A.3e.1 This appendix sets out the Tax Office's detailed responses to Chapter 6 of the review and contains the Inspector-General's comments on the Tax Office's response.

Tax Office detailed reply to Chapter 6

General comments

A.3e.2 Under the Test Case Litigation Program, the Tax Office provides financial assistance to taxpayers involved in litigation matters that are regarded as important to the administration of the revenue system.

A.3e.3 While the Commissioner is the ultimate decision maker on test case applications, there is an advisory panel consisting of members external to the Tax Office. The current panel includes two senior tax officers, a former NSW Court of Appeal judge, a tax barrister, a tax lawyer, a tax accountant and a former taxation director of the Institute of Chartered Accountants. The external panel members bring a range of skills and backgrounds to assist in deliberations.

A.3e.4 The Inspector-General's report advocates that the Test Case Litigation Program would benefit from greater independence from the Tax Office with a suggestion that the program could be administered by a different government agency. The view of the Tax Office is that any decision to remove the program from the Tax Office is one for government.

A.3e.5 The findings and our responses are set out below:

Key Finding 6.1

There are four categories of litigated cases which the Tax Office currently funds. These are cases funded under the formal test case program, cases where the Tax Office will fund a taxpayer's appeal costs where the Tax Office has lost a case at the AAT, cases involving a taxpayer appealing to the High Court and other cases it will fund under its general administrative powers.

Tax Office response

A.3e.6 The present booklet141 developed in consultation with the representative bodies describes all of the types of cases where funding will be provided. Broadly speaking, there are three main categories of test case litigation funding:

  • the formal Test Case Litigation Program;
  • funding for appeals by the Tax Office from decisions of the Administrative Appeals Tribunal (AAT); and
  • funding for some appeals by the Tax Office to the High Court.

A.3e.7 The Inspector-General distinguishes cases funded through the panel, which includes external members, and cases where the Commissioner offers funding of his own volition. Cases not funded under the panel process (i.e. where the Commissioner decided to fund a case of his own volition) are not considered by the Inspector-General as part of the 'formal test case program'.

A.3e.8 We feel it is important to point out the Inspector-General has defined the formal test case program differently to the way the Tax Office has administered it over the last decade.

A.3e.9 We accept the Inspector-General's statement that this may not be well understood by the community, but our publications and our public statements have been consistent in our explanation of the program. We will consider ways to improve understanding of the test case program.

Inspector-General's comments on Tax Office response

A.3e.10 The Inspector-General welcomes the Tax Office's comment that it will consider ways to improve the understanding of the test case program.

Key Finding 6.2

The Tax Office has defined cases which fall into the formal test case program as cases which consist of those which meet the formal criteria for funding which the Tax Office has formally communicated to the community as well as cases which do not meet these criteria. This definition is logically flawed and means that the formal communicated criteria for funding test cases are meaningless and do not operate as a means of controlling which cases will and will not be funded by the Tax Office. If the test case program were to be managed more independently of the Tax Office, perhaps by removing it to another government body there will automatically be a separation between cases which are funded under the formal test case program and cases funded by the Commissioner of his own volition and the problems which have emerged from the Tax Office's failure to be transparent about its objectives for funding particular litigated test cases should be less likely to arise.

Tax Office response

A.3e.11 The Tax Office has published a booklet about the Test Case Litigation Program. It invites taxpayers to apply for funding with applications that address certain criteria. It also makes clear that the Commissioner may also offer test case funding in cases where an application has not been specifically made, but which are considered fair and in the public interest to do so, and that these cases are regarded as an important part of the program.

Cases funded for law clarification

A.3e.12 The Inspector-General adopts an overly narrow definition of law clarification in his report. The Tax Office's Test Case Booklet provides that the purpose of the Test Case Litigation Program is to clarify the operation of the laws administered by the Commissioner of Taxation where:

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

A.3e.13 The booklet explains that cases with issues involving questions of fact where there are established legal principles will not generally be funded. The word 'generally' was intentional. There will be cases where uncertainty and contention in the law can be resolved for a substantial section of the community by cases that will further test the scope and application of existing legal principles. The litigation panel has also on occasion agreed to the funding of cases where taxpayers have wanted to challenge long-standing existing principles, where it is considered that a court or tribunal may now take a different view given the passage of time. If the underlying reasons for doing so will remove genuine uncertainty for the community and clarify what the law means, we take the view that favourable consideration should be given to funding.

