve a negotiated outcome without resort to litigation.
3.28 However, often the taxpayer is uncertain as to why information is being sought, as the ATO does not tend to communicate its technical views until the position paper is issued.
3.29 In one case reviewed by the IGT, the taxpayer in question approached the ATO to engage in ADR prior to issuing an amended assessment to enable the taxpayer to provide the ATO with more facts to correct matters which the taxpayer considered the ATO had misunderstood. The IGT's review of the ATO officer's file note in this case revealed that the taxpayer felt the interaction had been one-way, that the ATO had not communicated its thinking or reasoning which resulted in the taxpayer being unable to appreciate the ATO's position.
3.30 This uncertainty may result in less focused, and a greater volume of, information being provided and is likely to reduce the opportunities for early resolution. Stakeholders consider that a better understanding of the ATO's thinking and reasons for the requested information will better assist both the taxpayers and their representatives to provide the ATO with information that is necessary in the circumstances.
3.31 From the ATO's perspective, especially in large complex matters, it is sometimes understandable that the technical position to be finally adopted is in formulation and remains so until it has an opportunity to review the available information. However, where this is the case, the IGT is of the view that earlier and more extensive engagement with taxpayers will provide greater clarity regarding what information is available to assist the ATO to better direct and focus its information gathering efforts.
3.32 The ATO's LBTC booklet provides LB&I taxpayers with a commitment of engagement and ongoing dialogue where information is requested as part of active compliance activities.109 A similar commitment to continuous dialogue and engagement is made to High Wealth Individual (HWI) taxpayers.110 This level of interaction provides a valuable opportunity for the ATO and taxpayers to better focus the scope of inquiry. The IGT considers this commitment should be made to all taxpayers, not just HWIs and those within LB&I.
3.33 The IGT recognises that in more extreme cases, especially those which concern criminal activity such as serious fraud or evasion, it may not be appropriate for the ATO to disclose its reasons for requesting certain information. In the IGT's view, those cases should be rare and where such cases are identified, they should be dealt with by the ATO's specialist Serious Non-Compliance business line.
3.34 In general, the IGT considers that the ATO should provide taxpayers with reasons as to why certain information is being sought. In the IGT's view, this would serve two purposes, being to:
- ensure taxpayers and their representatives have a greater understanding of the ATO's technical thinking and the reasons for requesting information; and
- enable taxpayers to more effectively engage with the ATO in delivering information which satisfies the ATO inquiry and minimises delay and expense.
3.35 Where meetings are conducted at the commencement of audits or other compliance activities, such as in the LB&I, ITX and Tax Practitioner and Lodgment Strategy (TPALS) business lines, the IGT is of the view that such meetings provide a valuable opportunity for the taxpayer and the ATO to come to a shared understanding of the scope of the compliance activity and information which may need to be provided.
3.36 Submissions to the IGT have expressed concern that where information is sought by way of correspondence, some taxpayers have expressed concern that such information may be misunderstood or otherwise not fully appreciated by the reviewing ATO officer. In these instances, it has been suggested that opportunities should be afforded to taxpayers and their representatives to both provide information and concurrently speak with the ATO officer about the information and explain the context in which they believe it should be considered and understood.
3.37 However, stakeholders have noted that such an approach is not always available as ATO officers seemed uncertain as to their ability to engage in this manner, perceive that they lack authority to do so or would be unduly influenced by the taxpayer's view of the facts.
3.38 In one example, representatives for the taxpayer who were responding to a risk review questionnaire sought to contact the ATO officer to engage him in discussions to explain the nature of the taxpayer's business and why a particular response may appear unusual in the general case but was fully understandable within the context of that industry. These representatives reported that it was difficult to engage with the relevant officer, and it was not until after the intervention of a more senior officer in the ATO that a meeting was arranged which resulted in the situation being understood.
3.39 The IGT has made a number of recommendations regarding information gathering requests in his Large Business review. Many of the issues above may be overcome or alleviated if these recommendations were adopted across all ATO business lines with appropriate modifications.
3.40 The IGT appreciates that the approach recommended below may not be able to be applied in cases where, for example, the ATO:
- is necessarily engaged in covert evidence gathering;
- is reliant on another government agency gathering and providing the evidence; or
- is necessarily exercising its powers of access without notice (for example, pursuant to section 263 of the Income Tax Assessment Act 1936 (ITAA 1936)).
3.41 Such cases, where they exist, should be in the minority and should not operate to prevent the ATO implementing the recommendation made below more broadly.
In line with the theme of recommendations made by the IGT in the Large Business review, the IGT recommends that the ATO should, when requesting necessary information from taxpayers:
- provide the taxpayer with an opportunity to discuss the scope, appropriateness and relevance of the information request and, to the extent possible, provide the reasons for the request;
- work with the taxpayer to identify alternative documents, to the extent possible, where there are significant difficulties in providing the requested documents; and
- provide the taxpayer with an opportunity to discuss the contents of the information provided.
