4.1 The Commissioner in his 2010-11 Annual Report141 indicated a willingness to engage in ADR and through directions to ATO staff, such as PS LA 2007/23, the ATO has set out how and when ADR should be conducted. It should be appreciated that the ATO defines ADR broadly and includes within the definition 'direct negotiation of disputes by the parties without outside assistance.'142

4.2 To ensure consistency in this report the narrower definition of ADR is intended as outlined earlier. That is, it will be used to refer to processes in which an ADR practitioner assists the parties.

4.3 The ATO has indicated that its preference in relation to resolving disputes is to first engage and negotiate directly with taxpayers. Such an approach is sensible and should operate to reduce some of the costs associated with resolving the dispute for both parties. Where direct negotiations fail to resolve disputes the parties must turn their minds to other methods or processes which may assist in resolving the matter, including engaging in processes assisted by an ADR practitioner.

4.4 Having addressed early engagement in the chapter 3, this chapter will consider different aspects of ADR and the initiation of ADR where early direct engagement between the parties has failed to resolve the dispute.

When is ADR appropriate?

4.5 The AAT and NADRAC have acknowledged that, generally, all matters are potentially suitable for ADR.143 While NADRAC identifies some factors which may render ADR inappropriate, such as lack of time, unmanageable imbalance of power or entrenched conflict, it cautions that factors such as these should not automatically dismiss the possibility of ADR.144 Submissions generally supported this approach.

4.6 As previously noted, while the ATO generally supports the use of ADR, it has stated that 'not all cases are suitable for ADR' and that ADR may not be appropriate where:145

  • it would be in the public interest to have judicial clarification of the issues in dispute and the dispute is a suitable vehicle to test the issues;
  • resolution can only be achieved by departure from an established 'ATO view' on a technical issue; and
  • the dispute is of a kind where the state of the relationship between the parties is such that any proposed ADR is unlikely to be successful.

4.7 In relation to the third dot point, the practice statement does not provide any further guidance or examples of the kind of dispute which is envisaged. It is unclear whether the determination that ADR is 'unlikely to be successful' is made by the ATO, the taxpayer or both. Absent further clarity, the IGT is concerned that such a statement may be relied upon by either ATO officers or taxpayers as justification to avoid engagement.

4.8 Where it is accepted that ADR (including direct negotiation) is a useful vehicle for narrowing issues in dispute, clarifying evidence and fostering ongoing relationships as well as resolving disputes,146 ADR (including direct negotiation) may be employed in a much wider context. Furthermore, where the ATO is seeking to drive a cultural shift towards an earlier and better resolution culture, it should work to remove impediments such as that mentioned in the preceding paragraph.

4.9 The IGT considers that the position the ATO should adopt is one which would bring ADR (including direct negotiation) to the forefront as the primary dispute resolution mechanism, rather than as an alternative. To this end, the ATO's starting position should be that it is appropriate to engage in ADR (whether through direct negotiations or otherwise) unless there are clear reasons to the contrary.

4.10 Such clear reasons should be limited to cases where associated costs and delays are disproportionate to the issues in contention or where a public benefit would be served by having matters judicially determined and ambiguous areas of the law clarified (as discussed below). Even where it is desirable to have a matter judicially determined, the IGT does not consider that there should be any barriers to the parties engaging in ADR to ensure a more streamlined approach in taking the matter to Court.

Recommendation 4.1:

The IGT recommends that the ATO adopt the principles espoused by the AAT and NADRAC, that all disputes are suitable for ADR (including direct negotiation) except where it would be clearly inappropriate. For example, where:

  • the cost and delay involved in ADR is disproportionate to the benefits to be derived, such as where the parties are in agreement as to the facts and the dispute turns on genuine and fundamental issues of law;
  • there is a clearly identified public benefit in having the matter judicially determined; or
  • there is a genuinely held concern that it is not appropriate to engage in dispute resolution, such as in cases of serious criminal fraud or evasion.

The IGT further recommends that the implementation of this principle should be the subject of consultation with stakeholders as part of Recommendation 5.1.

ATO Response


The ATO is committed to minimising and resolving disputes as early as possible and actively participates with the AAT and NADRAC in dispute resolution. As noted by the Inspector General at paragraph 4.1, the Commissioner indicated in his 2011 Annual Report a willingness to engage in ADR. As is recognised in the recommendation, there are cases where it is not suitable or appropriate to enter formal ADR processes.

We agree that it might not be suitable to enter into ADR where such processes add extra steps, or create extra costs and the matter is otherwise quite straight forward. By way of context, in the vast majority of adjustments resulting from audits and reviews taxpayers do not seek a review of those decisions (about 4% in income tax cases) and only a very small proportion are not resolved at that stage through less formal processes (less than 3% of taxpayers objecting to an income tax adjustment go on to litigation).

We agree to the review of PS LA 2007/23 (see recommendation 5.1), in consultation with NTLG ADR Sub-committee.

Public benefit and law clarification

4.11 The IGT recognises that in some instances there may be a public benefit in litigating (or prosecuting) a matter rather than seeking to arrive at a negotiated outcome.

4.12 The public benefit may be served in a number of ways. For example, the prosecution of taxpayers for fraud and evasion (such as those under Project Wickenby) or civil penalties levied against promoters of tax avoidance schemes may serve as a deterrent to others contemplating similar activity and result in a flow on future compliance effect. Such cases should be rare and outside of the norm.

4.13 There is also significant public benefit in clarifying uncertainties in the law particularly where a broad range of taxpayers may be affected. Such clarification would lead to more consistent and certain application of the law, thereby reducing time and cost for both the ATO and taxpayers in the long run.

4.14 Given the complexities inherent in the tax law, issues concerning deficiencies or uncertainties in the law have been raised and considered previously. While the terminology adopted by groups or people considering the issue vary, the conclusion is generally the same. That is, deficiencies where they are identified should be corrected as quickly as possible.

4.15 The Board of Taxation recognised in its 2007 report, Improving Australia's Tax Consultation System, that:147

That minor policy and technical issues arise is not surprising given the complexity of tax and other law, the economy, and society generally. Issues can and do arise that were not, and in some cases could not be, anticipated when the policy was developed and the legislation drafted. This is not a reflection on the capabilities of the stakeholders in the system — it mainly reflects complexity built up over decades.

However, while such issues will arise, if they are not addressed in an effective manner, unintended expenses, complexity and compliance and/or difficult tax administration issues can arise. This can reduce community support for the tax system. That said, it is not realistic or appropriate to expect that all of these issues can be addressed. Ultimately it is a question of priorities and weighing the costs (including opportunity costs) and benefits of making particular changes.

4.16 Where there is a clear deficiency in the law, or an ambiguity which increases the cost of compliance for taxpayers, and the cost of administering the relevant provisions for the ATO, consideration should first be given to whether a changed ATO view on the interpretation or application of that provision may remove the uncertainty.

4.17 In one case reviewed by the IGT, the taxpayer applied to the AAT for review of a decision by the ATO to disallow the exempt status of certain income. The objections officer had correctly applied the ATO view, as contained in the relevant ruling, in determining the taxpayer's objection. At the AAT, the taxpayer applied for Test Case Funding which brought the matter before the ATO's Chief Tax Counsel, who considered that the ATO's view of the law was incorrect. This led to the matter being conceded, and the ATO view reconsidered and reissued.

4.18 If the ATO is of the view that it cannot interpret away uncertainties or ambiguities in the legislation then consideration should be given to why a change of the law cannot be effected, or an amendment to the relevant provisions passed, without the need for litigating cases aimed at testing the interpretation or application of those particular provisions.

4.19 As Justice Graham Hill, writing extra-judicially, noted:148

There is a need for the legislature to cure defects from time to time. Yet there seems to be a refusal on the part of the government to admit there are defects and to make amendments other than amendments which may be thought necessary to overcome avoidance. In some cases, the courts may be able to resolve difficulties by applying a purposive construction but in the Australian constitutional context where there is a sharp separation of the legislative and judicial powers there is a limit to what one can expect of the courts. Ultimately the courts cannot act as legislators. Parliament cannot stand by and then blame the courts if a decision is one that does not favour the revenue when the problem lies not in how the legislation is to be interpreted in a common sense way, but in how it is written.

4.20 Legislative change provides a mechanism through which Parliament is able to amend the law to give effect to the intended policy outcome. It should be the preferred method of correcting defects or clarifying ambiguities in the law where these defects and ambiguities are clear.

4.21 The Joint Committee of Public Accounts and Audit (JCPAA) also generally supports this approach. In 2011, it noted that:149

If substantial legislative problems have been identified, it is important that these issues are promptly fixed and that, after time, the public is notified of the improvements made.

