A.3d.1 This appendix sets out the Tax Office's detailed responses to Chapter 5 of the review and contains the Inspector-General's comments on the Tax Office's responses.

Tax Office detailed reply to Chapter 5

Key Finding 5.1

The Tax Office has not implemented all the major recommendations from an internal review relating to the management of its in-house legal services area.

The Tax Office has implemented those recommendations of the internal review which concern management reorganisation. The major recommendations that have not been implemented include the introduction of:

  • risk management processes;
  • reporting and reviewing systems which evaluate client satisfaction, the achievement of targets and the value for money of the in-house legal area; and
  • national support structures for staff of the in-house legal services area.

Tax Office response

A.3d.2 The Tax Office commissioned the review to examine the overall performance of our legal practice and recommend ways in which performance could be improved. There were 44 recommendations made in the report which were broadly endorsed by the Tax Office Executive.

A.3d.3 The majority of the recommendations have been implemented. The Tax Office has made substantial progress in improving the capacity to manage legal risk.

A.3d.4 The recent establishment of the Tax Office Law Sub Plan indicates a clear corporate commitment to providing an effective framework and hierarchy for identification and escalation of legal risk.

A.3d.5 Work has been completed to identify capabilities required for legal services work and gaps in individual staff capabilities. Development of a nationally focussed curriculum is well advanced to support continuing legal education. Options are also being explored as to the extent to which financial support is able to be provided corporately to assist staff in privately improving their legal skills.

Inspector-General's comments on Tax Office response

A.3d.6 The Tax Office has misquoted this key finding. The opening words of this finding are as follows:

The Tax Office has not implemented some of the major recommendations of …

Key Finding 5.2

The Tax Office does not employ risk identification and assessment techniques to its legal risk issues overall, including litigation issues. One result of this is that the Tax Office has no reporting systems which detail the overall state of the Tax Office's litigation program, including the revenue in dispute tied up in this process and the Tax Office costs incurred to date on either all or any individual cases. Another result is that the Tax Office does not employ cost/benefit analyses to its assessment of whether to proceed with litigation.

Tax Office response

Risk management

A.3d.7 It appears that 'proper' risk management of litigation requires, in the Inspector-General's view, a cost-benefit analysis to be provided to the Executive.

A.3d.8 At the executive level, the interest in litigation is more specifically based on exception reporting, and that is why most reports deal with issues such as risks to the fabric of the law, decision management, progress and issues about significant cases, and cases that might attract community interest. These significant risks are not measured by reference to the individual costs of all cases, nor is it appropriate to do so.

A.3d.9 Cost-benefit analysis is, however, very relevant at the lower levels of day-to-day management in each case. The taxpayer initiates litigation. When a taxpayer wants to enter into a settlement, cost-benefit analysis would then become relevant. When a settlement is contemplated, particularly in smaller factual or quantum type cases, our settlement policy guides officers to consider the cost of litigating (including internal Tax Office costs) and whether it is out of proportion to the possible benefits, having regard to the prospects for success, including collection of the tax and likely award of costs, assessed as objectively as possible.

A.3d.10 Even where there might be scope for settlement, there will also be cases where it is in the public interest to have judicial clarification of an issue and the case is suitable for this purpose.

Risk assessment in tax litigation

A.3d.11 In the Tax Office we risk manage our litigation in line with the Tax Office Risk Management Policy and with corporate strategies and processes to address risks.

A.3d.12 Due to the inherent legal risks arising from litigation, all litigation arising in the Administrative Appeals Tribunal (AAT), the Federal Court, High Court and State and Territory Supreme Court and Courts of Appeal are risk assessed to determine whether or not the litigation gives rise to a Priority Technical Issue (PTI).

A.3d.13 Unexpected challenges can also arise in the course of litigation to well-established Tax Office positions as well as core tax principles not previously identified under the present PTI process. In these circumstances, escalation as a potential PTI is required to ensure that Tax Counsel Network and/or Centre of Expertise resources are added to the litigation team.

A.3d.14 All new appeals (including both PTI and non PTI cases) are considered within the Legal Services Branch (LSB) callover process.

Inspector-General's comments on Tax Office response

A.3d.15 Contrary to the Tax Office's response, the report does not prescribe in detail the kinds of information that should be provided to the Tax Office's Executive to support a proper risk management approach to litigation.