Agree as tailored to each market segment.
We believe that this recommendation is more applicable to large, complex cases in the large business and small & medium enterprises markets. In relation to such cases we have implemented substantial further improvements to our processes in response to the Inspector-General's previous concerns as expressed in recommendation 7.2 in the Large Business review.
In the context of large audits or disputes the ATO has procedures to explain why we require requested information and we provide the taxpayer with an opportunity to discuss the contents of the information provided. The majority of taxpayers are willing to engage openly with us to progress issues in this way and we encourage such a reciprocal approach.
We remain committed to working with taxpayers to identify the most efficient way to respond to our information requirements. As part of this, we consider whether alternative information sources could assist in minimising compliance costs. However, there are times when we require specific documents and cannot always accept alternatives or substitutes.
For those more routine matters in other markets, including high volume requests, information requests are often made through correspondence. It is our practice to provide a contact point so that taxpayers can seek advice or discuss the request if they have questions. We think this opportunity substantially meets the broader thrust of this recommendation.
3.42 The ATO has extensive investigative powers which enable it to compel disclosure by taxpayers and their associates, as well as third parties, of required information and documentation.111 This power enables the ATO to gather information from third parties upon which it may seek to rely.
3.43 Stakeholders have expressed concern that this is sometimes done without the taxpayer being afforded an opportunity to inspect or comment on the additional information. This may hinder a taxpayer's ability to fully understand the putative case that may be in development against them or to address particular issues which may arise. Such an approach can seriously diminish the effectiveness of early engagement and increase the likelihood of protracted disputes, resulting in additional time and increased cost.
3.44 Stakeholders have advised the IGT that where this information is not provided by the ATO following an informal request, taxpayers have little option but to formally request documents under the Freedom of Information Act 1982, which adds time and cost for both the taxpayers and the ATO. Alternatively, where that FOI request does not yield necessary information, taxpayers are more inclined to commence litigation as this may enliven discovery processes under relevant Court rules.
3.45 Stakeholders have noted that this is undesirable and may be avoided where the ATO takes a more practical approach to information sharing. Indeed, this is the very same approach the ATO suggests that it would like taxpayers to adopt when responding to its information requests.
3.46 The ATO does not currently maintain a record of whether FOI requests relate to matters under compliance action (for example, audit or objection). As such, it is not currently possible for either the ATO or the IGT to ascertain the extent to which taxpayers need to rely on FOI to obtain information which would better enable them to understand the ATO's technical thinking during the end-to-end compliance process.
In order to assess the extent to which taxpayers are relying on the FOI process to ascertain relevant information from the ATO during compliance processes, the IGT recommends that the ATO:
- update its internal FOI record-keeping system to record whether FOI requests are made in relation to compliance cases; and
- publish the outcome annually thereafter to establish the extent to which taxpayers are using the FOI process during compliance activities in gaining access to relevant information.
Agree in part.
We agree to analyse this but we question whether all relevant taxpayers are relying on FOI to obtain information from the ATO during compliance processes. For example there were about 434,000 compliance activities including a significant number of high volume cases resulting in adjustments in 2010-2011 and in the same year about 850 FOI requests were received. In the vast majority of compliance activities taxpayers are not making FOl requests.
The analysis recommended will be included in work already underway aimed at expanding our analysis of FOI applications.
In relation to compliance activities the ATO has received FOI requests relating to long-running, complex cases which required consideration of hundreds of thousands of pages of information. Each of these requests can cost up to $500,000 or more in out-sourcing the work to a law firm to prepare documents for release to the applicants. Our early analysis of 2011-12 data shows we have spent about $1.3 million (45% of our FOI legal costs to date), dealing with FOI requests relating to 13 taxpayers, of which 5 related to Project Wickenby.
For publishing purposes, given the relatively small numbers of applications involved, we will need to balance public interest against the need to ensure taxpayers' right to secrecy is not infringed.
3.47 The IGT, in keeping with earlier comment, considers the ATO should generally adopt a policy that favours the release of information to assist taxpayers and their representatives to better appreciate the ATO's position.
3.48 Such a process is already in place for liquidators and trustees in bankruptcy where information is requested outside the FOI regime to assist in their work,112 and for unfair preference claims against the Commissioner. The IGT understands that this approach to information sharing has assisted both the insolvency practitioners and the Commissioner to settle a large number of disputes without resort to litigation, while also maintaining both sides' competing statutory obligations - the Commissioner's obligation to protect the revenue and the insolvency practitioner's obligation to act in the best interest of all creditors in maximising returns.