4.22 The JCPAA recommended that:150

... the Australian Taxation Office notifications to the Government, either directly or through Treasury, on tax policy and legislative problems be made public within 12 months of submission, along with the Government response.

4.23 Notwithstanding this general support, it is important to recognise that competing priorities, resources and limited Parliamentary time for consideration of such issues may see necessary amendments not tabled in a timely manner leading to prolonged uncertainty for both the ATO as administrator and taxpayers.

4.24 In cases where necessary law change cannot be readily effected, or where the scope of the defect or ambiguity is unclear, bringing a matter before the Courts to seek judicial clarification may result in an interpretation of a particular provision being affirmed or rejected. In the former instance, certainty may be achieved while in the latter, an adverse finding against the ATO may serve to highlight the uncertainty warranting Parliamentary intervention.151

4.25 Given the current pressures on the courts, seeking judicial clarification of an uncertain legislative provision may take many years. By way of example, in the case of Anstis, the High Court delivered its judgment on 11 November 2010, over three years after the decision of the AAT in the same case was delivered.152 The IGT also notes, however, that in appropriate cases, the courts may provide mechanisms through which cases may be expedited with hearings listed and judgments delivered within a reasonably short timeframe153 resulting in judicial clarification being obtained in a more timely manner.

4.26 The process of methodically working through the proposed public benefit process outlined above by the IGT is to provide a clearer test of the value to be obtained by employing the most appropriate course of action to final resolution. As in the Anstis case, the matter was considered so significant following the taxpayer's ultimate success in High Court that advice from both the administrator and Treasury led to the government seeking legislative change.154

4.27 While some individual cases may provide value in proving (or disproving) a particular principle, it may sometimes be more effective to accept a certain position as being meritorious with advice being provided to government to change the law prospectively rather than exhausting the court process.

4.28 Additionally, regard must be had to the fact that while bringing a matter before the court to have issues judicially tested and determined may at times be desirable, it should be noted that the litigation of a case can create an impost on private taxpayers whose cases are being relied on as vehicles to test uncertainties in the law in the form of additional legal costs.

4.29 A further difficulty associated with the use of private cases to test ambiguous areas of the law is that there exists a significant 'free rider' benefit for those taxpayers who ultimately enjoy the increased certainty of outcomes following litigation for law clarification purposes. This 'free rider' outcome creates a cost asymmetry which poses a very real concern for taxpayers.

4.30 Indeed, in a recent special leave hearing in the High Court, Qantas raised the issue via its legal counsel. Specifically, senior counsel for Qantas sought orders that if special leave were granted, the costs ordered in Qantas's favour in the court below should not be disturbed and that the ATO pay Qantas's costs of proceedings in the High Court. Senior Counsel noted in her request that the reason the Commissioner is being granted special leave to appeal is that the matter is one of 'public importance and for those reasons, it does not seem right that Qantas should have to pay the costs.'155

4.31 While the Court ultimately did not acquiesce to Qantas's request, it is a consideration that should be taken into account by the ATO as the system's administrator or by government as a policy consideration where such actions are undertaken and there is a clear public benefit to be obtained. As the High Court has noted in an earlier case:156

It is common in this Court in cases where the resolution of a point is desirable from the point of view of a large and recurrent litigant, whether corporate (for example, an insurance company) or governmental (for example, the Commissioner of Taxation or the Australian Competition and Consumer Commission), but the other party to the litigation is not a recurrent litigant and is not well-positioned to meet adverse costs orders on the point being tested, for the grant of special leave to be made conditional on appellants paying the other side's costs in any event and on appellants not seeking to disturb costs orders in the courts below which were favourable to the other side.

4.32 The tension between public and private benefits in this area and the importance of these considerations are especially pertinent given the high costs associated with litigation.157

Test Case Litigation Program

4.33 To alleviate the cost burden in these cases for some taxpayers, the ATO has for a number of years maintained its Test Case Litigation Program. The program aims to resolve uncertainty and to create legal precedents 'that provide guiding principles on how specific provisions ... should be applied more broadly.'158 One of the ways the Program does this is to identify appropriate cases to test uncertain or ambiguous areas of the law and to provide funding, where appropriate, to assist taxpayers to bear the legal cost burden of having these matters tested through the courts.

4.34 The Test Case Litigation Program is managed by the ATO's Strategic Litigation team.159 The Strategic Litigation team was established following a recommendation of an internal review commissioned by the ATO in respect of its in-house legal service.160 It is headed by a Senior Assistant Commissioner.

4.35 'The Senior Assistant Commissioner, Strategic Litigation provides technical leadership and is responsible for ensuring that strategic litigation is managed effectively, and is argued consistently with precedential ATO views. There are also three Senior Tax Counsel providing technical leadership in strategic litigation, two with responsibility for income tax issues and one with responsibility for indirect tax issues ... The relevant Senior Tax Counsel may take direct responsibility, or closely monitor, the strategic litigation cases, regardless of other Tax Counsel involvement.'161

4.36 According to the ATO, strategic litigation refers to its most significant cases, the outcomes of which are of particular interest to the Commissioner and the community. Specifically, it includes cases:162

  • where the revenue at risk is significant;
  • where there is a significant compliance risk;
  • likely to attract media interest (for example, prominent people or sensitive issues);
  • raising a contentious question of law;
  • before the High Court, the Full Federal Court or a State Court of Appeal; or
  • involving general anti-avoidance provisions.

4.37 Therefore, while all cases which are funded under the Test Case Litigation Program are necessarily strategic litigation cases, not all strategic litigation cases receive test case funding.

4.38 The ATO reports on strategic litigation cases and cases funded under the Test Case Litigation Program in its Annual Report.163 Additionally, the ATO also provides an update of significant litigation twice yearly at its June and December meetings of the NTLG.164

4.39 The IGT examined the ATO's Test Case Litigation Program in detail as part of the Review of Tax Office management of Part IVC litigation (the Part IVC review).165 That review noted some stakeholder perceptions of a lack of consistency and independence in the granting of funding, and found that the ATO appeared to be funding matters which were progressed for law enforcement, rather than law clarification, purposes.166

4.40 To enhance greater confidence in the ATO's law clarification efforts, the IGT recommended, amongst other things, the establishment of an independent panel to manage the Program, greater transparency through the publication of test case details and, in line with advice from the Solicitor-General, the ATO funding all cases in which it appeals an adverse decision.167 Recognising the often limited resources of taxpayer applicants in the AAT, the ATO has advised the IGT that in most cases it provides funding for taxpayers where it appeals an adverse decision from the AAT to the Federal Court.

4.41 The IGT considers that this should further be extended to cases being advanced to clarify ambiguous points of law. In such cases, the IGT does not consider it appropriate that one taxpayer be asked to bear the burden of legal costs, regardless of that taxpayer's resources.

4.42 The decision regarding whether the ATO should provide funding to a taxpayer is currently made by the Chair of the Test Case Litigation Panel following recommendations made by the Panel. The current panel comprises an accountant, a solicitor, a former Federal Court judge, an ATO Senior Tax Counsel and the ATO's Chief Tax Counsel, who is also the Chair.

4.43 The ATO's published information on the program outlines a three-fold criteria for funding. These are:168

  • there is uncertainty or contention about how the law operates;
  • the issue is of significance to a substantial section of the public or has significant commercial implications for an industry; and
  • it is in the public interest for the issue to be litigated.

4.44 In applying the above criteria, the Panel is guided by the following principles:169

  • Cases involving questions of fact where there are established legal principles will generally not meet the criteria for funding.
  • Our appeal against a decision of a court or tribunal usually indicates that an important issue is involved. If it is also in the public interest that the issue is clarified we may provide funding.
  • Most cases accepted under the program involve reviews of our decisions on objections to assessments or private rulings. These can be applications to the Administrative Appeals Tribunal (AAT) to review a decision or appeals to the Federal Court, including further appeals from an AAT or Federal Court decision. However, we will consider other cases on debt-related issues, applications for declaratory relief and judicial review issues where clarification of the law is important.
  • We prefer to fund cases that are brought before the Federal Court, rather than the AAT, because they are more likely to provide legal precedent to clarify issues. However, we still consider funding cases before the AAT or Small Taxation Claims Tribunal, particularly where the case is to be heard by a presidential member.
  • As it is important to clarify uncertainty in the law as quickly as possible, we expect applicants to cooperate to achieve an early hearing.
  • We take into consideration an applicant's financial capacity to pursue litigation, although we may still approve funding for applicants who have the capacity to fund their own case.
  • We do not usually fund cases that we consider involve tax avoidance schemes or attempts to gain a benefit clearly not intended by the law. However, we will consider these cases for funding if they test the proper meaning of anti-avoidance provisions or if funding the case is in the public interest.

