6.1 In the IGT submission to the Tax Forum,254 the position was advanced that the ATO's dispute management framework would be much enhanced by establishing a separate appeals area within the ATO to improve its current handling of objections and conduct of litigation. While it is hoped that the ATO's current T-project would reduce the likelihood of disputation through the engagement of more senior ATO experts earlier in the compliance process, it is acknowledged that not all disputes will be resolved at that time, or at a later stage.

6.2 Stakeholders have noted that, given the increasing complexities in the tax law, the need for a sufficient level of ATO expertise throughout the end-to-end process is critical. In this regard, stakeholders have noted that the ATO's claims of the limited internal expertise available to it are concerning.

6.3 Stakeholders consider that it is incumbent on the ATO as the monopoly administrator to ensure that it is responsive to the increasing complexities and new challenges. Maintaining a sufficient level of independence and expertise at the objection and litigation stages is crucial to meeting these challenges. As the Administrative Review Council noted:255

A good system of internal review is one which is transparent in process and affords a quick, inexpensive and independent review of decisions. Such a system is beneficial both to applicants and agencies. Its aim should be to encourage better primary decision making by agencies, and the delivery of a cost effective and time efficient review process to applicants.

6.4 An appeals area, such as proposed by the IGT, would provide an independent internal review at the objection stage, providing continuous feedback to better inform and enhance primary decision-making and support better selection of cases for litigation. Furthermore, by having specialised litigators as well as technical experts, it should also result in better management of the entire litigation process.

6.5 The ultimate goal of a separate appeals area is, therefore, to ensure that only genuine and fundamental disputes on interpretation or application of law are litigated, resulting in cost savings for both government and taxpayers.

Independent internal review at the objection stage

6.6 The ATO acknowledges the importance of independent review. It notes:256

Independence during the review process ensures that tax officers act in an objective and impartial manner, free from any conflict of interest or inherent bias or undue influence. Independence promotes fairness and perceptions of fairness, and minimises the incidence of taxpayer dissatisfaction and complaints.

6.7 In the IGT's Objections review, stakeholders expressed concern about the perceived lack of independence in the objections process where an ATO objection officer is located within the same business line as the original decision maker, albeit in a different section. This has led to certain stakeholder concerns that there is a perception of bias in the resolution of objections and that the process was merely formality before the matter progressed to the AAT or Federal Court.257

6.8 The IGT found that in relatively simple matters, there was a greater degree of independence with objections officers having more of an appreciation of their role and the role of the original decision maker. However, in larger more complex cases these respective roles and responsibilities became blurred. This was partly due to the complexity of the facts or the relevant law and ATO's scarce technical resources.258

6.9 The ATO recognises this independence issue as a risk, noting that:259

... in some circumstances there may be a trade-off between maintaining independence during the review process and the nature and extent to which the reviewer seeks input from the original decision maker. Ultimately, it will be an exercise of judgment on the part of the reviewer.

6.10 The ATO, however, in considering this independence trade-off has noted that:260

Contact with the original decision maker should not be used as a substitute for independent re-examination of the dispute. Whilst it is acknowledged that efficiencies can be gained through contact with the original decision maker (particularly in complex disputes) such contact should not be used to replace the reviewer's own understanding and research.

6.11 Similar concerns regarding the perceived lack of independence of the objections process have also been raised by certain stakeholders with the IGT during consultations for this review. This perception was strongest where the matters concerned complex transactions (such as transfer pricing) or unsettled areas of taxation law (such as Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)) where there was a lack of sufficient subject-matter experts.

6.12 One suggestion which was put to the IGT during consultations for this review was that there should be an option, in complex cases, for the taxpayer to bypass the objection process and apply directly to the AAT or the Federal Court.