A.3d.16 The report finds that the Tax Office does not employ risk management and assessment techniques to its legal risk issues overall, including litigation issues. Cost-benefit analysis is just one facet of risk management techniques.

A.3d.17 The review notes that a previous internal review (the Behm review) also made the finding that the Tax Office does not employ risk management and assessment techniques to its legal risk issues, including litigation issues.

A.3d.18 The report notes that the Behm recommendations in this area have not been implemented. The Tax Office's response to Key Finding 5.1 confirms that they have not been implemented by its reference to the progress which the Tax Office considers that it has made in this area.

A.3d.19 The measures referred to by the Tax Office as being 'in line with' Tax Office Risk Management Policy involve only the identification of litigation which involves 'priority technical issues'. The identification of such cases is only one facet of a risk management approach to litigation and will not, for example, enable the identification of legal risk issues that may exist in litigation which does not involve priority technical issues.

A.3d.20 The Tax Office's response confirms that it considers that cost-benefit analyses are relevant to the lower levels of day to day management in litigated cases. Although the Tax Office's response recognises the importance of such analyses, the review found that a very limited form of formal cost–benefit analysis for litigation existed within only one business line of the Tax Office.

Key Finding 5.3

The Tax Office does not communicate the status of its litigation program (including the revenue results and/or costs incurred) to the public and as a result the public is unable to assess whether the Tax Office's overall litigation program is being conducted effectively, fairly and with minimum cost.

Tax Office response

A.3d.21 The Tax Office provides in the Annual Report each year an overview of the conduct of litigation and test case funding for that year. As a result of recent initiatives of the Attorney-General's Department, we will also be moving to report legal costs in future Annual Reports.

Subsidiary recommendation 5.1

The Tax Office should introduce reporting systems under which its Executive is aware of the total state of all Tax Office Part IVC litigation, including the extent to which cases being litigated have produced negative revenue results.

Tax Office response

A.3d.22 The Tax Office has in place a monthly report which is sent to the Tax Office Executive to advise them of the most significant cases currently before the courts and Administrative Appeals Tribunal (AAT). The focus of the Executive is on strategic issues such as those that have an impact on the coherent fabric of the law. However, we will improve the level of reporting through the Law Sub-plan.

Subsidiary recommendation 5.2

The Tax Office should be more transparent in communicating the overall results of its litigation program (including the number and dollar value of cases heard by a court or tribunal, the number and dollar value of cases settled or resolved by other means and the total costs incurred by the Tax Office in resolving all these disputes) to enable the public to assess whether the Tax Office's overall litigation program is being conducted effectively, fairly and with minimum cost.

Tax Office response

A.3d.23 We will examine, in the context of the Tax Office's Change Program, ways to improve our reporting of cases which are litigated, as well as cases that are resolved before a decision of a court or tribunal.

Key Finding 5.4

There is a lack of support tools for Tax Office staff who work in the in-house legal area, including support tools that are necessary for the staff of this area who actually conduct litigation at the Small Taxation Claims Tribunal or Administrative Appeals Tribunal.

Subsidiary recommendation 5.3

The Tax Office should ensure that adequate support tools (such as a database of precedents, adequate facilities to interview taxpayers and/or their representatives, and adequate continuing legal education) are developed for Tax Office staff who are responsible for the actual conduct of cases.

Subsidiary recommendation 5.4

The Inspector-General recommends that a consolidated and up-to-date set of litigation reference material should be developed and made available to all Tax Office staff.

Tax Office response

A.3d.24 We agree with subsidiary recommendations 5.3 and 5.4, but not with Key Finding 5.4.

A.3d.25 The Tax Office has a number of support tools, including a litigation manual, litigation flow charts and the Significant Issues Litigation Committee (SILC) process to provide guidance to legal services staff.

A.3d.26 We have recently updated our reference materials, including practice statements, instruction bulletins and reference manuals which apply to litigation. These materials are added to websites and share drives for the convenience of staff.

A.3d.27 A mentoring system is also in place, where a less experienced staff member is paired with a senior staff member who will provide guidance and advice on the conduct of litigation.

A.3d.28 We will review existing support tools to ensure they are adequate.