4.45 Stakeholders generally support law clarification by litigating test cases in appropriate circumstances. However, stakeholders also raised two matters which should be borne in mind when litigating matters funded by the ATO under the Test Case Litigation Program.

4.46 First, noting the ATO's preference for test cases to be heard and determined by the Federal Court, stakeholders observed that the right of the taxpayer to commence proceedings in the AAT should be preserved. This is important given the AAT's special ability to stand in the shoes of the Commissioner which is not otherwise available in any other forums.

4.47 Second, if an issue is considered sufficiently important so as to warrant test case funding support, then all parties to that action should be afforded the opportunity to exhaust the appellate process. Where this is not actually, or not perceived to be, the case the process may be open to accusations of potential bias and claims that the law has not been fulsomely or exhaustively established on the specific point.

4.48 The notion that a judgment is very clear and does not require further surety may sometimes be in the eye of the beholder. It is a feature of the legal system that the higher appellate courts establish the law more conclusively for the benefit of both litigants and others more broadly. It seems much clearer and fairer for the appeal process to continue at either parties option in such circumstances.

4.49 In addition, stakeholders have also expressed concern that ATO officers sometimes reject proposals to engage in ADR with no reasons given for this rejection though in some cases, the absence of reasons has led taxpayers to suspect that the matter is being advanced to clarify a point of law.

4.50 In a recent case, Commissioner of Taxation v Clark & Anor (No 2),170 the Full Court of the Federal Court awarded indemnity costs to the successful taxpayers following the Commissioner's rejection of their Offers of Compromise pursuant to Order 23 of the Federal Court Rules. In opposing the application for indemnity costs, the Commissioner argued that in an appropriate case, the public interest may be better served by having the Court decide a case which has wider ramifications, rather than settling it upon the basis of purely commercial considerations.171 However, the Court was not persuaded that the matter at hand was such a case, noting the Commissioner's rejection of the taxpayer's application for Test Case Litigation funding.172

4.51 The case recognises there are instances where it is appropriate for the Commissioner to reject reasonable offers of settlement. Namely, that there is a public benefit in having the matter judicially determined. However, it also suggests that where such is the Commissioner's intention, the decision to do so must be transparent and clearly communicated to the taxpayer.

4.52 In the same manner, where a taxpayer wishes to litigate their own matter, their right to do so is appreciated. However, where that action is genuinely at odds with an established interpretation of the law then there is no public benefit to be obtained by any public funding being provided.

4.53 The IGT considers that greater transparency and openness in respect of the ATO's identification of public benefit issues and its intention to progress certain cases to clarify the law would assist taxpayers and their representatives to better understand the ATO's position in respect of litigation and any responses to offers of settlement.

4.54 In the IGT's view, the Commissioner should clearly state, whether any litigated case has wider ramifications and involves a public benefit that would be better served by having the court decide the case. This should be communicated to the relevant taxpayers and their representatives.

4.55 Furthermore, as matters of law clarification may be of interest to broader taxpayer community, the ATO should look to publish information (sufficiently redacted to remove any identifying taxpayer information) regarding cases which the ATO is advancing to test or clarify ambiguous areas of the law.

4.56 The IGT notes that the ATO currently presents updates of deliberations and recommendations of the Test Case Litigation Panel at each of the meetings of the NTLG. However, there is a general time lag of several months in the publication of this information (for example, the 15 March 2011 Panel decisions were presented to the meeting of the NTLG on 22 June 2011. The Minutes of 22 June 2011 meetings were not published until 23 November 2011).

4.57 Additionally and with the aim of limiting compliance costs, the ATO should also suspend, or stay, tax disputes where those disputes bear facts or questions of law which are materially similar to those of a court proceeding that has been designated a test case. The IGT notes that the ATO has used this approach in relation to certain types of project work in the past, such as mass marketed scheme cases. Such an approach is already being utilised by the New Zealand IRD to limit the number of cases on substantially the same matter being heard thereby reducing compliance costs and limiting the resource impact on the courts. It also ensures that once a decision is issued in relation to the test case, that decision may be applied consistently to resolve similar issues in other cases.173

4.58 A more contemporaneous publication of cases advanced for law clarification may assist the ATO to achieve this outcome.

4.59 Even where matters are being progressed for law clarification purposes, there is scope for the parties to utilise ADR (including direct negotiation) to ensure an efficient progression of the matter through to hearing. The IGT notes that one of the principles guiding applications for test case funding requires 'applicants to cooperate to achieve an early hearing.'174 The IGT considers that such a principle should inform the management of all cases which are advanced for law clarification purposes, regardless of whether they are formally funded by the ATO, through the use of ADR to settle statements of facts, processes and procedures including interlocutory litigation steps and ultimate orders sought where one or another party is successful.

4.60 Where a matter is not progressed on the basis of law clarification, the ATO should give careful consideration to all offers of settlement.175 The IGT recently considered the ATO's approach to settlement in the Settlements review.

4.61 Similarly, the IGT considers that it is important to note that the Test Case Litigation Program should only be relied upon by taxpayers for cases in which there is a clear and fundamental disagreement as to the proper application of the law, which if clarified would benefit a broader group of taxpayers than those involved in the immediate dispute.

4.62 In other words, taxpayers should not view the Test Case Litigation Program as a means through which funding may be obtained to progress personal litigation goals that do not satisfy clear public benefit, and otherwise seek to avoid engagement with the ATO to resolve or settle matters through other means. Given the requirements of the CDRA 2011, both the ATO and taxpayers should take genuine steps to resolve disputes without litigation.

Recommendation 4.2:

The IGT recommends that:

  1. As soon as practicable, the ATO should consider and identify whether a case has wider ramifications and involves a public benefit that may be better served by having the courts decide the case. If the case is so identified, the ATO should:
    1. communicate this to the taxpayer and their representatives;
    2. provide litigation funding irrespective of the taxpayer's resources;
    3. engage with the taxpayer and their representatives to:
      1. reach agreement on those materials facts to which the parties can agree;
      2. identify any material facts which are in contention and determine whether additional information may assist in resolving these matters;
      3. settle the questions which need to be put to the Court at the hearing; and
      4. clarify and settle any necessary interlocutory or procedural steps to expedite the matter for hearing.
  2. The ATO publish a public register of cases in litigation, sufficiently redacted to remove identifying taxpayer information, which have wider ramifications and involves a public benefit. The register should be updated in a timely manner to reflect progress of the litigation and include the following information:
    1. the point of law to be clarified;
    2. the benefit expected from the clarification of the law and the wider ramifications which may arise if there is no clarification;
    3. why the particular case is appropriate to clarify the point of law; and
    4. what action the ATO is taking to mitigate the impact on other taxpayers while the case is being heard and determined, including consideration of suspension or stay of disputes which are materially similar in fact or questions of law and remission, or cessation of GIC accrual, for the period of the suspension in these cases.

ATO Response

Agree with 4.2.1(a), and with (c) provided the taxpayer and their representatives also commit to this course of action. Disagree with 4.2.1(b). Agree in part with 4.2.2.

A set amount of funding is available for the Test Case Litigation Program. There is a risk that recommendation 4.2.1(b) would extend test case funding to cases that do not meet the community's expectations about which cases should receive public funding. This could include, for example, cases involving tax avoidance schemes, instances where the taxpayer has not been willing to co-operate with the ATO to achieve an early hearing, or cases where the taxpayer has the financial capacity to pursue litigation without test case funding. There is also a risk that such an approach may encourage a more litigious approach to dispute resolution rather than ADR.

The Test Case Litigation Program has criteria that have been designed to ensure, from a community perspective, that the funding of a particular taxpayer's litigation costs is an appropriate expenditure of Commonwealth resources. That is, the case raises issues of uncertainty or contention about how the tax and superannuation laws operate and that are potentially of significant community interest. To assist in making this judgement our Test Case Litigation Panel comprises 5 members, 3 of which are non-ATO accounting and legal professionals. The panel provides independent advice on the merits of applications for test case funding and on the significance of the issues to the community.

Under existing court processes, taxpayers who are proven right may be reimbursed for their legal costs through court orders on costs.

Regarding recommendation 4.2.2, as noted in the report at paragraph 4.38, the ATO already reports on strategic litigation cases and cases funded under the Test Case Litigation Program that have wider ramifications and involve a public benefit in the Commissioner's Annual Report, and in updates twice yearly at its June and December meetings of the NTLG.

In relation to the specific wording of recommendation 4.2.2 we are concerned that ATO statements in a public register of cases whilst such cases are in the course of litigation may be perceived to be influencing the courts and tribunals.

Nevertheless the ATO will explore whether there is scope for more frequent updating of our register and whether there is more that we can add to the register. However, we are limited by law to only providing information that is available on the public record.