3.49 The ATO advises the IGT that it already encourages officers at the audit and objection stage to share information with taxpayers informally where such information, if disclosed, would not prejudice the ATO's ongoing investigation.
3.50 The IGT has found an example in which this has occurred through reviewing active compliance cases on the ATO's Siebel case management system. In that case, the taxpayer sought access to information held by the ATO in relation to the audit. The audit officer escalated through relevant senior officers within the business line and the FOI section and released the requested information without the need for formal application.
3.51 The IGT recognises that in some instances, it may be necessary for the ATO to maintain the confidentiality and anonymity of third parties who provide information to it as part of an ongoing investigation. Sometimes, the maintaining of anonymity of informants is necessary to protect their safety.
3.52 The IGT appreciates that in these sensitive cases, not all information may be able to be provided. However, a large amount of corroboration is needed when the ATO acts on information anonymously provided. The IGT considers that such considerations must necessarily be balanced against the right of taxpayers to examine and respond to any information on which the ATO may rely in formulating its position.
3.53 To an extent, the ATO seems to share the same view. An internal instruction to ATO staff provides:113
The tax officer must contact the taxpayer when an objection is expected to be disallowed in full or, in part due to acquiring information that the taxpayer is unaware of, which:
- concerns material facts, evidence or a technical view, or
- provides a very persuasive explanation of the basis of the audit position.
Additional information can be obtained from any source such as the audit decision maker, or subject or industry experts from either within or outside the ATO.
The tax officer must explain to the taxpayer how the additional information influences the ATO position and what information if any, would alter the ATO position.
3.54 This approach may go some way to assisting the taxpayer to better understand the ATO's decision but the IGT does not see any reason why it should only be limited to the objection phase of an end-to-end process as the ATO's information gathering powers are able to be utilised at other stages such as during an audit. Furthermore, while apprising the taxpayer of the impact of third party information on an ATO decision may be useful, unless the information is provided to the taxpayer they are deprived of an opportunity to directly address the accuracy, credibility and relevance of the information relied upon by the ATO.
3.55 The IGT considers that where the ATO seeks to rely on third party information in formulating its position or in rendering a decision, such information should first be provided to the taxpayer for comment. The instances in which the provision of such information would prejudice an ongoing investigation or jeopardise the safety and anonymity of informants should be rare.
3.56 The IGT is of the view that where such situations exist, the ATO should communicate to the taxpayer both why the totality of the information cannot be provided to them, and to provide the information in redacted form to the extent that this does not seriously prejudice an ongoing investigation or situations where confidentiality of individuals may need to be preserved for safet reasons. Ultimately, the taxpayer has a right to understand the case against them and the evidence used in that case.
Save where disclosure of requested information would seriously prejudice an ongoing investigation, the IGT recommends that the ATO:
- adopt and promote a policy of open and informal information sharing with taxpayers; and
- where information is not to be disclosed on an informal basis, that decision should be signed off by a senior officer with information access expertise and the reasons for this are communicated to the taxpayer.
Our approach is to share information with taxpayers in the spirit of this recommendation. This is outlined in the Large business and tax compliance booklet where we set out mutual expectations during compliance activities, including that both parties should provide relevant information in a timely manner.
In responding to disclosure requests, we do take account of our previous disclosures during audits, the time required to respond and administrative costs of such requests. It is our practice to provide clear and complete reasons where information is not to be disclosed on an informal basis.
We also encourage taxpayers and their advisors to take an open and informal approach to information sharing with us.
Case conferences with taxpayers
3.57 Submissions to the IGT have noted that where tax officers have sought to appreciate the commercial and factual nature of a taxpayer's business, there has been a better working relationship, leading to a common understanding of issues and concerns which were able to be addressed more efficiently. Conversely, where this does not occur, there was a tendency for issues to escalate to disputes requiring formal intervention.
3.58 In one case, the effectiveness of early engagement avoided what may otherwise be a dispute. In this case the ATO officer engaged with the taxpayers and their representatives to discuss responses to a risk review questionnaire which may be misconstrued but which were otherwise acceptable within the specific industry context.
3.59 In another case, the IGT was advised by a taxpayer that throughout the course of an audit, the ATO auditor failed to appreciate the nature of the taxpayer's business and refused to accept information presented to them to assist in their understanding both of the taxpayer's industry generally and the taxpayer's business specifically. This crystallised a dispute which the taxpayer challenged in an objection and subsequently in the AAT. The submission to the IGT suggested that had there been greater engagement by the ATO auditor with the taxpayer to inspect the business premises, the infrastructure and the books and records of the taxpayers, then the matter may have resolved rather than progressing through litigation.
3.60 As the ATO aspires to identify and resolve disputes early and as close to the original decision maker as possible, the IGT considers that a consistent and systematic approach to open engagement and communication between the parties is critical.