Inspector-General's comments on Tax Office response

A.3d.29 The review found that at the time fieldwork was conducted there was a lack of support tools for Tax Office staff who work in the in-house legal area. The Inspector-General welcomes the comments that the Tax Office has recently updated its reference materials, has introduced a mentoring system and will review existing support tools to ensure they are adequate.

Key Finding 5.5

There is presently only limited written reference material which explains to LSB staff and others within the Tax Office the policies and procedures, including case management procedures, which apply to litigated cases. Most of this material is outdated and is also spread across a number of different sources.

Tax Office response

A.3d.30 We have recently updated our reference materials, including practice statements, instruction bulletins and reference manuals which apply to litigation. These are being consolidated into one large handbook for the use of all staff and will be posted on our internal website.

Subsidiary recommendation 5.5

The Tax Office should develop a reference document which sets out all of its procedures for handling litigated matters which do not involve PTI's.

Tax Office response

A.3d.31 Agreed

A.3d.32 The Tax Office will develop a single document which will consolidate procedures for handling litigation matters which do not involve a Priority Technical Issue.

Key Finding 5.6

Case files in the Tax Office's legal services area indicate that, in a significant percentage of cases, staff of the Tax Office's in-house legal area are not complying with internal Tax Office case management procedures in relation to the keeping of records in connection with a litigated case. Procedures that are not being followed include those which require staff to record the outcomes of key internal Tax Office meetings in relation to litigation, to keep copies of external key litigation documents (such as briefs to counsel and counsel's subsequent advice) and to record the eventual outcome of the case.

Subsidiary recommendation 5.6

The Tax Office's LSB area should develop appropriate file and record-keeping procedures for litigated cases. Processes should also be established to monitor the application of these procedures, to review their effectiveness and to implement any necessary improvements.

Tax Office response

A.3d.33 There is room for improvement in our file and record-keeping procedures.

A.3d.34 We will review and reissue the File Management Protocol issued in May 2001. We will put in place governance arrangements to ensure compliance with the revised practices in line with recently issued Corporate Management Practice Statement (CMPS) PS CM 2005/27 on record keeping.

Inspector-General's comments on Tax Office response

A.3d.35 The Tax Office's response does not accurately state key finding 5.6. The opening words of this key finding actually state that: 'A significant percentage of the case files in the Tax Office's legal services area examined by staff of the Inspector- General indicated …'

A.3d.36 The Inspector-General welcomes the Tax Office's response that it will improve its file and record-keeping procedures.

Key Finding 5.7

The Tax Office has no structured internal quality control processes for litigation.

Tax Office response

A.3d.37 We have a number of internal quality control processes in place for litigation, including the SILC process; monthly meetings with the Assistant Commissioner for litigation; regular callovers; as well as bi-annual meetings with the Senior Tax Counsel Strategic Litigation and other stakeholders.

Subsidiary recommendation 5.7

The new independent area of the Tax Office that is primarily responsible for the management of all aspects of litigated cases should be subject to formal quality control processes for work conducted by staff of that area.

Tax Office response

A.3d.38 Agreed in principle.

A.3d.39 We will develop a more structured quality assurance process. As indicated in our response to Key Recommendation 2, all decisions regarding litigated cases will be managed by the Office of the Chief Tax Counsel (OCTC) or the Tax Counsel Network.

Inspector-General's comments on Tax Office response

A.3d.40 The Inspector-General welcomes the Tax Office's comments that it will develop a more structured quality assurance process for litigation.

Key Finding 5.8

There is no uniform, written and clear set of internal management policies and procedures for the litigation roles which are currently carried out by members of the Tax Office's Tax Counsel Network. The Tax Counsel Network is also not required to prepare any management reports to the Tax Office's Executive for any cases for which they are effectively responsible. The litigation management activities of this network are also not subject to adequate quality control processes.

Tax Office response

The role of Tax Counsel

A.3d.41 Key Finding 5.8 and the paragraphs that precede it deal with the policy and procedures around the involvement of Tax Counsel in litigation. The Tax Counsel Network works within a broad governance framework provided by a wide range of practice statements and reporting mechanisms. The Priority Technical Issues System, for example, provides a robust means of monitoring the Tax Counsel involvement as the PTI owner of many high-level risks to the Tax Office. Tax Counsel ensures that PTIs are progressed in a timely way, and this is monitored by the Priority Technical Issues Committee.