6.13 A similar suggestion was considered by the IGT as part of the Objections review in which stakeholders called for greater flexibility to seek external review where, for instance, the ATO and taxpayer have fully considered the facts, evidence, issues and application of the law early in the dispute and there is a difference of opinion on the tax implications between the ATO and the taxpayer.261

6.14 The IGT concluded in that report that 'the objection stage is an important part of the dispute resolution process, even where the Tax Office and the taxpayer have formed a conclusive view on the law. Properly framed, a re-examination of facts, issues, evidence and law by an independent officer may provide scope for the resolution of the dispute without the need to proceed to litigation, for instance, through mediation or settlement negotiations.'262

6.15 In that report, the IGT recommended, amongst other things, that the ATO implement arrangements for:263

A fast-tracked process to external review be made available that would allow an objection decision to be expedited where resolution of the dispute at the objection stage is unlikely as it deals with the Tax Office view of the law (as expressed in a ruling, determination or other interpretative advice) and the facts are agreed.

Where an objection officer has sought input from the original decision maker on material facts, evidence or technical view, and the objection officer is likely to disallow the objection, the taxpayer is given an opportunity to respond on these material facts, evidence or technical view.

6.16 The ATO agreed to implement these recommendations. As part of an upcoming review into the ATO's implementation of agreed recommendations, the IGT will review the extent to which there is a sufficiently expedited process for objections in which it is considered that resolution is unlikely to be achieved through any alternate means other than litigation.

ATO Management of Litigation

6.17 Some concerns have also been raised with the IGT in relation to the ATO's management of litigation. In particular, focus has been directed at the ATO's litigation case losses when progressing matters through the courts and on appeal. Recent statistics from the ATO suggest that while it continues to enjoy high success rates of litigation in the AAT, its success rate in the Courts has decreased over the past few years. The figures are outlined in the tables below.

Table: Success rates in the AAT 2009-10 to 2011-12 (YTD)264
Year Fully Favourable to ATO Fully Favourable to Taxpayer Partially Favourable
2009-10 63% 9% 28%
2010-11 76% 9% 15%
2011-12 (YTD) 69% 14% 17%
Table: Success rates in the Courts 2009-10 to 2011-12 (YTD) 265
Year Fully Favourable to ATO Fully Favourable to Taxpayer Partially Favourable
2009-10 56% 35% 9%
2010-11 47% 38% 15%
2011-12 (YTD) 45% 45% 10%

6.18 Further, statistics gathered by the IGT from publicly available sources indicate that since the case of WR Carpenter266 in which judgment was delivered in July 2008, the ATO has litigated or been party to fifteen matters in the High Court of Australia. Of these:

  • ten were tax technical challenges and the Court delivered only one wholly favourable judgment for the Commissioner,267 eight were in the taxpayers' favour and one case in which the appeals of both parties were dismissed;268
  • three matters turned on challenges arising out of debt collection activities or the operation of provisions of the corporations law, two of which were favourable to the Commissioner; and
  • two were constitutional challenges to the validity of enactments administered by the ATO and were argued by and on behalf of the Commonwealth.269

6.19 In 2011, the JCPAA queried the Commissioner on the ATO's losses in general tax law litigation. In response, the Commissioner noted that the ATO's 'success rate is still very positive in terms of numbers'270 but expressed some concern of 'worrying signs in relation to the courts' approach to the general anti-avoidance provisions of the law.'271

6.20 In respect of general anti-avoidance litigation matters, that is those concerning the application of Part IVA of ITAA 1936, some stakeholders have suggested that the reason for the ATO's losses may be due to poor case selection by the ATO in matters appropriate for litigation. In this regard, stakeholders have expressed concerns in relation to the ATO's in-house legal services function.

6.21 In particular, it was queried whether officers internal to an organisation, such as those within the legal services section of the ATO, could objectively review the facts and evidence of a case and determine, independently of the compliance section, whether the matter should be settled, defended or appealed. In a recent judgment, Justice Logan of the Federal Court of Australia stated:272

It is a matter of concern to me in this case that the objective detachment which is an incident of a truly independent solicitor acting for the Commissioner has not been apparent. That is not in any way to criticise counsel but, rather, to emphasize the singular importance of an independent solicitor acting for a client. That role is to act as something of a reality check for a client. Where a solicitor is in house, and Mr Tanna [the Australian Taxation Office Solicitor] has that status, there is a risk which must constantly be guarded against of client capture. I was left to wonder on the hearing of this application, having regard to the material before me, whether that particular phenomenon had occurred here.