3.61 The ATO's internal repository of procedures, the Online Resource Centre for Law Administration (ORCLA), contains a number of documents which outline procedures for staff aimed at providing guidance and support for ATO officers who interact with taxpayers in the course of their duties. The 'Engaging with the taxpayer' page in ORCLA mentioned earlier directs that:114
During the life cycle of a dispute, there will be instances when the tax officer either identifies issues of concern or senses the taxpayer is likely to dispute the outcome. In these instances the tax officer must engage with the taxpayer as soon as possible.
3.62 The document goes on to further explain that:115
Interaction with the taxpayer includes phone and face-to-face discussions and provides an opportunity to:
- show the audit or objection is being conducted fairly and impartially;
- create a collaborative environment;
- request information necessary to reach a decision;
- communicate the ATO view of the relevant facts, evidence, application of the law and penalties;
- give the taxpayer an opportunity to respond to the ATO view, in particular where the view is based on information the taxpayer may not be aware of;
- actively listen to the taxpayer's arguments about facts and issues;
- reach a common understanding or agreement, as early as possible on:
- many aspects of the audit or objection; and
- the facts and issues of the case, especially those that may form the basis of an ongoing dispute;
- explore options for resolving the issues in dispute;
- discuss the future management of the issues that remain in dispute; and
- reach finality sooner.
3.63 The IGT considers that these new processes, properly implemented should provide taxpayers with greater opportunity and access to ATO officers to ventilate and discuss issues of concern with a view to resolving any disputes which may arise.
3.64 However, the instruction appears to presuppose the existence of a dispute before engagement should take place. The IGT is of the view that there is room to improve these communication opportunities both to enable the parties to better understand each other's positions and to identify facts and evidence which may assist to resolve any disagreement. In effect, communication and engagement opportunities between the ATO officer and taxpayers should be broadened and occur throughout the different stages of the compliance process and prior to disputes arising.
Case Conferences in the AAT
3.65 The AAT makes extensive use of case conferences in which an AAT Conference Registrar acts as an independent third party who brings the parties together to discuss the dispute, determine whether it can be settled at the conference, whether a formal ADR process may assist or if the matter cannot be settled, and how the matter can best be expedited for hearing and determination by a Tribunal Member.116 Case conferences are mandatory prior to a matter being listed for hearing.
3.66 Some submissions to the IGT have noted that the use of AAT case conferences has been particularly useful in tax disputes to bring to the ATO's attention information which is pertinent to the issues in contention and to be able to explain and clarify the information presented.
3.67 Indeed, in discussions with a number of ATO litigation officers who participate in the AAT case conferences, it has emerged that the intervention of the conference registrar, as a neutral third party, often assists the parties to better appreciate each other's respective positions, the evidentiary burden in proceeding to hearing and the opportunities which exist for resolution of the matter.
3.68 The high success rate of the AAT case conferences is illustrated by statistics which have been provided to the IGT. These show that of the 3400 tax matters finalised in the AAT during the three year period from 1 July 2008 to 30 June 2011, only 15 per cent were finalised by way of a decision on the merits following a hearing, with the remaining being resolved by way of agreement between the parties or the matter being withdrawn. During the same period, the statistics show that the AAT held 2866 conferences, 245 conciliations, 26 mediations and 26 early neutral evaluations or case appraisals. There were only 284 matters which progressed to substantive hearings.
3.69 In summary, the above AAT statistics show that over 90 per cent of AAT cases in the three years ending 30 June 2011, were resolved without progressing to hearing. This suggests that there is much room for improvement in settling issues earlier and not resorting to bringing matters to the AAT. The discussion that follows further explores these opportunities for improvement.
3.70 It should be noted that the AAT and the ATO adopt different methodologies when recording tax dispute matters. The ATO records one dispute for each taxpayer regardless of the number of tax years which that taxpayer is disputing. In contrast, the AAT records each disputed tax year as a separate matter.117 As such, the statistics recorded here for the AAT are not directly reconcilable with statistics reported by the ATO, such as those contained in the annual reports.118
Direct conferencing with taxpayers prior to litigation
3.71 Stakeholders have suggested that if the AAT case conferences were replicated by the ATO prior to formal proceedings being commenced, this may assist to address issues earlier. Others, while generally supporting the idea have cautioned the IGT against imposing an additional burden on disputants with processes which may protract and add to the cost of disputes.