As for recommendation 4.2.2(d), decisions to defer objections can occur with the written consent of the taxpayer, in circumstances where it is agreed that the issue is already being considered in a current Part IVC case before either the AAT or Federal Court.

The ATO also already has a policy for remission of GIC which is set out in PS 2011/4. Basically, it states that under a 50/50 arrangement the taxpayer must pay all of the undisputed debts and at least 50% of the tax in dispute, and the ATO will allow a 50% remission of the GIC on the unpaid disputed tax, if the taxpayer's dispute is partly or wholly unsuccessful.

Declaratory Proceedings

4.63 Declaratory proceedings seek a ruling of the court on a point of law without asking the court to apply that to the facts, or to make any orders in respect of awards to one party or the other.

4.64 A number of submissions noted that in some instances declaratory proceedings may be used by the Commissioner or the taxpayer to clarify an ambiguous point of law without the need to progress a matter through the Part IVC process.176 The Part IVC process can impose unnecessary costs and delays in cases where the facts are settled but the dispute concerns the ATO view or the application of that view to the facts.

4.65 Following the Full Federal Court's decision in Commissioner of Taxation v Indooroopilly Children's Services (Qld) Pty Ltd,177 the Commissioner sought advice from the Commonwealth Solicitor-General, Chief General Counsel of the Australian Government Solicitor and another member of the NSW Bar regarding, amongst other things, the viability of using declaratory proceedings to clarify ambiguous points of law.178

4.66 The advice noted there were 'numerous situations in which it may be appropriate to seek a declaration in relation to the operation of Federal income tax legislation' and 'it is clear that a court will grant a declaration where, for example, no assessment has issued or where liability does not depend on a notice of assessment.'179

4.67 However, the advice went on to say that it was generally not appropriate for the Commissioner to use declaratory proceedings either prior to the issuance of a ruling or prior to the issuance of an assessment. This is so, even where the court has undoubted jurisdiction to make the declarations sought.180 However, the advice did indicate this may not include cases where the facts were not disputed and the declaration would provide for the ascertainment of the taxpayer's liability.181

4.68 Even in instances where there is no consensus between the parties, the IGT is aware that declaratory proceedings have been brought successfully by taxpayers. For example, in one case a taxpayer applied for declarations in the Federal Court that payment of royalties were not subject to withholding tax and succeeded in securing consent orders on the declarations sought.182

4.69 The IGT is of the view that while declarations may not be appropriate in all cases, there are some instances in which the use of declaratory proceedings may assist the Commissioner and taxpayer to clarify specific points of law having wider impact without the need to progress matters through the Part IVC process.

4.70 Furthermore, the IGT recognises that the Commissioner alone cannot bring applications for declaratory relief in the abstract, as in the absence of any justiciable controversy, the Court is likely to decline to rule on such an application as such a ruling may be considered an advisory opinion or otherwise based on hypothetical situations.183

4.71 The IGT considers that, given the above, there is scope for the parties to jointly make greater use of declaratory proceedings in cases where the facts and evidence are not in dispute and where there is a public benefit in having a judicial statement on specific questions arising in the case.

4.72 Through robust engagement and discussion, the parties could discuss and identify the issues under dispute, the questions needing to be put before the Court and any steps which could be taken to expedite the matter for hearing and determination. Such a process would assist in ensuring that the right questions are properly put before the Court for determination and provide a more efficient and effective means to obtain further certainty on how the law should be interpreted.

4.73 To facilitate a greater understanding of the circumstances and factors which may favour the use of declaratory proceedings, the IGT is of the view that there is benefit in the ATO supporting taxpayer opportunities to make greater use of declaratory proceedings in appropriate cases to clarify ambiguous points of law without the need for the taxpayer progressing a matter through the Part IVC process.

Recommendation 4.3:

The IGT recommends that, for the purpose of reducing compliance costs and unnecessary delays, the ATO consult on:

  • making use of declaratory proceeding opportunities in appropriate cases through engagement with taxpayers and their representatives; and
  • when the use of declaratory proceedings may be appropriate and how the ATO will engage with, and support, taxpayers to progress these opportunities.

Following the above consultation, IGT also recommends that the ATO provide its views on these matters in a practice statement.

ATO Response


The ATO does engage with taxpayers on making use of declaratory proceedings, however our experience shows that there are limited circumstances where declaratory proceedings will provide clarification of a particular legal issue. While taxpayers can initiate declaratory proceedings, many significant tax matters often raise a question of law and a set of complex facts that are generally not suited to declaratory proceedings.

It should also be noted there is the risk of duplicating proceedings; this recently occurred in a matter where the Full Federal Court noted:

"... there are existing Pt IVC proceedings on foot in the AAT in relation to the 2006 Assessment. The pending of those proceedings would normally mean no declaratory relief should be made in relation to the 2006 Assessment"2

Although there have not been any approaches by taxpayers or professional associations for a public statement by the ATO on declaratory proceedings, we will consult with the NTLG Public Rulings Steering Committee to assess the priority of drafting a practice statement on declaratory proceedings.

2 Mount Pritchard & District Community Club Limited v Commissioner of Taxation [2011] FCAFC 129

4.74 It has been suggested that an alternative mechanism to declaratory proceedings may be found in rule 30.01 of the Federal Court Rules. The rule allows a 'party to apply to the Court for an order that a question arising in the proceeding be heard separately from any other questions.'

4.75 The taxpayer and the Commissioner could 'reach some agreement that the taxpayer lodge an objection which raises all of the issues which the taxpayers wishes to litigate including the issue which the Commissioner wishes to have tested and then agree that the issue which the Commissioner wishes to have tested be one on which the Court should be asked to give a preliminary ruling as a separate question.'184

4.76 Such an approach necessarily entails some agreement by the parties as to the substantive matters and procedures to be adopted in litigation to ensure that any questions needing to be tested arise 'in the proceeding'. This provides opportunities for the taxpayer and Commissioner to make use of either direct discussions or those facilitated by a neutral ADR practitioner to establish this agreement.


4.77 At the other end of the spectrum to law clarification cases, certain types of disputes readily lend themselves to resolution through either direct negotiation or ADR. For example, disputes concerning market valuations.

4.78 During consultation, valuation disputes were consistently identified as a type of dispute which turns on specific facts or findings of fact that may be more readily and objectively ascertainable and, as such, were highly suitable for resolution through means other than litigation, such as ADR (and in particular, early neutral evaluation), where the parties' respective experts were unable to agree.185 The IGT notes that clause 26 of the ATO's Code of Settlement Practice specifically identifies valuation disputes an area which may be appropriate for settlement.

4.79 One example in which ADR was successfully used to resolve the valuation aspect of a large dispute saw the ATO and the taxpayer engage in early neutral evaluation which was conducted by a former judge. The taxpayer's representative advised the IGT that this process was helpful as it allowed the ATO to objectively test some of its assumptions and its valuation approach, to take advice from the judge and to re-evaluate its approach based on this advice.

4.80 In another example, the taxpayer obtained a valuation for the purposes of determining GST payable on a sale transaction. The ATO did not agree with the adopted methodology and inputs which had been used in the valuation, and engaged the Australian Valuation Office (AVO) to review the initial valuation. The AVO supported the ATO's view that the methodology applied was not appropriate, though the taxpayers contend that the AVO had in fact not understood the methodology which had been adopted. After some discussion, the ATO agreed to engage another expert to review the valuation. That expert agreed with the taxpayer's valuer. However, the differences between the ATO and the taxpayer were not able to be resolved until the parties jointly appointed a further independent valuer to review the issues. The matter ultimately resolved, but only did so some two and a half years after the ATO commenced its investigation and after both the ATO and the taxpayer had incurred significant costs.

4.81 The above examples illustrate the effectiveness of ADR in assisting to resolve valuation disputes. The latter example, in particular, also illustrates the risk of valuation-based disputes being protracted and increasing costs for both the taxpayer and the ATO.186 This is especially so where the parties need to engage additional experts to review initial expert reports well after the given events have taken place.

4.82 The Federal Court has sought to address some of the issues concerning disputes arising out of expert witnesses through the use of directed conferences as outlined in Practice Note CM 7.187 The practice note states that 'it would be improper for an expert to be given, or to accept, instructions not to reach agreement. If, at a meeting directed by the Court, the experts cannot reach agreement about matters of expert opinion, they should specify their reasons for being unable to do so.'188

4.83 Following the IGT's Settlements review, the ATO agreed that 'disputes and settlements involving valuations will be used as a key area for exploring earlier resolution opportunities and strategies.'189 As a result, the ATO issued staff instructions via its internal 'Work Processes Homepage' explaining that market value issues were to be resolved at the earliest possible point in time during an audit or review.