6.22 Additionally, in light of a number cases which were progressed through litigation despite advice to the contrary, where there was no law clarification purpose and significant offers of settlement were made, stakeholders have voiced concern that ATO litigation may be directed, not by the legal services section, but by certain senior officers who were involved.

6.23 One submission suggested that the removal of the litigation function from the ATO altogether would assist to ensure greater independence of advice and improve the performance of the ATO in tax litigation.

6.24 In his valedictory lecture,273 the ATO's former Chief Tax Counsel and Special Tax Adviser, Kevin Fitzpatrick, voiced his view that the ATO needed to adopt a better strategy to improve its litigation capability through more targeted and better focused litigation efforts. He also suggested that the management of tax litigation could be enhanced through some officers within the ATO's TCN specialising in litigation and having responsibility for strategically important cases.274

6.25 Mr Fitzpatrick further suggested that greater consistency of tax decisions may be achieved through a permanent panel of special appellate judges.275 That is, tax litigation matters may be determined by a broader pool of judges or tribunal members, but on appeal, it should be heard by a narrower group of appellate judges with specialist tax knowledge.

6.26 This suggestion for the establishment of some specialist forum to adjudicate tax litigation is not novel. Such a model already exists in such jurisdictions as the United States276 and Canada.277 There is some stakeholder support for the establishment of a specialist tax court or tribunal, akin to the Trade Practices Tribunal, composed of 'a judge, an economist and perhaps someone from business or the tax office so that the decision of the tribunal will necessarily be informed by the internal deliberations of those with the required knowledge and training.'278

6.27 The IGT notes that a similar suggestion was also raised in the A Tax System Redesigned report (the Ralph Report).279 Specifically, the Ralph Report noted that given the large number of cases proceeding through the courts and tribunals each year, contributing to both delays and uncertainty 'the tribunal and court arrangements applying to tax disputes need themselves be reviewed and all options for improvement considered.'280

6.28 The Ralph Report outlined two options for consideration to reform in this area. These options were:281

  • the establishment of a specialist taxation tribunal to facilitate effective tax dispute resolution, possibly as a division of the proposed Administrative Review Tribunal or Federal Magistrates Court; or
  • the creation of a dedicated Tax Court, possibly as part of the Federal Court, presided over by judges with specialist tax knowledge.

6.29 Opponents of the suggestion that Australia would benefit from a specialist tax court argue that tax law does not exist in isolation and judges are often called upon to elucidate and apply 'concepts of general law as they impinge on the operation of tax statutes.'282 Furthermore, a specialist tax court poses a potential concern of being seen to be 'too close' to repeat litigants (that is, the Commissioner who will either be applicant or respondent in all matters).283 This is likely to create a real risk of diminished confidence in the determinations of any such court.

6.30 Countering this argument is the suggestion that the risk of distortion and institutionalisation of the law through the application of specialist perception may be addressed by a general appellate court with a broader pool of judges.284

6.31 The IGT notes that both the Federal Court of Australia and the AAT285 have designated tax specialists and, through internal arrangements, ensures that tax cases are heard and determined by judicial officers possessing appropriate taxation expertise. Specifically, the New South Wales registry of the Federal Court has established a specialist panel of tax judges to ensure that tax dispute matters are allocated to a judge on the panel.286 Each registry of the Federal Court also has a tax list coordinating judge who is tasked with ensuring that tax matters are expedited, that issues are brought to light early and the matter is either resolved or set down for hearing as soon as possible.287

6.32 The IGT raises this matter as a point of discussion and notes that any reform in this area falls outside of the IGT's jurisdiction. Should it become necessary to consider the need for a specialised tax court, the IGT is of the view that the Attorney-General's Department may be better placed to investigate and advise as to whether such an establishment would be in the public benefit and create value for the community as a whole.