A.3e.14 We will consult with representative bodies to determine whether a further revision of the booklet is necessary.

Budplan and another unidentified case

A.3e.15 Budplan is identified in the report as a case which was funded under the Inspector-General's fourth category. The fourth category refers to cases that the Commissioner decides to fund outside the external advisory panel process. This process is set out on page two of the Test Case Litigation Program booklet.

A.3e.16 When the application came before the Test Case Litigation Panel in 1998, funding was refused because the case involved tax avoidance, which at that stage was prohibited under the guidelines.

A.3e.17 The Budplan investment scheme involved 9,842 investors and claimed deductions of $372.5 million.142

A.3e.18 By the time it came back to the panel in February 2000, the case had attracted significant community interest and an extensive investigation by the Commonwealth Ombudsman.143

A.3e.19 A senior officer of the Ombudsman's office made representations to the panel in February 2000. The Tax Office issued several letters to individual taxpayers involved in the Budplan scheme to invite them to apply for test case funding.

A.3e.20 While the Commissioner said at the time that he was looking for effective ways to put an end to schemes of this type by securing strong judicial decisions reinforcing the strength of the law, he was also concerned about the taxpayers who were resisting moves to resolve these disputes and, in doing so, were potentially putting themselves in a worse financial position. The Commissioner's aim was largely to bring an understanding of their legal position to those taxpayers, that is to have the law clarified for them.

A.3e.21 While the Tax Office does not generally support funding litigation in schemes cases, the decision by the Commissioner to fund these cases, following the panel meeting in February 2000, recognised the public interest in doing so. Up until then there had been long delays in getting lead cases before the courts.

A.3e.22 It is incorrect to say that Budplan was not also directed to law clarification. The scheme had a round-robin non-recourse financing arrangement that was typical of mass marketed agricultural schemes and it was hoped that the court's views about the application of Part IVA to that arrangement would be helpful in other, similar cases. It was seen as a test case for all involved and our whole strategy was to test these matters in the court.

A.3e.23 The Commissioner also said that '[we] will consider funding test cases for other schemes if they raise materially different principles.' This was a major factor in the decision to revise the test case booklet, to accommodate this change in policy.

A.3e.24 The Senate Economics Reference Committee144 'welcomed' the decision to fund representative cases. It highlighted the uncertainty and ambiguity around the application of Part IVA to round-robin non-recourse financing.145

A.3e.25 In our view, these applications fell within the criteria for funding. Page three of the former booklet146 said 'two aspects of the criteria of funding are:

  • whether or not the issue will clarify taxation law in a manner beneficial to the community; and
  • whether the issue is in the public interest'.

A.3e.26 The Budplan case was a factually complex case and as a result it came at a very high cost to the test case program. Given the massive number of cases waiting in the AAT and at the objection stage, it was important that the case be run well on both sides so that there was no doubt about the correctness of the outcome. His Honour Conti J said:

The assistance which I received from all legal representatives involved, both in address and in written submissions, was substantial and of a high order professionally. The work of counsel and solicitors engaged in this litigation was competently and thoroughly prepared and presented.147

A.3e.27 The court found for the Commissioner on the primary deduction provisions. It was therefore strictly unnecessary for the court to deal with the application of Part IVA. However, this was an area of great public interest. His Honour Conti J said

The issue arises as to the application of Pt IVA ….. Given the 'test case' character of the present proceedings, it is appropriate that I resolve that issue in any event.148

A.3e.28 The Commissioner won the case. The taxpayers did not appeal the decision. No other case was brought forward by another Budplan participant to seek to obtain a different outcome. No subsequent decision of a court has suggested that the Budplan decision was incorrectly decided. Clearly this was law clarification.

A.3e.29 Even though the Inspector-General takes the view that this case provided no new principle of law, considering the massive number of mass marketed scheme participants who were waiting for the outcome, the number of cases in the AAT and the amount of revenue involved, this case was plainly a case in the public interest. As required under the previous criteria, the 'issues in the case [were] of relative significance to the administration of the tax law'.149

A.3e.30 The Inspector-General points to community perceptions that avoidance cases should not be funded (which stand in contrast to his recommendation 6.5). We agree with community views that avoidance cases should generally not be funded, except where there is a strong public interest served, as in the Budplan case.