A.3d.42 In terms of litigation, the Tax Counsel's role is well established through practice statement PSLA 2005/22. The actual conduct of litigation is ordinarily well managed by competent staff in both the Legal Services Branch (LSB) and the Business Lines. In significant litigation Tax Counsel will approve documents and submissions to the court or tribunal. While responsibility rests with Tax Counsel, it is a collaborative effort involving business line and LSB staff, as well as our solicitors and external counsel.

A.3d.43 The business model intends that the Tax Counsel generally limit their involvement in the day to day conduct of litigation.

Inspector-General's comments on Tax Office response

A.3d.44 The Tax Office's comments confirm Key Finding 5.8.

Key Finding 5.9

The internal management policies and procedures for litigation of each of the Tax Office's business lines are not uniform and are of varying quality, with none exhibiting all the hallmarks of best practice. The area with the most extensive and detailed processes for the internal management of its litigation processes is the GST business line. However, this area's processes still require improvement, particular in the area of efficiency. The area with the least extensive and least detailed internal management processes for Part IVC litigation is the aggressive tax planning area, with other lines falling in between.

Tax Office response

A.3d.45 We will continue to further develop consistent corporate policy and practices for review and litigation in particular for quality assurance, reporting and analysis. An environment of sharing best practice will be further supported through, for example, regular internal workshops of the type that have been conducted in recent years and have systematically improved our governance processes.

A.3d.46 Of the 77 cases reviewed, the Inspector-General commented against three of the cases that the business line files were not provided despite a request being made. As advised, there was only one case where the files could not be located. The Inspector-General was advised that in the remaining two cases, files were available for inspection. For the Inspector-General to make the comment that a 'significant percentage' of files were not able to be located when requested by the Inspector-General is simply inaccurate.

A.3d.47 It is difficult to understand the Inspector-General's comments with respect to the Aggressive Tax Planning (ATP) area. While ATP is not a separate business line, ATP litigation cases involving mass marketed and employee benefit schemes have been closely managed in recent years. A dedicated senior tax counsel reported to the First Assistant Commissioner (ATP) on all litigation cases.

A.3d.48 It is suggested that there is no process for internal review of decisions made by the Large Business and International business line during the litigation phase.

A.3d.49 The LB&I structure and procedures are such that many quality assurance checks and reviews are built into the front end of the process.

A.3d.50 Amended assessments are raised after position papers are provided to the taxpayer, who is given an opportunity to respond. That material is considered before an assessment is raised; this is the first review. In many cases, Tax Counsel and Centres of Expertise are involved in the technical decision and external counsel's opinion is sought before the case is both peer reviewed and signed off by a senior officer.

A.3d.51 When reviewing objections, LB&I officers are instructed to follow Taxpayers' Charter requirements for an independent review. The review officer is not the officer who approved the assessment.

A.3d.52 At the appeal stage, Legal Services Branch is involved for the first time and the Large Business cases are more often than not supported by Tax Counsel and independent counsel and solicitors.

Inspector-General's comments on Tax Office response

A.3d.53 Staff of the Inspector-General were not provided with a significant percentage of the files requested for examination during the fieldwork stage of this review. This was despite a generous notice period being provided for the production of these files. The Inspector-General's comment that a 'significant percentage' of files were not able to be located when requested by the Inspector-General is therefore entirely accurate. The Inspector-General considers that an inordinate time to locate files concerning litigation is not consistent with good litigation management practice. The Tax Office's comments which imply that most of these files have now been located are noted.

A.3d.54 The Tax Office's comment that 77 cases were reviewed by the Inspector-General is not accurate.

A.3d.55 The Inspector-General also notes the Tax Office comments concerning the absence of an internal review mechanism in the LBI area. The Inspector-General does not consider that any of the internal processes referred to in the Tax Office's response (such as the taxpayer's ability to respond to a position paper or to an amended assessment and the approval of objection decisions by officer not previously involved in the dispute) amount to an internal review mechanism that can be availed of by taxpayers. Furthermore, most of the processes referred to by the Tax Office occur prior to the stage when the dispute has been referred to the AAT or a court. This review has not examined Tax Office processes that are applied to litigated disputes before they reach the litigation stage.