Separating objection and litigation functions from audit functions

6.33 The IGT considers that separating the objections and litigation functions from the investigative arm of the ATO will assist in enhancing both the actual and perceived independence of review of original ATO decisions. A separate appeals and review area seeks to empower a separate ATO litigation section to independently assess the evidence and prospects of a case before progressing to originate litigation or appeals for adverse decisions. In effect, the ATO's litigation function would, like the Director of Public Prosecutions in criminal matters, have ultimate discretion as to which matters the ATO would litigate, which would be conceded and which should otherwise be settled.

6.34 Such a structure existed in the ATO prior to 1994 in the form of its Appeals and Review Group. However, following an internal review, a restructure took place whereby the functions formerly exercised by Appeals and Reviews were subsumed into business lines which were created contemporaneously. These business lines have evolved since then but to date they still house both the objections and the audit areas.288

6.35 The IGT notes that the restructure came about, in part, from recommendations of the JCPA in its 1993 report. In that report, the JCPA noted:289

In the event that the decision making process within the ATO is amended to require that decisions on assessments and prosecutions are made after a process of internal review, the functions of the officers of the Appeals and Review Group would be effectively reallocated to staff within the mainstream decision making process. In the Committee's view, those functions should properly be conducted in every case not merely those that go to objection. Thus, the resources of the Appeals and Review Group should be allocated to general decision making areas.

6.36 The report recommended that:290

The Australian Taxation Office reallocate the resources of the Appeals and Review Group to the performance of internal review within the on-going decision making processes of the Australian Taxation Office.

6.37 The ATO's 1993-94 Annual Report also alluded to a separate internal review in relation to the organisational restructure.291 The IGT has not been able to review this report as it cannot be found despite the ATO's best efforts.

6.38 The IGT acknowledges that the decision to disband Appeals and Review was driven by the ATO's desire to improve compliance through improvement of its client focus.292 However, as outlined in the IGT's Objections review and following concerns raised by stakeholders in this review, the IGT considers that it is now necessary to revisit the need for, and benefits of, a separate appeals and review function.

6.39 The IGT notes that since 1998 such a model has existed in the United States' IRS, with Congress having legislated to mandate the restructure:293

The Commissioner of Internal Revenue shall implement a plan to reorganize the Internal Revenue Service. The plan shall [...] ensure an independent appeals function within the Internal Revenue Service, including the prohibition in the plan of ex parte communications between appeals officers and other Internal Revenue Service employees to the extent that such communications appear to compromise the independence of the appeals officers.

6.40 Taxpayers who disagree with IRS decisions are able to elect to conference (either by correspondence, telephone or in person) with an Appeals officer and are asked to be prepared to discuss all disputed issues at the conference.294 The Appeals officer is sufficiently authorised to separately and independently settle or pursue matters arising out of IRS decisions. Central to the independence of the Appeals section is the direct reporting by the Chief, Appeals, to the Commissioner of the IRS.

6.41 Technical views applied by the Appeals area are set by the Office of Chief Counsel. Chief Counsel is 'the legal advisor to the Commissioner of Internal Revenue and the Service's officers and employees on all matters pertaining to the interpretation, administration, and enforcement of the internal revenue laws and related statutes.'295

6.42 Appeals officers are required to either apply the views set by Chief Counsel, or to seek advice from Counsel in respect of an issue. Where the officer seeks to depart from Chief Counsel's views, the Appeals officer must escalate the matter to the Chief, Appeals, for consideration and rectification of any errors in a timely manner and to ensure consistency of views adopted by Appeals.296

6.43 Similar arrangements exist in New Zealand with the IRD's Adjudication Unit, being a part of the Office of the Chief Tax Counsel, providing an independent and impartial decision based on issues arising out of IRD decisions.297 The Unit is separate from the audit and investigative arm of the IRD and, in order to maintain transparency and independence, all correspondence between the Unit and either of the disputing parties is conducted through the Field Liaison and Communication Unit.298

6.44 While the IGT does not consider that the ATO needs to strictly adopt the United States model, the IGT considers that a separate appeals and review section would provide an avenue for taxpayers to raise concerns regarding an ATO view, and have the alternate interpretation or view considered as part of the independent review. The IGT believes that this would ensure that only genuine and fundamental disputes on interpretation or application of the law are litigated.