A.3e.31 Although the Senate Economics Reference Committee welcomed the funding of representative Budplan cases150, it recognised not all lead scheme cases should be test case funded.151

Cases funded on a full indemnity basis

A.3e.32 It was said that we funded two cases on a full indemnity basis, and that this 'strongly indicates the Tax Office has given preferential funding to cases involving law enforcement purposes'. The funding was agreed on a solicitor and client basis in these cases, as with all cases under the Test Case Litigation Program152 (under both the cases dealt with by the panel as well as those funded with the agreement of the Commissioner).

A.3e.33 At the time of the relevant funding, our offers of funding for counsel were consistently based on rates capped for counsel at Commonwealth rates, as they are now. However, in these two cases we agreed to fund counsel at higher rates, due to exceptional circumstances.153 Approval was obtained from the Attorney-General to fund counsel at these higher rates.

A.3e.34 In both cases, various costs incurred by the taxpayer in the preparation of the cases were denied by the Tax Office in line with the solicitor-client offer of funding.

Alienation of personal services income cases

A.3e.35 The Inspector-General highlighted the fact that the Tax Office settled some of the cases chosen for funding because the Commissioner was advised by counsel that he would lose. The relevant cases are those involving alienation of personal services income.

A.3e.36 These cases were not settled, but rather conceded by the Commissioner. However, the Tax Office otherwise agrees with this statement. The Commissioner altered his view and publicly announced his change in policy in December 2005. These actions are consistent with the Tax Office being a model litigant.

Inspector-General's comments on Tax Office response

Cases funded for law clarification

A.3e.37 The Inspector-General's definition of 'law clarification' for the purposes of the test case program is not 'overly narrow'. It is the definition that was in place at the time when the decisions to fund Budplan and the other cases referred to in the report were made. Prior to April 2005, the test case litigation program booklet stated, in an unqualified way, that:

the aim of the program is to develop legal precedent, that is, a legal decision which will serve as a rule for future similar cases

A.3e.38 The law clarification aim for the program was reworded in the April 2005 test case program booklet and now includes a statement that:

cases with issues involving questions of fact where there are established legal principles will not generally be funded

A.3e.39 The Inspector-General considers that, despite the use of the word 'generally' in the new April 2005 test case program booklet, the essential aim of the test case program remains the same as it was prior to April 2005 i.e. the aim of the program is to fund cases which create new legal principles.

A.3e.40 In any event, it is not appropriate for the Tax Office in responding to this finding to refer to a definition of the aim of the program which was not in place when the decisions to fund the cases referred to in this finding were made.

Budplan and another unidentified case

A.3e.41 The Tax Office response confirms that the Commissioner's decision to fund Budplan was not made in accordance with relevant applicable test case program criteria, nor was it funded in accordance with normal test case program procedures.

A.3e.42 The Inspector-General does not dispute that the case may have achieved law clarification in the sense of clarifying how existing law applies to a given set of facts. However, this is not the sense in which the term 'law clarification' is used in the current test case program guidelines, nor the guidelines that were in place at the time of the decision to fund Budplan.

A.3e.43 The Inspector-General considers that the Tax Office's approach, combined with poor communication, led the community to believe it was a formal test case chosen by the Tax Office contrary to its stance of not funding avoidance cases. The denial of formal test case funding for other earlier and subsequent avoidance cases was then seen as inconsistent.

Key Finding 6.3

The Tax Office has failed to adequately communicate to the community the existence of the fourth category of 'other funded cases', and the criteria it will apply to fund such cases. This lack of communication has led taxpayers to believe that taxpayers funded under the fourth 'other category' of funding have been funded under the formal test case program. This has fuelled community perceptions that the Tax Office is not consistently applying its test case program criteria to all cases that are funded under that program.

Tax Office response

A.3e.44 The so-called 'fourth category' of other funded cases referred to by the Inspector-General is set out on page two of the Test Case Litigation Program booklet.