Earlier resolution of compliance disputes involving market value

Advice has been sought from a respected, expert, external valuer on how we can drive earlier resolution of potential disputes for efficient, effective and appropriate case outcomes. In giving this advice he referred to his extensive experience in litigation matters relating to tax-related valuations.

The advice is as follows:

'I would think that the first step is to ensure agreement exists on the basics: what is being valued, at what date, in what context and whether a market exists.

Then attempt to form agreement on a range of possible "futures" for the asset. That should ensure that any debate is contained to the mathematical part of the equation rather than fundamentals.'

Active Compliance requirement aimed at earlier resolution of disputes

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.

On the basis of the above advice from an experienced tax-valuation expert, all team leaders managing valuation disputes in active compliance are required to pursue agreements on the matters referred to above with taxpayers before active compliance audit cases are finalised.190

4.84 In 2012 the Organisation for Economic Development and Cooperation published its report in relation to dealing with the challenges posed by transfer pricing cases. At the core of transfer pricing disputes is the proper valuation of the goods in question. The report noted that in many transfer pricing cases the parties' positions had become 'so deeply entrenched' that progress to settlement was slow, taking many months or even years.191

4.85 The report noted that many disputes of this kind could be progressed beyond the deadlock through a reassessment of the case, by reconsidering of the merits through 'fresh eyes' and updating the proposed plan of action jointly with the taxpayer. Where this failed to resolve the dispute, consideration was given to the use of ADR and, in particular, early neutral evaluation.192

4.86 The report also notes that 'business and administrators alike were interested in exploring further whether [early neutral evaluation] could be used or adapted for transfer pricing cases, particularly in reaching agreement that sufficient facts and evidence had been provided or obtained.'193 It suggested that revenue authorities consider using early neutral evaluation in relation to transfer pricing cases which have stalled.194

4.87 The IGT is of the view 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.

4.88 In addition to the current work the ATO is doing in relation to resolving valuation disputes, the IGT considers that there is merit in the ATO exploring what further specific procedures it could implement to avoid such disputes altogether, including:

  • where it becomes necessary for an independent expert to be engaged, the ATO and the taxpayers jointly appoint the expert to review matters in contention, to agree on the parameters of the appointment, agree on the issues to be tested and the assumptions to be made; and
  • where two experts conflict as to the issues in contention, utilising expert conferences, such as those in the Federal Court, to enable opposing experts to seek to resolve their different findings or to narrow the issues in contention.

4.89 In relation to the first dot point above, the IGT recognises that sometimes it may be difficult to seek agreement on these matters, particularly in valuation fields which are highly specialised and the pool of expert valuers is limited. The IGT nonetheless considers that in most common valuation areas, genuine attempts should be made to ensure such agreement as a means of reducing the likelihood and severity of any disputes which may arise.

4.90 The IGT's view on these issues seems to be supported by the ORR, where the ATO has noted:195

Where we saw valuation disputes, the original decision could have benefited from stronger engagement between AVO and the taxpayer's valuer during the audit phase. Our new memorandum of understanding [MOU] with the AVO has been amended to increase expectations on AVO officers to be visible with the taxpayers to hopefully resolve more potential disputers [sic] during the audit phase.

Recommendation 4.4:

With a view to ameliorating the impact of potential valuation disputes, the IGT recommends that, where it becomes necessary to appoint an independent expert to either critique or conduct a valuation, the ATO adopt a more open process that seeks to accommodate joint appointment with the taxpayer where the parties agree on such aspects of the appointment as:

  • the independent expert to be retained;
  • the accepted independence of the agreed expert;
  • the requirements of the appointment;
  • the issues for expert consideration; and
  • any assumptions which are to be made by the expert.

ATO Response


The ATO is willing to agree to the appointment of a third party expert or suggest such an appointment in circumstances where it is necessary to do so.

Our practical experience with valuation related matters has been that most taxpayers do not wish to share an expert and generally prefer to retain their own valuation experts. Nonetheless, our approach to the resolution of valuation disputes involves both parties agreeing to a resolution process and committing to accepting the outcome of that process. Joint commitments are important for resolution of disputes in these circumstances.

Recommendation 4.5:

With a view to resolving valuation disputes without resorting to litigation, the IGT recommends that the ATO:

  • where both parties agree, adopt a process of 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;
  • where the expert opinions cannot be reconciled at the conferences, implementing a procedure to ensure that all valuation disputes be referred to ADR (for example, early neutral evaluation) unless there are clear reasons why ADR would be inappropriate (for example, where engagement in ADR impinges on international agreements the ATO has with other jurisdictions); and
  • where an ATO officer decides not to engage in ADR in these cases, that officer must provide reasons as to why ADR is not appropriate in the circumstances and obtain authority from a duly authorised senior officer.

ATO Response


We also note that the recommendation acknowledges that there would be cases where formal ADR would not be appropriate.

Where taxpayers wish to proceed with formal ADR in circumstances where we think such a process is not appropriate, we will ensure that the matter is considered by a duly appointed officer and, subject to that review, our reasons provided to the taxpayer.

4.91 More recently the ATO has, following consultation with the Australian Property Institute and the AVO, published a Valuations Issues Paper196 in which it identifies a number of recurring issues in margin scheme valuations and outlines its position in respect of each. The Issues Paper concludes:197

The ATO accepts that valuations can, by their very nature, be a subjective assessment of a property's value and in many cases there are interpretive assessments of impacts on the property value. Regardless of this subjectivity there is still an expectation that values will fall within a 'reasonable range'. This is regardless of the valuer who is valuing the property or the method adopted.

Where the AVO opinions are supported by evidence, and also align with the ATO's perception of reasonableness, these will be referred to the relevant valuer to enable these noted elements of the valuation to be reviewed. If there is sufficient merit in the valuer's adopted assumptions and conclusions, such that these can be considered reasonable, the valuation can be accepted as a complying valuation. Where the valuer's assumptions and conclusions are not sustainable based on evidence, or are not reasonable, the valuation cannot be considered a complying professional valuation.

4.92 Stakeholders have expressed some concern with the IGT that there should have been broader consultation with other valuations experts prior to the publication of the Issues Paper, and that its publication may create further disputes.

4.93 The IGT is currently undertaking a review to examine the ATO's implementation of agreed recommendations arising out of reviews released since November 2008. The IGT will examine the ATO's implemented strategies to resolve certain aspects of valuation disputes as part of that review.

Australian Valuation Office

4.94 An ancillary issue has also been raised with the IGT concerning the AVO. The AVO is a business line within the ATO that is located in eleven ATO offices as well as throughout a number of regional sites around Australia. It also provides a wide range of valuation services for federal, state, territory and local governments on a fee-for-service basis. It is appreciated that the ATO is one of the AVO's main clients.

4.95 Many submissions demonstrated a strong perception of a lack of independence by the AVO when acting as an adviser or expert for the Commissioner in valuation disputes. This, it was submitted, resulted in an unwillingness of taxpayers to accept the AVO's findings which leads to the engagement of further experts to review the issues in contention.

4.96 It has been suggested to the IGT that issues concerning the AVO's independence may be addressed by removing the AVO function from the ATO altogether and establishing it as a wholly separate and independent agency under the oversight of a Commonwealth Valuer-General.

4.97 As this review did not specifically investigate the AVO, the IGT will not make any formal recommendations in this regard. However, the IGT considers that the ATO of its own volition should consult with stakeholders to better understand their concerns regarding its use of the AVO as experts in valuation cases and to address these concerns accordingly. The IGT may consider a review into taxpayer concerns regarding the ATO's interactions with the AVO in developing his future work programs.

Who should initiate ADR?

4.98 The IGT considers that all parties to a dispute bear responsibility for initiating ADR (including direct negotiation) in appropriate cases. This is especially relevant given the requirements of the CDRA 2011 for the parties to take genuine steps to resolve a dispute prior to commencing litigation.

4.99 For the ATO, the obligation goes beyond the CDRA 2011. As previously discussed, there are a number of other legislative and policy requirements which impose on it an obligation to consider ADR, including the LSD 2005 and PS LA 2007/23. The IGT notes that in its submission to the Issues Paper on the Review of the Legal Services Directions, NADRAC relevantly recommended that the directions should be amended to instruct that, an agency:198

  • commence legal proceedings itself only after ADR has been initiated and (a) has been declined by the other party or (b) has been attempted without satisfactory resolution; and
  • where it is the respondent to an application (which is more common), suggest, or agree to participate in, ADR at the earliest possible opportunity.

4.100 However, the IGT notes that neither the LSD 2005 nor the ATO's internal policies specifically require that it initiate ADR where it is considered appropriate.199 The IGT is of the view that it is implicit in these requirements that, where ADR is considered appropriate, the ATO should initiate ADR with taxpayers.