6.45 The IGT also appreciates that a separate appeals and review area may on occasions give rise to internal tensions within the ATO such as auditors' perceptions that 'cases are given away' and reviewers' perceptions that auditors' decisions are not technically robust. The IGT considers that tensions of this nature are not necessarily undesirable in ensuring robust and tested outcomes are achieved, thereby reducing the overall level of taxpayer disputes and the cost to the broader tax system.

6.46 Accordingly, the IGT considers that there is significant merit in the ATO undertaking a restructure to:

  • separate its objections and litigation functions from its investigative function;
  • ensure actual and perceived independence and impartiality of the objections function through implementing clear protocols regarding communication between objection officers and other compliance officers, including a general prohibition against ex parte communication save where all parties are informed of and given an opportunity to participate in such communication taking place; and
  • empowering a separate internal function to independently assess and determine whether matters should be settled (and if so, to facilitate such) or whether matters should be defended in litigation.

6.47 However, the IGT recognises that such a restructure would be a major undertaking and that some time may be required for the ATO to build up sufficient internal capability to manage a separate appeals and review section. Furthermore, public and professional confidence in the independence and expertise of staff within such an area would take time to develop.

6.48 As such, the IGT considers that his recommendation in this regard may be implemented in stages, with the ATO first developing a separation of the audit and objection/litigation functions in respect of the most complex matters, where perceptions of lack of independence are most acute.

6.49 The IGT notes that such an approach would help to inform the ATO and provide relevant learnings in respect of a larger roll out of the recommendation. It may also be informative for the government in respect of any legislative or regulatory changes which it may make in line with the IGT's recommendations to the Tax Forum.

Recommendation 6.1:

In working towards a fully functioning independent appeals area to be headed by a new Second Commissioner as set out in the IGT's October 2011 submission to the Tax Forum, the IGT recommends that the ATO establish a pilot 'Appeals Section':

  • under the leadership of the current Second Commissioner — Law to carry out the objection and litigation function for the most complex cases;
  • establish clear protocols regarding communication between Appeal officers and compliance officers, including a general prohibition against ex parte communication, save where all parties are informed of, and consent to, such communication taking place; and
  • empower the appeals function to independently assess and determine whether matters should be settled, litigated or otherwise resolved (for example, ADR).

ATO Response


The establishment of an additional Second Commissioner statutory officer and any specific roles are matters for Government.

The NTLG, professional associations and taxpayers involved in dispute resolution involving more complex issues have all expressed their preference for engaging law experts early in the dispute process. They also want access to all those involved in the decision making process, in the same spirit as having key experts at the table for ADR. This preference for earlier engagement and increased levels of collaboration is consistent with the underlying principles of the Transforming Tax Technical Decision Making Project. A proposal that quarantines access to ultimate decision makers until later in the process would be inconsistent with the preference of taxpayers and advisers to resolve issues as early in the process as possible and would be expected to add to the cost of resolving disputes and the time taken to do so.

While the recommendation only proposes a pilot, the organisational logistics of such a pilot would be burdensome. For example, how are cases to be classified, there is also significant work associated with developing relevant guidelines and protocols, and there is a diversion of senior expert staff away from earlier resolution of the more complex cases.

254 The federal government's Tax Forum which was convened on 4 - 5 October 2011; Inspector-General of Taxation, A Submission to the Tax Forum, Sydney, September 2011. A copy is included in Appendix B to this report.

255 Administrative Review Council, Internal Review of Agency Decision Making, Report 44, Commonwealth of Australia, Canberra, 2000.

256 Australian Taxation Office, Work Processes intranet page, document entitled 'Independence'.

257 Inspector-General of Taxation, above n. 35, p. 10.

258 ibid., p. 11.

259 Australian Taxation Office, above n. 256.

260 ibid.

261 ibid., p. 119.

262 ibid., p. 14.

263 ibid., p. 120.