Inspector-General's comments on Tax Office response

A.3e.45 While this category of funded cases is referred to on page two of the booklet, the subsequent commentary in the booklet fails to clearly set out the nature of these other funded cases and the criteria that will be used to grant funding for these cases.

Key Finding 6.4

The Tax Office does not have adequate governance processes in place to ensure that either the decision to fund the 'other category' of cases it will fund or the method of funding these cases is subject to appropriate internal scrutiny.

Tax Office response

A.3e.46 The Tax Office believes there are adequate governance processes in place.

A.3e.47 All test case funding comes under the control of a First Assistant Commissioner within the Office of the Chief Tax Counsel (OCTC). Reports are provided to the Priority Technical Issue Committee (PTIC), including a summary of the cases which have been funded. All decisions have the involvement of senior officers.

Inspector-General's comments on Tax Office response

A.3e.48 The Inspector-General does not believe that the Tax Office can assert that it is appropriately managing its decisions to fund test cases when no internal reports containing details such as the quantum of funding agreed for a case, the progress of that funding and/or the progress of the case itself are prepared and no internal reviews are conducted on whether the test case program is meeting its purpose.

Subsidiary recommendation 6.1

The Tax Office should establish appropriate governance arrangements to allow appropriate oversight by the Tax Office's Executive of all litigated cases which it funds. These governance arrangements should distinguish between cases where the Tax Office has obtained no external advice on its decision to fund the case and those where it has obtained, and followed, that advice.

Tax Office response

A.3e.49 We currently report this information to the Priority Technical Issues Committee (PTIC) which is chaired by the Second Commissioner Law.

Inspector-General's comments on Tax Office response

A.3e.50 The Inspector-General believes that the Tax Office should implement this recommendation in full. As the report indicates, at the time of the Inspector-General's review, the Tax Office did not prepare internal management reports (which identify details such as the number, cost and progress) either for cases which it funds of its own volition, or for cases which it has funded under the formal test case program. The Tax Office's response indicates that the practices observed by the Inspector-General have not changed. The Inspector-General does not believe that the Tax Office can assert that it is appropriately managing its decisions to fund any of these cases when no such internal reports are prepared.

Subsidiary recommendation 6.2

The Tax Office should take steps to clearly notify the community of the existence of funding arrangements for cases which fall outside the formal test case program and the other rules for funding Tax Office appeals against AAT decisions and appeals to the High Court. It should notify the community of the types of cases that it will fund in this way and of the circumstances in which this funding has been and will be used by the Tax Office.

Tax Office response

A.3e.51 Agreed in principle.

A.3e.52 Commentary on the different types of cases funded is now in the booklet 'Test Case Litigation Program', published in April 2005. In developing the booklet, we consulted externally before finalising its content and mailing it to major stakeholders. It was placed on our external website and a media release announcing its availability was issued.

A.3e.53 The Test Case Funding Program includes cases funded for law clarification purposes that are in the public interest. This includes cases where the Tax Office agrees to fund cases based on an application by a taxpayer, and those cases where the Tax Office funds a case without the taxpayer needing to apply. The booklet identifies when the Tax Office will fund appeals from decisions of the Administrative Appeals Tribunal and Small Taxation Claims Tribunal. It also makes clear that the Tax Office sometimes offers to meet the taxpayer's costs when special leave is being sought to appeal a case to the High Court.

A.3e.54 Ideally we would prefer to make these funding arrangements totally transparent, but we have been advised by the Australian Government Solicitor (AGS) that there may be problems in doing this in some aspects because of the secrecy provisions contained in the tax law. We will continue to consult with AGS to clarify this.

Subsidiary recommendation 6.3

The Tax Office should ensure that where it funds cases under its general administrative powers the method of funding (such as the basis and timing of funding) provided is consistent with that which is provided under the formal test case program. This would be to ensure that litigants who achieve funding for law clarification purposes are not disadvantaged when compared with litigants who have achieved Tax Office funding of their case for purposes other than law clarification.

Tax Office response

A.3e.55 We have not drawn any distinctions in our funding practices based on whether it was commenced by a taxpayer application or funded by the Commissioner offering funding in important cases. That said, while the intention is to provide consistent approaches to funding cases, there needs to be some flexibility in appropriate cases having regard to individual circumstances so that all cases are appropriately supported under the program.