3.72 One of these documents, on the ORCLA intranet webpage, the 'Case Conferencing' Document (CCD), encourages ATO officers to identify opportunities to conference with taxpayers in resolving disputes at their earliest point in time and provides some guiding instructions regarding what conferencing with taxpayers involves. 119
3.73 The CCD defines a case conference as a discussion, between taxpayers and their representatives on the one hand and the relevant ATO officers on the other, where there is an appointment, an agenda and a consideration of who will attend.120 In particular, the CCD notes, 'conferences can discuss matters such as legal issues in dispute, the correction of any factual errors, the provision of additional facts, or the administration of the dispute.'121
3.74 These ATO direct conferences are intended to occur well before legal proceedings are commenced and thus fall outside of the case conferencing process mandated by the AAT. They are intended to provide a forum for facilitated discussions to occur directly between the taxpayer and the ATO officer.
3.75 The ATO considers that such conferences may be useful to discuss complex issues or information, a contentious position paper or the prospect of settlement. In particular, it urges its officers to consider case conferencing where there is a risk of litigation, the taxpayer is likely to receive an adverse decision on interpretative assistance work (for example, an adverse private ruling), the taxpayer has appealed an ATO decision or the taxpayer has requested a conference.122
3.76 The CCD goes on to say that where a taxpayer has requested a case conference, the ATO officer is to consider 'whether a case conference would be a productive forum to discuss matters with the taxpayer, remembering that this is an opportunity to attempt to resolve or limit the dispute.'123
3.77 From some of the examples which have been brought to light during consultation, the IGT considers that effective conferences between the ATO and the taxpayer would assist to improve the understanding of the parties' respective positions and aid in resolving some of these matters without resort to litigation.
3.78 In addition to this, the IGT has also been provided with copies of the ATO's pro-forma correspondence used during the audit process. As mentioned earlier, the IGT notes that business lines such as LB&I,124 ITX and TPALS have incorporated into their audit processes an initial meeting at which audit and timeframe expectations are outlined so that the parties are better able to establish a common understanding of what will be involved.125
3.79 Further the TPALS business line correspondence also offers an additional meeting for the ATO officer and taxpayer to meet and discuss the ATO's interim report findings and provide an opportunity for the taxpayer to furnish any further relevant information for the ATO's consideration before the report and audit are finalised.126
3.80 As discussed in Chapter 2, the ATO currently utilises the LRI at objection stage to assess the risk of a matter proceeding to litigation following an adverse objection decision. If such a matter is identified, the objections officer is required to escalate the matter to engage, where appropriate, senior ATO officers from the TCN, COE and/or LSB to assist to resolve the matter earlier and without resort to litigation.
3.81 The IGT considers that greater direct engagement between the ATO and taxpayers may serve to develop a collaborative and cooperative relationship in which matters of concern may be expeditiously and informally addressed as they arise. The IGT encourages business lines, except in matters concerning serious criminal fraud or evasion and in which covert investigations may be necessary, to incorporate opportunities for face-to-face discussions as part of the compliance process and related correspondence with the objective of:
- outlining the ATO's areas of inquiry or focus;
- developing a shared understanding of the ATO's expectations of the taxpayers and also what the taxpayers may expect of the ATO officers undertaking the compliance activity; and
- setting other general expectations such as areas of inquiry and timeframes for completion of the compliance activity.
3.82 The IGT notes that while the ATO has promoted the use of case conferencing with its staff, the IGT was unable to find general references to this on its public website or in other published documents. The IGT is of the view that it would benefit both the ATO and taxpayers for the ATO to more publicly promote the engagement of tax officers with taxpayers through, for example, the use of direct conferences at specific points in the end-to-end compliance process. The ATO has advised the IGT that it will incorporate this as part of its current work to develop a DMP.
3.83 Additionally, the IGT considers that these ATO direct conferences should be built into existing end-to-end processes across all business lines to provide opportunities for the ATO and taxpayers to engage with each other to arrive at a common understanding of the matters of concern and how these may be addressed in an expeditious and efficient manner.
3.84 Indeed, as one piece of correspondence from a tax practitioner reviewed by the IGT pointed out, the ATO's commitment outlined in the LBTC booklet to engage with taxpayers to resolve disputes directly (that is, by direct negotiation between the taxpayer and their representatives and the ATO) or otherwise through ADR should be made to all taxpayers and not only those in the LB&I segment.
3.85 The IGT considers that there are different times at which these conferences between the ATO and taxpayers may occur. Specifically, with the aim of avoiding and limiting the scope of disputes, the IGT considers that opportunities to conference with taxpayers should be incorporated into the ATO's compliance processes at:
- commencement of an audit or review;
- prior to issuing a position paper or reasons for decision;127 and
- following the lodgment of an objection.
3.86 Furthermore, the flexible use of direct conferences with taxpayers should be encouraged at other points during the compliance process where the parties consider that such conferences would assist to address any issues or concerns arising in the matter.