264 Australian Taxation Office, above n. 96, p. 9. See also: J. Granger, above n. 63.

265 Australian Taxation Office, above n. 96, p. 11; Commissioner of Taxation, above n. 108, p. 32; Commissioner of Taxation, above n. 95, p. 107.

266 WR Carpenter & Anor v Commissioner of Taxation [2008] HCA 33

267 Commissioner of Taxation v Bargwanna [2012] HCA 11 in which the High Court found for the Commissioner.

268 Commissioner of Taxation v Bamford; Bamford v Commissioner of Taxation [2010] HCA 10

269 Pape v Commissioner of Taxation [2009] HCA 23 and Roy Morgan Research v Commissioner of Taxation [2011] HCA 35.

270 Joint Committee of Public Accounts and Audit, above n. 149, pp. 18 and 19.

271 For example, RCI Pty Limited v Commissioner of Taxation [2011] FCAFC 104. On 10 February 2012 the High Court denied the Commissioner special leave to appeal the decision of the Full Federal Court.

272 Deputy Commissioner of Taxation v Maxwell William Prentice as Trustee of the Personal Insolvency Agreement of Craig Kirrin Gore [2011] FCA 1535 at [26]; see also Pacific Exchange Corporation Pty Ltd v Commissioner of Taxation [2009] FCA 1155 at [58] - [59].

273 Kevin Fitzpatrick, 'A Long Innings,' (2012) 46(9) Taxation in Australia 394.

274 ibid, p. 395.

275 ibid, pp. 395 and 396.

276 See United States Tax Court.

277 See Tax Court of Canada.

278 Justice G.T. Pagone, Some Problems in Legislating for Economic Concepts - A Judicial Perspective, paper delivered to the Treasury Revenue Group on 2 December 2010, Canberra, viewed on 16 January 2012.

279 J. Ralph, A Tax System Redesigned, Commonwealth of Australia, Canberra, 1999.

280 ibid., p. 148.

281 ibid.

282 Justice M. Kirby, 'Hubris Contained: Why a Separate Tax Court should be Rejected', (2007) 42(3) Taxation in Australia 164; Justice G. Hill, 'Great Expectations: What do We Expect from Judges in Tax Cases?' (1995) 69 Australian Law Journal 992.

283 ibid.

284 Justice G.T. Pagone, above n. 278.

285 Justice G. Downes, 'Twenty-Five Years of Tax Cases in the AAT; Eleven Years of the "practical business tax"', Speech delivered to the Corporate Tax Association 2011 GST Corporate Intensive, 15 October 2011, Sydney, viewed on 19 March 2012.

286 Federal Court of Australia, Panels for the Individual Docket System, Sydney, 1 November 2011; A similar panel also existed previously in the Victorian registry however, at a recent Tax List Users Forum meeting on 18 April 2012, the Federal Court advised the attendees that the Victorian panel would no longer be maintained owing to resourcing constraints.

287 Federal Court of Australia, Practice Note TAX 1, Sydney, viewed 8 August 2011.

288 Australian Taxation Office, Working for All Australians 1910 - 2010: A Brief History of the Australian Taxation Office, Commonwealth of Australia, Canberra, 30 September 2011, p. 220.

289 Joint Committee of Public Accounts, above n. 81, pp. 270 and 271.

290 ibid.

291 Commissioner of Taxation, Annual Report 1993 - 1994, Canberra, 1994, p. 10 and 11.

292 ibid.

293 Subsection 1001(a)(4) of the Internal Revenue Service Restructuring and Reform Act 1998.

294 Internal Revenue Service, Publication 556: Examination of Returns, Appeal Rights, and Claims for Refund, viewed 2 February 2012, p. 9.

295 Internal Revenue Service, Internal Revenue Manual, viewed 2 February 2012, part

296 ibid., part 8.6.3.

297 Inland Revenue Department, The Adjudication Unit - its role in the dispute resolution process, Wellington, 5 November 2007, viewed 2 February 2012.

298 ibid.; Inland Revenue Department, Managing communications associated with a dispute referred to the adjudication unit, Wellington, 10 February 2006, viewed 2 February 2012.