The Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) use of early and alternative dispute resolution (ADR) was prompted by a number of concerns raised by stakeholders that, notwithstanding the ATO's high level commitment to earlier engagement with taxpayers to resolve disputes, at a practical level, the ATO was not making sufficient use of dispute resolution opportunities, instead preferring taxpayers to progress disputes through formal channels such as those outlined in Part IVC of the Taxation Administration Act 1953.

The Commissioner of Taxation also requested that the IGT undertake this review.

The review received a high level of interest and the IGT received over forty written and oral submissions from a broad range of stakeholders including taxpayers, tax practitioners and their representative bodies, dispute resolution experts and members of the judiciary. During the conduct of the review, the IGT was mindful of the Federal Government's strategic framework for access to justice which, amongst other things, seeks to encourage a shift in the community and federal agencies towards a resolution culture.

The IGT recognises the ATO's current work program to enhance its dispute resolution framework. These include its Integrated Approach to Dispute Resolution and the Transforming Tax Technical Decision Making project which seek to engage ATO senior staff earlier in the compliance process to enhance the robustness of ATO technical decisions in the first instance and to resolve any disputes which may arise as close to the original decision as possible. These together with discussion of other ATO initiatives are outlined in Chapter 2.

The report notes that a large portion of matters brought to litigation, particularly in the Administrative Appeals Tribunal (AAT), are resolved prior to hearing. Statistics provided by the AAT show that approximately 90 per cent of matters are resolved without hearing and further statistics from the ATO show that many of these are resolved as a result of new or additional information being identified. Such statistics suggest a significant opportunity for earlier resolution of tax disputes through better information exchange and engagement including the use of ADR.

The report found that in some instances, the ATO's dispute resolution processes worked well, with senior staff appropriately engaged, issues identified and ADR processes employed to address and resolve specific cases. However, in other cases, some taxpayers' experiences appeared to be varied with officers appearing uncertain of their ability or authority to engage in discussions with taxpayers to address concerns and resolve disputes early in the process.

The IGT has made twenty-two recommendations, all but one (Recommendation 6.1) of which are broadly aimed at:

  • Ensuring the ATO and the taxpayer engage earlier to ascertain and agree on those matters that are agreed and those that remain in contention;
  • Streamlining of information exchange between the parties to ensure that the matters in dispute are understood;
  • Ensuring clear escalation channels to appropriate ATO personnel to engage in dispute resolution processes;
  • Bringing early engagement and ADR to the forefront of ATO dispute resolution efforts and only litigating cases which turn on genuine and fundamental disputes as to law and where there is a public benefit in having the matters judicially determined;
  • Enhancing the skills and understanding of both ATO staff and taxpayers of the different types of engagement available in ADR and the circumstances in which these may be appropriate through increased training and publication of information respectively; and
  • Identifying opportunities for continuous improvement through implementing processes to enable feedback to be provided regarding the use of ADR in the tax dispute context.

The final recommendation (Recommendation 6.1) is aimed at addressing the perceived lack of independence in the objection process and empowering the ATO's in-house legal services function to assess matters independently of the audit arm and determine, on the facts and evidence, whether a matter should be abandoned, otherwise settled or proceed through to litigation. These concerns were raised in the course of this review as well as in earlier reviews and the IGT's submission to the 2011 Federal Government's Tax Forum (the 'Tax Forum Submission').

The IGT notes in the report that while the ATO still enjoys higher rates of success than taxpayers in the AAT, this was not as pronounced in the Federal Court where there was a clear downward trend. In the High Court, statistics gathered and analysed by the IGT showed that since its last favourable outcome in a tax technical dispute in July of 2008, the ATO has been involved in ten other tax technical matters, with only one judgment delivered in its favour.

The IGT seeks to address these concerns, amongst others, in Recommendation 6.1, as a prelude to the relevant recommendation in the Tax Forum Submission. Broadly, Recommendation 6.1 proposes that the ATO undertake a pilot separation of its objection and litigation functions from its audit function in the management of its most complex disputes.

The ATO has disagreed with the above recommendation. However of the twenty-two recommendations made in this report, the ATO has agreed in full with fourteen recommendations, agreed in part with four, agreed in principle with two and disagreed with ne. The remaining recommendation was directed at government.