3.87 The IGT acknowledges that not all cases will lend themselves to such conferences at specified times. However, the IGT considers that the inclusion of direct conferences throughout the end-to-end process and in ATO compliance procedures will generally act as key milestones and triggers for both the ATO and taxpayers to turn their minds to matters of concern or contentious issues which may be addressed through direct contact and discussions.
The IGT recommends that:
- The ATO update the Taxpayers' Charter to commit to a position which favours engagement with taxpayers for the purposes of dispute resolution and where direct negotiations fail to resolve the dispute, the ATO will consider other dispute resolution options, including ADR.
- The IGT further recommends that the ATO amend its compliance procedures to require ATO officers to consider, and if appropriate engage in, direct conferences with taxpayers at each of the following points in time:
- when the parties have reached agreement as to the facts, or agreement to disagree on contentious factual matters;
- prior to issuing a position paper or reasons for decision;
- following the lodgment of an objection; and
- at any other point in time at which the parties agree that a case conference would be beneficial.
Agree to 3.5.1, and agree in part to 3.5.2 in relation to large and complex cases in the large business and small & medium enterprises markets.
We agree to update the Taxpayers Charter to state that the ATO will consider avenues for dispute resolution, including ADR, in appropriate circumstances. In doing so, we note that the booklet entitled "If you're subject to review or audit" we state that we will:
.....work towards resolving disputes about the facts, or how the law applies to the facts, prior to finalising the audit.
We agree to on-going engagement with taxpayers during our large and more complex compliance activities and we have procedures and a focus on skilling to reinforce this requirement (see for example the Large business and tax compliance booklet). We encourage taxpayers and their advisors to take a similar approach.
We believe that a more iterative engagement throughout the audit process is beneficial to the efficient conduct of large and complex matters. It is often not until after we have developed our position paper in larger audits that we would have a more considered articulation of facts and law, which allows both parties to narrow ongoing discussions. However, there may be other points of time at which the parties agree that a case conference would be beneficial.
Use of trained ATO officers to guide the parties in direct case conferences
3.88 The ATO has considered the possibility of using an independent, in-house tax officer as a facilitator in case conferences, especially where there will likely be a number of participants in the conference, where the issues to be discussed are complex or where previous discussions between the parties have not been successful.128
3.89 The ATO further notes that the facilitator in such a conference would 'guide the parties through their discussion ensuring the participants focus on the purpose of their work together.'129
3.90 Between February and July 2011, the HMRC conducted two dispute resolution pilots which focused on the use of in-house HMRC facilitators to assist in the resolution of disputes in the large and complex cases and those involving small and medium (SME) taxpayers.
3.91 Interim results issued by HMRC have suggested that the pilots have been successful, resulting in considerable savings as compared to costs which would have been expended had the matters proceeded to litigation.130
3.92 As of May 2011, eleven entities had participated in HMRC's large business pilot which used the facilitated discussions as a precursor to formal mediation to ensure that the parties fully appreciated each other's respective arguments. Of these, two cases were resolved at mediation, two were entering mediation, one case was resolved through the facilitated discussions and a further two were proceeding towards bilateral resolution. The remaining four were at different stages of the facilitated discussions.131
3.93 In relation to HMRC's SME pilot, preliminary results indicate that 97 per cent of taxpayers who were offered an opportunity to participate in the pilot accepted to do so. As at May 2011, one hundred and fifty taxpayers had entered the pilot, with twenty eight facilitated discussions having been completed and 64 per cent of these had resulted in resolution of issues either in whole or in part. The preliminary evaluation noted that the average timeframe for cases progressing through the pilot was 28 days.132
3.94 HMRC advised that its goal in establishing the pilots was to divert cases from the First Tier Tribunal, and to that end, selected cases in which it was foreseeable that HMRC would issue an unfavourable determination or assessment to the taxpayer. Engagement as part of the pilot, therefore, occurred before assessment.133
3.95 HMRC also advised the IGT that significant external consultation was undertaken in relation to the pilots and, importantly, in formulating the terms of reference of the pilots and the measures of success, they relied on private sector experts who were seconded from the largest accounting firms. This, they advised, assisted to garner taxpayer support for the initiative and helped to impress that this was a joint project rather than one wholly owned by HMRC.134
3.96 When inviting participation in the pilots, HMRC provided taxpayers with clear statements of agreement as to what would be expected of each party, and emphasised the rights of taxpayers to proceed to the Tribunal should the matter not otherwise resolve.
3.97 In canvassing the potential of a similar pilot with stakeholders, the IGT was advised that though it may not be appropriate in all cases (particularly, the larger more complex matters), it may be of some utility in smaller tax disputes, especially where the taxpayer is not able to afford their share of the cost associated with engaging in ADR with an ADR practitioner. Some concern was expressed by stakeholders as to perceptions of bias, lack of independence and a lack of confidence in the process if it was not properly managed by the ATO. It is imperative that if such a pilot was to be run in Australia, the ATO actively ensure the independence (actual and perceived) of its in-house facilitators.