A.3e.56 All cases funded are for the purposes of law clarification.

Inspector-General's comments on Tax Office response

A.3e.57 The Inspector-General welcomes the Tax Office's intention to provide consistent approaches to funding cases but notes that, as indicated in the report, this intention has not been put into practice by the Tax Office over the life of the test case program.

Key Finding 6.6

The formal test case program has not been well managed internally by the Tax Office. Although there have been recent improvements, including processes to control costs funded under the program, to ensure that taxpayers are given reasons if their funding request is denied and in respect of record-keeping for the program, key deficiencies in the Tax Office's internal management of the program remain. These include:

  • An absence of an adequate quality assurance processes for the program;
  • A general failure by the Tax Office to ensure that all cases warranting funding are identified and funded to the appropriate extent; and
  • A lack of appropriate internal governance arrangements for the program.

Tax Office response

A.3e.58 The placement of the Test Case Litigation Program within the Strategic Litigation team better enables issues of importance to be identified. The connections that exist with the Priority Technical Issue Committee, in particular, enable issues of importance to be identified for a strategic litigation response.

Quality processes

A.3e.59 All decisions are currently made by the First Assistant Commissioner, Office of the Chief Tax Counsel. All letters and communications of substance are signed off by the Senior Tax Counsel, Strategic Litigation.

A.3e.60 There is a corporate file for the application, and a process for collecting comments and feedback from the Tax Office business line and senior officers involved in the case. Decisions are made after careful consideration by a panel consisting of a number of external members. There is a process for internal review where an applicant is aggrieved.

A.3e.61 Concerns about costs, legal issues and the test case deeds are reviewed by the Australian Government Solicitor.

Internal governance arrangements

A.3e.62 Although we believe that we have appropriate internal governance arrangements in place, we will review the Test Case Litigation Program's internal review, analysis, evaluation and quality processes.

A.3e.63 The chair and deputy chair of the Test Case Litigation Panel report directly to the PTIC meeting on the operation of the Test Case Litigation Program.

A.3e.64 The test case reports are also provided to the national tax liaison group, which includes legal and tax professional representative bodies.

Inspector-General's comments on Tax Office response

A.3e.65 The Inspector-General has made no comment on Key Finding 6.5. As regards Key Finding 6.6, the Inspector-General welcomes the Tax Office's commitment to review the test case litigation program's internal review, analysis, evaluation and quality processes.

Key Finding 6.7

The test case program has not been administered fairly by the Tax Office. The Tax Office appears to have used the program's funds, together with other public funds, to support its organisational objectives of collecting revenue and enforcing the tax laws, rather than using these funds primarily to have certain areas of the tax law clarified by the courts.

Tax Office response

A.3e.66 We consider that there is absolutely no substance to this finding, nor any explanation in the report of how the Tax Office might have achieved this result before independent courts and tribunals. Moreover, it is not clear how an enforcement objective is achieved by funding taxpayers to be legally represented against us.

A.3e.67 Of the 44 cases funded under the program which resulted in a final decision by a court or tribunal, the Commissioner won 21, the taxpayer won in 20 and there were three cases partly in favour of both. This even split should be compared to the Commissioner's general success rate in the courts and tribunals. For example, in 2004-5 the Commissioner won 76 per cent of cases in the Tribunal and 63 per cent of court cases.

A.3e.68 Despite the finding, the Inspector-General concludes that the 'figures on the results of funded and decided cases therefore do not give any clear indication of bias in the Tax Office's funding of test cases.'

A.3e.69 We would suggest that the figures show positively that there is no bias in the Tax Office's funding of test cases. Our commitment to law clarification is apparent by the existence of the program. Fairness is apparent from the existence of the external panel members, whose advice has generally been followed.

Amount budgeted for and spent on the program

A.3e.70 The Commissioner has an interest in providing funding that will provide law clarification benefits for the broader community, where the matters are in the public interest to be resolved.

A.3e.71 Although the Inspector-General agrees with the assertion put to him that the Commissioner has failed to do enough to ensure the test case budget is spent, the Tax Office has elsewhere in the report been criticised for having voluntarily funded cases.