4.101 However notwithstanding these obligations, some practitioners and taxpayers have noted that in their experience the ATO has rarely initiated ADR in seeking to resolve disputes.

4.102 Practitioners observed that it should be incumbent on the ATO to make the first attempts to resolve a dispute with a taxpayer, especially with self-represented taxpayers and those with access to limited resources. This is so as a dispute with the ATO can involve a considerable imbalance of power — that is, where the ATO having significant resources may have greater influence over the ultimate outcome.

4.103 The ATO's ADR Register does not currently record data as to which party initiated the ADR. At the IGT's request, the ATO compiled data in relation to which party initiated the ADR. That data shows that of the 250 relevant cases:

  • the ATO, its solicitor or its counsel initiated ADR in 67 cases;
  • the taxpayer initiated ADR in 19 cases;
  • the ADR was ordered by a Court or Tribunal in 86 cases;
  • the parties jointly agreed to the ADR in 12 cases;
  • the ATO was not party to the ADR in 2 cases; and
  • data was not available in respect of 64 cases.

4.104 Although 26.8 per cent of of these cases were found to be initiated by the ATO the majority proceeded to ADR following a direction from the Court or Tribunal (34.4 per cent). The IGT considers that some of the delay in initiating ADR (that is leaving it until it is formally ordered by a Court of Tribunal) may have contributed to the perception that the ATO does not often initiate and engage in ADR with taxpayers.

4.105 During the review process, the ATO advised the IGT that in an effort to enhance the data captured by the ADR Register as a way to better monitor ADR participation in ATO disputes, a number of updates were being implemented. Some of these were completed in February 2012. The IGT has been advised that there are further planned updates to enhance the register and to incorporate it into the ATO's enterprise case management system, Siebel. One proposed addition to the updated register is a field requiring ATO officers to record who initiated the ADR process.

4.106 The IGT considers that there is merit in the ATO's work in this regard and is of the view that data from the Register serves a twofold purpose:

  1. to better inform the ATO of the effectiveness of its use of ADR and whether there are any skill gaps which may be addressed by appropriate training; and
  2. the data may be published to inform the taxpayers of the ATO's commitment and efforts in relation to ADR usage and to encourage taxpayers to consider and approach the ATO to engage in ADR where disagreements arise.

Recommendation 4.6:

  1. With a view to ensuring an accurate and meaningful collection of data on the ATO's use of ADR, the IGT recommends that the ATO's suite of future planned improvements to the ADR register should include information such as:
    • who initiated the ADR process;
    • who represented the ATO and the taxpayer at the ADR;
    • how many people were present for each party at the ADR and their respective roles;
    • whether a person with authority to settle the dispute for the ATO and the taxpayer was present at the ADR; and
    • whether these persons also had authority to settle any issues in relation to the underlying debt arising from the tax dispute.
  2. The IGT further recommends that the ATO publish its findings from the ADR Register, in its Annual Report or another publication, to demonstrate its achievements in, and affirm its commitment to, the use of ADR in the resolution of tax disputes.

ATO Response

Agree in principle.

The ATO has been progressively improving the register, and will continue to make future improvements in the way we collect data about our use of formal ADR processes. From 1 July 2012, changes will be made to our IT systems, to progressively replace the current ADR Register. System changes to further configure the register's reporting criteria will have to be assessed for priority against other system change requirements of the broader organisation.

The ATO agrees to improve the register by including information such as who initiated ADR and who represented both the taxpayer and the ATO in formal ADR. We will also include on the register whether the people attending the ADR had authority to settle within a ceiling, noting that in our experience people attending ADR on behalf of taxpayers only have authority to negotiate and settle up to a point.

The ATO agrees to publicly publish relevant ADR information, to the extent that it is able to do so and the taxpayer does not object to it.

Taxpayers initiating ADR

4.107 In submissions to the IGT, taxpayers and their representatives have outlined their experiences when approaching the ATO to enter discussions with a view to either narrowing the issues in dispute or resolving the matter without recourse to litigation. Stakeholders have advised that such approaches are sometimes problematic as the designated ATO audit or objections officers appeared to be too inexperienced, lacked necessary skills, lacked authority or were generally perceived to be unwilling to commit to meet with taxpayers and their representatives.

4.108 As an example, in one case the IGT was advised that both the ATO officers and the taxpayers were able to identify the issues in dispute and agreed that ADR was appropriate. However, despite the understanding between the parties, the ATO was unable to initiate and engage in ADR in an efficient manner as it took the ATO officer some time to identify and escalate the case to appropriate ATO personnel for a decision to be made regarding engagement in ADR. The submission noted that this particular dispute is ongoing.

4.109 Some stakeholders perceive that existing escalation processes are not effective because the escalation point is often the ATO officer's immediate team leader or manager. Stakeholders consider that in these circumstances their concerns are not being objectively considered.200

4.110 In such cases, stakeholders advise they have had to rely on professional contacts with Senior Executive Service (SES) officers to intervene and act as circuit breakers. Stakeholders observed that whilst this may address the immediate problem, it was not an ideal solution as it necessarily imposed on an SES officer not involved in the dispute and resulted in some taxpayer concerns of potential 'retaliation' or a breakdown in working relationships.

4.111 It was also suggested by certain stakeholders to the IGT that these professional contacts with ATO SES officers are more available to 'the big end of town' or those able to afford the professional services of advisers who were engaged in forums and conferences with ATO SES officers. These stakeholders believe that such an approach is inefficient, providing ad hoc solutions, potentially discriminating against smaller, less-resourced and less-sophisticated taxpayers. A submission to the IGT also noted that the comparative difficulty of smaller taxpayers to contact and address senior ATO officers may be impeding opportunities for engagement in early negotiations to resolve issues in dispute.

4.112 The IGT has been made aware of some work undertaken by the ATO to address this concern. This is discussed below.

Points of Escalation

4.113 Stakeholder concerns regarding the need for greater clarity in escalation processes and team leader oversight were raised with the IGT in the Large Business review. The IGT made a number of recommendations in that review, including that risk review and audit team leaders should:201

  • have end-to-end accountability for the timely and effective coordination of risk reviews and audits;
  • have effective oversight of review and audit case officers and other staff involved in the process; and
  • ensure there is proper dialogue and engagement with taxpayers through active participation in key workshops and meetings.

4.114 The IGT further recommended that a senior executive officer should be appointed to 'act as the key escalation point for taxpayer concerns with the conduct, progress or direction of a risk review or audit and consider and decide whether ADR is appropriate and ensure that genuine steps are taken to resolve potential disputes.'202

4.115 Consistent with these recommendations, the ATO has advised that the LB&I business line has taken steps to clarify and enhance escalation process by reviewing its standard pro-forma audit correspondence to clearly provide a point of contact to whom a taxpayer or their representative may escalate issues of concern, including requests to engage in discussions, in cases where the taxpayer is unable to address these issues with the appointed audit officer.

4.116 The IGT is of the view that this approach provides clear channels of escalation for taxpayers without the need to sidestep the appointed audit officers and suggests that such arrangements would be of most benefit where:

  • the senior officers to whom matters are escalated are relatively senior and sufficiently experienced to appreciate the application and benefits of ADR and other dispute resolution techniques; and
  • such senior officers should provide assurance to the taxpayer and their representatives that their own view was considered independently and balanced against those of the audit officer to manage the risk of perception or otherwise that their decision is based only on the ATO audit officer's views.

4.117 Ensuring that clear and effective escalation channels are communicated to taxpayers not only provides taxpayers with a legitimate avenue of recourse where it is perceived that ATO officers are not acting appropriately, it also adds a level of accountability for ATO officers and enables team leaders and managers to be apprised of issues early, to engage and manage issues before they crystallise into disputes.

4.118 The IGT considers that there is significant merit in the approach adopted by LB&I to ensure clear communication of escalation channels. However, the IGT recognises that such processes may not be administratively efficient when applied in business lines with high volume work and a larger taxpayer base.

4.119 Further, the IGT recognises that given the time lag in reviews and audits and officers moving roles, the inclusion of escalated contact points in correspondence alone will not be sufficient. The ATO's Wealthy and Wise booklet which sets out procedures, commitments and expectations in relation to the HWI taxpayer segment provides that where taxpayers are unable to resolve issues or concerns directly with the designated case officer, they should escalate these issues to:203

... a more senior officer also advised to you at the start of the compliance activity. The senior officer will review the issue (including the relevance and scope of information requests) and work out a process for addressing your concerns. They may need to discuss the issue with you and the case officer. If your concerns are not adequately addressed at this level, further avenues are open to you. Details of contact points will be available through a home page for highly wealthy individuals on our website.

4.120 The IGT considers that the approach adopted in relation to HWIs is appropriate and should be expanded to include all taxpayers as, ultimately, all taxpayers should be able to readily obtain the details of senior officers within the ATO to whom matters of concern may be escalated to be addressed.