3.98 The IGT notes that the ATO agreed, as part of the Review of aspects of the Tax Office's settlement of active compliance activities (the Settlements review),135 to implement mechanisms to 'improve the taxpayer experience in relation to the settlement process and access to settlement by providing a 'circuit breaker' or 'reference point' for taxpayers with the aim of drawing on significant alternative dispute resolution and settlement experience; and providing a fresh set of eyes for decisions to access the settlement process or disputes arising in the settlement process.'136
3.99 Given the high rate of concession and settlement which occurs at the AAT case conferences, the IGT is of the view that there would be considerable benefit in the ATO undertaking a pilot similar to HMRC's to assess whether in-house ATO facilitators could be utilised to act as circuit breakers in certain disputes and to assist in the resolution of these disputes without resorting to litigation under Part IVC.
The IGT recommends that, in consultation and collaboration with external stakeholders, the ATO undertake a pilot to assess the utility and effectiveness of using trained in-house ATO officers to act as facilitators to assist in resolving smaller, less complex disputes.
A sample of smaller, less complex indirect tax objection cases will be in scope for such a pilot, with the NTLG Dispute Resolution Sub-Committee to be involved in the evaluation.
Objection cases sampled for the pilot may include features such as:
- valuation or apportionment issues; and
- smaller dollar objections involving disputes over the facts, or disputes over the application of penalty provisions.
Enhance skilling of ATO staff to better manage potential conflict
3.100 NADRAC has recommended, amongst other things, that a primary strategy in ensuring that government agencies are well placed to address issues before they become 'disputes' is the building of 'communication, negotiation and conflict resolution skills of people across the agency.'137
3.101 Submissions to the IGT have noted that enhanced education and training of staff is key to ensure that they are properly skilled to be able to both identify issues and to address them as and when these issues arise. It was perceived that one of the reasons for a lack of early engagement on the part of the ATO is that officers involved earlier in the compliance process were relatively inexperienced, lacking the skills and authority to engage with taxpayers.
3.102 The ATO also recognises the importance of enhancing skills to enable staff to better engage earlier with taxpayers to manage issues before they escalate to more formal disputes. Encouragingly, the ATO has committed publicly that, 'at a broad level [it has] invested in negotiation skills training and [it is] encouraging earlier direct contact with taxpayers, by phone, or meeting personally with taxpayers.'138
3.103 As discussed in Chapter 2, the ATO's centralised training section provides and coordinates internal training, as well as external conferences and forums to ensure staff gain a greater appreciation of dispute resolution options and resources available to equip them with practical skills in resolving potential conflict when interacting with taxpayers. The ATO's learning management system (LMS) enables ATO staff to register for training sessions relevant to their work.
3.104 The ATO has provided the IGT with a number of dispute resolution training modules which are listed on LMS. Some of these include:
- negotiation skills, a foundational session targeted at debt operations staff;
- negotiation in the field, which looks at negotiation, settlement and conflict resolution skills for active compliance field staff;
- negotiating and Influencing for IA, a foundational session targeted at tax technical officers at the audit stage;
- negotiating and influencing for LAC, a foundational session targeted at tax technical officers at the audit stage;
- negotiating and influencing for SE, a foundational session targeted at tax technical officers at the audit stage; and
- negotiating and influencing for SME, a foundational session targeted at tax technical officers at the audit stage.
3.105 Each of the above modules are presented in classroom sessions, with material provided to participants prior to, or on the day of, the training. The IGT understands that the sessions are not mandatory and are run on a needs and interest basis. That is, the LMS system permits ATO staff to 'pre-book' or express interest in a session with sessions being run once sufficient numbers are reached.
3.106 For each of the above modules, the IGT notes that there were no current planned sessions, and a one year projection did not reveal any future planned sessions which had been uploaded to LMS. Notwithstanding this, the modules allowed staff members to download copies of PowerPoint slides and workbooks which may be reviewed and worked through at that staff member's pace.
3.107 The IGT notes that the training modules are not formally assessed. A number of the modules provided state that:139
There is no assessment for this course. By attending the classroom training, you successfully complete this course.
3.108 In addition, the IGT was advised during the course of this review that the ATO is currently in the development phase of a foundational negotiation skills training package, and is procuring an intermediate negotiation skills program to be rolled out to staff later in 2012.
3.109 While the IGT generally supports ongoing training, whether facilitated in-house or externally, it is important that the impact of such training is assessed at a practical level to ensure its relevance and effectiveness and that skills obtained are correctly and consistently applied. In particular, as negotiation and dispute resolution are complex areas requiring the application of different skills in different contexts, it is critical that any training provided is tailored to the needs of the organisation and of the individual staff member.