A.3e.72 There has only been one case where a decision was made contrary to a Test Case Litigation Panel recommendation, other than in those cases where the decision to fund was decided by the Commissioner. In that case, a recommendation was not accepted in relation to the first application of the taxpayer. In subsequent appeal proceedings, the panel's recommendations were accepted by the chair. That case went to the High Court and the taxpayer received costs for all stages of the proceedings.

Inspector-General's comments on Tax Office response

A.3e.73 The Tax Office has not correctly quoted this key finding and its comments in this response are therefore unsound. The key finding's opening sentence actually reads as follows:

The test case program has not been administered fairly by the Tax Office in the sense of achieving its aim of law clarification in all cases that warrant funding determined on an objective basis.

A.3e.74 The 44 cases referred to in the Commissioner's response which are alleged to show no bias in the Tax Office's funding of cases do not include the significant number of funded test cases that did not result in a finalised court decision. The number of these cases is the difference between the 110 cases that were initially funded by the Tax Office and the 44 cases which have led to a final court or tribunal decision. The percentages quoted for the number of cases won by the Tax Office also only cover cases that were finalised by a court decision and do not cover the significant number of cases that were finalised without a court hearing (for example by being settled).

Amounts budgeted for and spent on the program

A.3e.75 The Tax Office's response suggests that the report is inconsistent by stating, on the one hand, that the Tax Office could do more to ensure that the test case budget is spent and on the other hand, that the Tax Office is to be criticised for having voluntarily funded cases. The report is not inconsistent in this area. The criticisms made in the report in respect of certain cases which the Tax Office has voluntarily funded do not go towards whether or not these cases should have been funded but deal with the manner in which those cases were funded (eg whether they were funded in accordance with stated Tax Office guidelines).

A.3e.76 The Tax Office response also asserts that there has been only one decision to not fund a case where that decision was made contrary to a test case panel funding recommendation. The Tax Office has dismissed the second example of such a case referred to in the report. It has done so on the basis that the test case panel consist of two tax officers as well as a number of parties who are external to the Tax Office and that when the views of these tax officers are counted the decision not to fund the case was made in accordance with an overall recommendation of the panel.

A.3e.77 The Inspector-General's report clearly states (and the Tax Office has confirmed) that a majority of the members of the panel that were external to the Tax Office wanted to fund this case but this was not the decision that was followed by the Tax Office.

A.3e.78 The Inspector-General believes that the Tax Office should not count the views of its own officers in any case where it is making assertions about the extent to which its decision was made in accordance with a recommendation of a consultative panel. To do so devalues the effectiveness of Tax Office consultation panels in the community's eyes because it leads to a community perception that the Tax Office is capable of manipulating the decisions of such panels. This manipulation could occur through the Tax Office appointing enough members of its own staff to such panels to ensure that its own staff's views will override the views of external members of the relevant panel.

A.3e.79 The Tax Office's response emphasises the need for new management arrangements to be implemented for the formal test case program as referred to in Key Recommendation 4.

Key Finding 6.8

The test case program has not been administered openly. For example, the Tax Office has not published the names of cases that it has funded under the program and continues to assert that the secrecy provisions prevent it from publishing these names. It has also not published financial data on the operation of the program which would allow the community to properly assess the operations of the program.

Tax Office response

A.3e.80 We have been advised by the Australian Government Solicitor that we are precluded from publishing the names of cases that have been funded under the program, other than in the Annual Report. At present a selection of test case decisions are reported in the Annual Report; in future all cases will be published in the report.

A.3e.81 We also have arrangements in place with the Federal Court where an award of costs will be made in accordance with a Test Case Funding Deed. If the court facilitates that request, this will provide a means by which the test case funding decision is placed on the public record in the body of the court decision.

Inspector-General's comments on Tax Office response

A.3e.82 The Inspector-General welcomes the Tax Office's decision to publish test case decisions in its Annual Report. The Inspector-General also notes that in its response to Subsidiary Recommendation 6.4 it may also make publicly available the details of test cases in 'some other publication'.

Key Finding 6.9

The Tax Office's funding of cases does not presently extend to all cases where the Tax Office appeals against a court or tribunal decision in relation to Part IVC litigation matters.

Tax Office response

A.3e.83 The Tax Office accepts this finding. We refer to our comments in relation to recommendation 5.