Recommendation 4.7:

The IGT recommends that the ATO clarify the lines of escalation by:

  • updating the Taxpayer's Charter to include a commitment to providing taxpayers with the contact details of senior officers to whom they can escalate matters of concern;
  • revising and updating processes to ensure that taxpayers are advised of both the designated ATO audit or review officer's details and the details of a more senior officer at the outset of any risk reviews and audits; and
  • ensure that all escalation contact officers are sufficiently senior and possess sufficient skills and knowledge to adequately address taxpayer concerns.

ATO Response

Agree as tailored to relevant market segments.

We will update the relevant Taxpayer Charter publication If you're subject to review or audit to reflect our current practice in the larger and more complex cases. The practice in those cases is to advise taxpayers and advisers of ATO escalation points at the outset of any compliance activity (see also pages 7 and 44 of the Large business and tax compliance booklet). Typically those people are the team leader's manager or an Assistant Commissioner.

We are concerned about the efficiency impacts of applying this recommendation without differentiation to all markets. To promote effective management and early resolution of less complex and higher volume cases, we do provide a contact point in our correspondence as well as providing taxpayers with information about their options for escalation. In line with the observations on high volume cases at paragraph 3.9 of the report, we think these tailored approaches substantially meet the thrust of this recommendation.

Access to ATO Contacts

4.121 The ATO has had in place for a number of years, a telephony contact point to assist tax agents to escalate tax technical matters to appropriate subject-matter experts. The Professional to Professional (P2P) service is available to tax agents who have been unable to resolve technical matters after conducting relevant research and relying on information available on the ATO website, as well as utilising a dedicated tax agents' telephony service.

4.122 The P2P service provides a senior ATO contact, whom the tax agent may contact or email to outline the technical issue and their attempts to resolve it. The senior ATO contact reviews the matter and puts the tax agent in contact with relevant ATO subject-matter experts to either resolve the issue or assist the tax agent to identify proper channels to address the issue.

4.123 One of the benefits of the P2P is the ability to directly contact a senior ATO officer who has a broader understanding of the ATO's operations and structure and is able to apply this knowledge and draw on his or her resources to quickly and easily channel the tax agent's query to the appropriate personnel. Coupled with this, the IGT was advised that the major business lines have also appointed their own representatives to liaise and work with the P2P officer to better handle these queries. The result is that queries which come through the P2P service are directed to the appropriate area within a few days.

4.124 In response to findings of the ATO's Legal Practitioners Services Survey204 in 2008 which identified, amongst other things, the need for improved access to ATO staff by legal practitioners, the P2P service was extended to the 19 members of the ATO's Legal Practitioners Working Party (LPWP) in March 2010 on a trial basis. The ATO noted that use of this service during the trial period had been limited,205 but the IGT has received feedback from those who used the service that it provided an effective point of contact within the ATO to escalate matters of concern.206 Similarly, the IGT has been advised by ATO officers participating in the service that there is merit in it but that a larger pilot needs to be conducted to better assess the service's utility to tax practitioners.

4.125 The IGT is of the view that facilitating more efficient and effective contact between taxpayer representatives and appropriate ATO officers would enhance communication and engagement in resolving matters, or disputes, thereby reducing the need to resort to more formal channels. The IGT supports an extension of the P2P program to legal practitioners and for the ATO to investigate and report on the findings of an extended pilot.

4.126 In order to encourage sufficient levels of participation in the expanded program, the ATO should actively promote the existence of the program and invite legal practitioners to participate and provide feedback on the effectiveness of the initiative in addressing taxpayer concerns and disputes. The ATO has acknowledged the need to promote the P2P program, generally and to a broad base of legal practitioners as part of the program's expansion.207

Recommendation 4.8:

To better assist taxpayers and their representatives to get in touch with the right areas of the ATO for dispute resolution purposes, the IGT recommends that the ATO:

  • further promote the Professional to Professional program to a broader group of tax and legal practitioners; and
  • assess and report on the utility of the Professional to Professional program.

ATO Response


At what point during the compliance process should the parties engage in ADR?

4.127 There was no clear consensus of any optimal time at which ADR should be engaged. Stakeholders were varied in their views as to when ADR is most effective and appropriate.

4.128 A submission noted that there were two critical points at which ADR may most effectively be applied. The first is at the very beginning of a dispute where the parties genuinely want to avoid litigation and the other being towards the end where both parties have retained Counsel and advisers who are able to cast fresh eyes over the dispute with a view to resolution.

4.129 Other submissions noted that the parties are able to consider ADR at any stage of the dispute, and as early as possible, even if only to enable the parties to agree (or agree to disagree) on facts. Some practitioners emphasised that for ADR to be effective it must occur prior to issuance of an objection decision as, once this occurs, the taxpayers and their representatives are completely focused on filing evidence to challenge the decision.

4.130 Statistics provided by the ATO from the ADR register notes that of 250 tax dispute cases which proceeded to ADR, 231 (92.4 per cent) were conducted during litigation at first instance. Of the remaining cases, 14 proceeded to ADR on appeal (from a decision of the AAT to the Federal Court or from a single judge of the Federal Court to the Full Court), one occurred during the objection stage and two during the pre-assessment period. The remaining two cases did not report data on this point.

4.131 It has been noted that the ATO has also traditionally looked at resolution of tax disputes after issuing a position paper but prior to issuing an amended assessment, as well as between lodgment of the appeal and the hearing.208 It has been posited that opportunities exist for the ATO to consider resolution of tax disputes at other points in time, such as following lodgment of an objection but before commencement of any litigation.209

4.132 The point in time at which the parties should or could engage in ADR is dependent on a number of factors including the nature of the dispute, the parties to the dispute and the facts and evidence which are already in the parties' possession or knowledge.

4.133 The IGT considers that there are a number of points throughout the compliance process during which ADR could be utilised. These points may include the time at which the facts have been agreed, position paper has been issued or at the objection stage.

4.134 The Part IVC process necessitates the taxpayer taking the first step in challenging a decision by way of objection and then litigation. In light of the requirements imposed by the CDRA 2011, it necessarily falls on the taxpayer as the potential applicant to take genuine steps to resolve the dispute prior to commencing action in the Federal Court. Equally, the Commissioner as the respondent to these proceedings needs to be responsive to the efforts of the taxpayer.

4.135 To ensure a streamlined and expedited process, the IGT is of the view that the ATO should implement a process through which a taxpayer or their representative can quickly and easily engage the ATO in ADR (including direct negotiation) at different points in time during a dispute.

4.136 The ATO has advised the IGT that on some occasions, taxpayers have requested the ATO to engage in ADR without clear reasons as to the objectives sought. In these instances, the ATO has rejected ADR because it considered that engagement at that point in time would increase costs and delay resolution of the dispute overall.

4.137 Through review of the case files on the ATO's electronic case management system, the IGT identified a case in which the taxpayer had not appreciated the nature of ADR and what it was designed to achieve. The IGT notes that the taxpayer sought to engage only as a means of providing further information to the ATO and to better understand its reasoning and position. As discussed earlier, with improved early engagement, such a situation could be avoided. In another case that the IGT examined, the request to engage the ATO in ADR was sufficiently detailed, with an annexure providing the reasons for the requested engagement as direct settlement negotiations had failed. This request was appropriately escalated to a relevant senior ATO management officer for consideration. At the time of writing this report, the case had not yet been finalised.

4.138 The above cases demonstrate the extremes of the range of taxpayer experience in engaging the ATO in an ADR process. To some extent it depends on the level of sophistication of the taxpayer. However a more uniform and improved experience for all taxpayers may be achieved by providing better information to the public as discussed in Chapter 5.

4.139 As ADR is a process which the parties must design for themselves to suit the dispute in question, it is undesirable to be too prescriptive in relation to when ADR should be entered. Rather, the IGT considers that it would be beneficial for the ATO to:

  • affirm its commitment to ADR in relation to all taxpayers in the Taxpayer's Charter so that taxpayers may hold ATO officers to account where engagement is denied without sufficient reason;
  • adopt a process which favours engagement in ADR and implement a mechanism through which the taxpayer may request the ATO engage in ADR quickly and easily throughout the end-to-end process; and
  • in consultation with external stakeholders, determine what guidance may be given to taxpayers regarding information needing to be provided when seeking to engage the ATO in ADR.

4.140 The IGT considers that the ATO should reflect and reinforce its commitment through corporate documents such as PS LA 2007/23 and the Taxpayers' Charter, and provide guidance to taxpayers as set out in Recommendation 5.2 in the next chapter.