3.110 The IGT considers that it is imperative that all officers who interact with taxpayers and their representatives, at any stage of the compliance process, have strong communication and practical conflict management skills and be sufficiently confident and authorised to apply these skills to actively manage disputes which may arise. As the former Attorney-General has noted, if a resolution culture is to be achieved, there is a 'greater need for trained, experienced officers, to have the confidence' to exercise their own judgment in the resolution of disputes.140
- To ensure that ATO compliance and technical staff are well-equipped to prevent or resolve disputes, the IGT recommends that the ATO develop a targeted suite of training products which focuses on:
- early identification of potential issues in dispute; and
- negotiation and conflict management resolution skills.
- The IGT further recommends that, based on the skilling needs of individual staff, the ATO compliance and technical staff who interact with taxpayers complete the above targeted training as a requirement of their performance development agreements, with reviews to be conducted periodically to ensure these skills are current and effective.
The ATO has existing training products that focus on negotiation and conflict management skills and processes that assist in the early identification of potential issues in dispute. Nevertheless we agree to review these products and processes to assess their fit for purpose.
The ATO also agrees to assess the need for compliance and technical staff who interact with taxpayers to complete training in relation to these matters.
As is currently the case, staff and managers will continue to review their training needs and the effectiveness of training received through the bi-annual performance management process.
The ATO has in place a number of programs and support mechanisms in relation to the matters identified in the recommendation. ATO training in these skills has included externally provided programs. The further roll out of these types of products and processes to compliance staff will depend on a range of factors including the assessment of the training needs of individual officers, case profiles and other skilling priorities.
91 Inspector-General of Taxation, above n. 71, p. 134.
95 In 2010-11, the ATO reported that it took action in over 416,000 cases as a result of data matching. See: Commissioner of Taxation, Annual Report 2010-11, Canberra, 2011, p. 100.
97 Inspector-General of Taxation, above n. 71, p. 133.
98 Australian Taxation Office, above n. 53.
99 Australian Taxation Office, ORCLA intranet page, document entitled 'Engaging with the taxpayer'.
100 Australian Taxation Office, ORCLA intranet page, document entitled 'Dispute Risk Procedures'.
101 Australian Taxation Office, above n. 88, p. 14.
105 Australian Taxation Office, ORCLA intranet page, document entitled 'Early Resolution Report'.
107 A case which did not arise out of the ATO's investigation of a scheme or arrangement which is designed to avoid or defer tax.
108 Commissioner of Taxation, Annual Report 2009-10, Canberra, 2010, p. 29.
109 Australian Taxation Office, above n. 51, p. 29.
110 Australian Taxation Office, above n. 50, p. 36.
111 See for example section 264 of the ITAA 1936 and section 353-10 of Schedule 1 to the Taxation Administration Act 1953.
113 Australian Taxation Office, above n. 99.
114 Australian Taxation Office, above n. 99.
116 Administrative Appeals Tribunal, Conferences, Sydney, November 2010, viewed on 21 September 2011, p. 3.; Administrative Appeals Tribunal, Conference Process Model, Sydney, 16 May 2012, viewed on 23 May 2012.
117 For example, if Taxpayer A disputes his income tax for the 2007, 2008 and 2009 years, the ATO will record this as one dispute whereas the AAT will record it as three.
118 See for example, Commissioner of Taxation, above n. 108, p. 30; Commissioner of Taxation, above n. 95, p. 105.
119 Australian Taxation Office, ORCLA intranet page, document entitled 'Case Conferencing'.
124 Australian Taxation Office, above n. 51, pp. 8 and 10.
125 Examples of ITX and TPALS standard correspondence provided by the ATO to the IGT.
126 Copy of TPALS template letter provided by the ATO to the IGT.
127 See for example, Inspector-General of Taxation, above n. 71, para 9.38, p. 146.
128 Australian Taxation Office, above n. 119.
130 'Mediating Tax disputes: HMRC's ADR pilots', Tax Journal, 14 July 2011, viewed on 21 September 2011.
133 Information provided by HMRC to the IGT, 23 December 2011.
134 Information provided by HMRC to the IGT, 23 December 2011.
135 Inspector-General of Taxation, Review into Aspects of the Tax Office's Settlement of Active Compliance Activities, Sydney, 1 December 2009.
136 ibid., p.23.
137 NADRAC, Submission by NADRAC in response to the Issues Paper on the Review of the Legal Services Directions, Canberra, April 2004, viewed on 1 November 2011, p. 2.
138 J. Granger, above n. 63.
139 Australian Taxation Office, internal learning management system.
140 R. McClelland MP, above n. 9.