Recommendation 4.9:

Subject to the caveats previously outlined regarding when ADR may not be appropriate, the IGT recommends that the ATO consults with external stakeholders on developing a mechanism which enables taxpayers to request initiation of ADR (including direct negotiation) with the ATO, to wholly or partly resolve matters in dispute at the most appropriate point in time, such as:

  • once agreement has been reached on the facts or both parties believe that the facts in contention have been sufficiently narrowed;
  • prior to a position paper or reasons for decision being issued;
  • after the position paper has issued but prior to the amended assessment;
  • prior to the lodgment of an objection; and
  • prior to issuance of an objection decision.

Where the ATO considers that ADR is not appropriate, or not appropriate at a particular point in time, the reasons for the ATO's view in this regard should be communicated to the taxpayer with an alternative as to how the issues concerning the taxpayer could otherwise best be addressed.

ATO Response

Agree in part.

There will be situations where there is a dispute on a procedural or preliminary issue where informal or formal ADR processes are an appropriate way of progressing the matter.

In relation to questions of liability and entitlements, the ATO has statutory responsibilities and it is important that the community has confidence that the ATO is resolving cases appropriately and with integrity. This requires a proper process to establish the facts so as to make a proper assessment of taxpayers' liabilities or entitlements.

In the larger, more complex cases, it is often only after the issue of a position paper that we have a considered articulation of facts and law to enable us to consider the appropriateness of a formal ADR process.

We agree that any decisions with respect to ADR should be clearly communicated to taxpayers. However, taxpayers might want to take their own advice as to how they wish to progress their dispute. We would of course share with them possible alternatives if they were prepared to engage with us.

141 Commissioner of Taxation, above n. 95, p. 105.

142 Australian Taxation Office, above n. 40, para. 21.

143 Administrative Appeals Tribunal, Alternative Dispute Resolution (ADR) guidelines, Sydney, June 2006, viewed on 21 September 2011, p. 3; NADRAC, above n. 138, p. 3.

144 NADRAC, above n. 137, p. 4.

145 Australian Taxation Office, above n. 38, paras 4 and 11; see also Australian Taxation Office, above n. 51, p. 34.

146 ibid., paras 10.

147 Board of Taxation, Improving Australia's Tax Consultation System, Sydney, 2007, p. 45.

148 Justice G. Hill, To Interpret or Translate? The Judicial Role for GST Cases, speech delivered on 5 August 2005 at a conference organised by Monash University on "Interpreting the GST Law" cited in Commissioner of Taxation v Multiflex Pty Ltd [2011] FCAFC 142 at [1].

149 Joint Committee of Public Accounts and Audit, Report 426 Ninth Biannual Hearing with the Commissioner of Taxation, Canberra, 23 November 2011, p. 25.

150 ibid., p. 26.

151 Justice G. Hill, 'The Judiciary and its Role in the Tax Reform Process,' (1999) 2(2) Journal of Australian Taxation 66, p. 66.

152 Commissioner of Taxation v Anstis [2010] HCA 40.

153 See for example: Multiflex Pty Ltd v Commissioner of Taxation [2011] FCA 789.

154 Tax Laws Amendment (2012 Measures No. 1) Bill 2012. The bill was introduced in the Senate on 10 May 2012.

155 Commissioner of Taxation v Qantas Limited [2012] HCATrans 36.

156 CSR Limited v Eddy [2005] HCA 64.

157 Michael Kirby, 'Alternative Dispute Resolution - A Hard-nosed view of its strengths and limitations' (2009) 28 The Arbitrator and the Mediator 1, p. 3.

158 Australian Taxation Office, Test Case Litigation Program, Canberra, 9 June 2009, viewed on 23 May 2012.

159 Australian Taxation Office, above n. 74.

160 Knowledge Pond Pty Ltd, Managing Legal Risk in the Australian Taxation Office: Aligning Resources and Functions, September 2003. Report provided by the ATO to the IGT and is not publicly available.

161 Australian Taxation Office, above n. 74, para. 61.

162 Australian Taxation Office, Significant Technical Issues, Canberra, 10 January 2011, viewed on 2 December 2011; see also ibid, Attachment 1 to Annexure F.

163 Commissioner of Taxation, above n. 95, pp. 170 - 181.

164 Australian Taxation Office, NTLG Minutes June 2011, Canberra, 23 November 2011, viewed on 15 December 2011, item 10.

165 Inspector-General of Taxation, Review of Tax Office Management of Part IVC Litigation, Sydney, 7 August 2006.

166 ibid., p. 105.

167 ibid., p. 119.

168 ibid.

169 ibid.

170 Commissioner of Taxation v Clark & Anor (No 2) [2011] FCAFC 142.

171 ibid., para. 28.

172 ibid., paras. 24 and 28.

173 Inland Revenue, Disputing an Assessment, Wellington, 2011, viewed on 2 February 2012, pp. 8 & 27; Inland Revenue, Disputing a Notice of Proposed Adjustment, Wellington, 2011, viewed on 2 February 2012, pp. 7 & 27

174 Australian Taxation Office, above n. 158.

175 See for example, International All Sports Limited v Commissioner of Taxation (No 2) [2011] FCA 1027.

176 See: Oil Basins Ltd v Commonwealth & Anor [1993] HCA 60; Platypus Leasing Inc & Ors v Federal Commissioner of Taxation [2005] NSWCA 355.

177 Commissioner of Taxation v Indooroopilly Children's Services (Qld) Pty Ltd [2007] FCAFC 16.

178 D. Bennett QC, H. Burmester QC and J. Hmelnitsky, Application of Precedent to Tax Cases - Further Opinion on Declaratory Proceedings, Sydney, 18 June 2007, viewed on 15 August 2011.

179 ibid., p. 6.

180 ibid., pp. 14-17.

181 ibid, pp. 16 - 18

182 News Sports Programming Pty Ltd & Ors v Commissioner of Taxation & Ors (Federal Court proceeding NSD 916 of 2008); M. Jacobs, "ATO drops action against News", The Australian Financial Review, 11 September 2008.

183 D. Bennett QC, H. Burmester QC and J. Hmelnitsky, above n. 178, pp. 9 and 11.

184 J. Batrouney SC, The Commissioner's Role in Interpreting Tax Law and Emerging Issues for Advisers, paper delivered at the 46th Victorian State Convention, Melbourne, 11-13 October 2007, viewed 19 March 2012, p. 13.

185 Australian Taxation Office, NTLG Dispute Resolution Sub-committee meeting minutes June 2011, Canberra, 6 October 2011, viewed on 2 December 2011, item 7.

186 The taxpayer's legal fees in the case in the preceding paragraph for its solicitor alone was approximately $250,000 by the time the matter concluded.

187 Federal Court of Australia, Practice Note CM 7, Sydney, 1 August 2011, viewed on 2 September 2011.

188 ibid, para. 3.1.

189 Inspector-General of Taxation, above n. 135, p. 32.

190 Australian Taxation Office, Work Processes intranet page, document entitled 'Early dispute resolution attempts: valuation-related audit issues.'

191 OECD, Dealing Effectively with the Challenges of Transfer Pricing, 19 January 2012, p. 46.

192 ibid.

193 ibid., p. 47.

194 ibid.

195 Australian Taxation Office, above n. 189, p. 3.; Australian Taxation Office, Draft ATO - AVO Memorandum of Understanding, Schedule 1.

196 Australian Taxation Office, Valuations Issues Paper, Canberra, 17 January 2012, viewed on 20 January 2012.

197 ibid.

198 NADRAC, above n. 137.

199 See for example: Attorney-General's Department, above n. 20, and Australian Taxation Office, above n. 40, both of which only require the ATO to 'consider' ADR.

200 Similar issues were raised with the IGT in: Inspector-General of Taxation, above n. 71, point 7.52, p. 97.

201 ibid., p. 83.

202 ibid.

203 Australian Taxation Office, above n. 50, p. 37.

204 Australian Taxation Office, Legal Practitioner Services Survey 2008, Canberra, March 2009, viewed on 28 October 2011.

205 Australian Taxation Office, Legal Practitioners Working Party minutes 13 October 2010, Canberra, 10 November 2011, viewed 21 October 2011.

206 Australian Taxation Office, Melbourne Regional Tax Practitioners Working Group minutes, October 2010, Canberra, 31 August 2011, viewed 21 October 2011, item 8.

207 Australian Taxation Office, Legal Practitioners Working Party Minutes August 2011, Canberra, 23 February 2012, viewed 14 May 2012, item 3; M. D'Ascenzo, Tax Practitioner Action Plan, speech delivered to the CPA Sydney Professional Accounts Group Annual Dinner, Sydney, 3 February 2012, viewed on 23 May 2012.

208 G. Williams and C. W. Jackson, 'New Ways to Fix Tax Disputes', Charter, June 2011, p. 50.

209 ibid, p. 51.