Inspector-General's comments on Tax Office response

A.3e.84 The key finding quoted by the Tax Office is actually Key Finding 6.10, not Key Finding 6.9 in the report. The Tax Office has made no response to Key Finding 6.9 of the report which refers to new arrangements for the management of the test case program being needed.

Subsidiary recommendation 6.4

The Inspector-General recommends that any new arrangements for administering the formal test case program should make publicly available to taxpayers an annual report on the operations of its processes for funding cases. This report should at a minimum contain the following:

  • an annual assessment of the degree to which test cases funded by the relevant body have achieved the aim of law clarification;
  • details of the extent to which the budget for test cases has been spent; and
  • details of the number of test case applications made, the number granted and the number rejected, with broad details of the reasons for the rejections.

Tax Office response

A.3e.85 Agreed

A.3e.86 We will make publicly available the details of funded cases in our Annual Report, or some other publication.

Key Finding 6.10

Taxpayers who are involved in a case involving alleged tax avoidance do not generally receive assistance for the cost of any appeal of the Tax Office if an independent tribunal has determined that their case does not amount to tax avoidance.

Tax Office response

A.3e.87 We agree with this finding, but see comments at recommendation 6.5. It should be remembered that if the taxpayer ultimately succeeds, the taxpayer will usually be awarded costs by the court.

Inspector-General's comments on Tax Office response

A.3e.88 The Key Finding quoted as Key Finding 6.10 by the Tax Office is actually Key Finding 6.11 of the report.

Key Finding 6.11

The Tax Office has used the term 'test case' in a number of different ways in its communications to taxpayers both generally and individually. This has led to taxpayers in a number of cases making the following incorrect assumptions:

  • that the Tax Office will apply the result of the case to their case and all cases with similar facts;
  • that the case has been funded by the Tax Office; and
  • that the Tax Office's funding of the case has been in accordance with the formal test case program.

The last of these assumptions has added to taxpayers' concerns that the test case program is not being applied consistently.

Tax Office response

A.3e.89 The use of the term 'test case' traditionally means a case that will test the law and provide a precedent. The Tax Office generally uses the term 'lead case' to refer to cases which are representative of other factual cases.

A.3e.90 We accept that 'test case' has been used in a number of ways and may have led to some confusion in the community. We will attempt to have more uniformity in the manner in which the term 'test case' is used when communicating with taxpayers.

Inspector-General's comments on Tax Office response

A.3e.91 The Key Finding quoted as Key Finding 6.11 by the Tax Office is actually Key Finding 6.12 of the report.

Subsidiary recommendation 6.5

The Inspector-General recommends that the current exclusion of tax avoidance cases from the AAT adverse appeal funding arrangements be removed. The Tax Office should develop guidelines which allow funding for the costs of an appeal to be provided to taxpayers in cases involving alleged tax avoidance, where the AAT determines that there was no such tax avoidance, the taxpayer wins their case and the Tax Office appeals against that AAT case to the Federal Court.

Tax Office response

A.3e.92 Tax avoidance cases will not be automatically excluded where it is fair and in the public interest to fund an appeal.

Subsidiary recommendation 6.6

The Tax Office, when describing a case as a test case or leading case in any communication, whether to taxpayers individually or to the public at large, should clearly indicate:

  • whether it has funded the case, and if so its reasons for funding the case;
  • whether or not the case is expected to determine the tax disputes of taxpayers in similar circumstances; and
  • if the case is expected to determine other disputes, the nature of the other disputes that will be determined by the case and the nature of disputes that the case is not expected to determine.

Tax Office response

A.3e.93 Agreed in principle.

A.3e.94 However, we will need to clarify our position with the Solicitor-General on possible issues around the secrecy provisions of the various tax laws.

Inspector-General's comments on Tax Office response

A.3e.95 The Tax Office has omitted to quote the last dot point of Subsidiary Recommendation 6.6 which reads:

that the above is subject to the actual findings of the relevant tribunal or court.

Other comments on Chapter 6

Role of the Test Case Panel

A.3e.96 The Inspector-General makes a number of findings in paragraphs 6.102 to 6.105, which he concludes are 'further evidence that the Tax Office is giving preferential funding treatment to cases which meets its corporate objectives (for example that of law enforcement), rather than cases which may give rise to law clarification (in the wide sense) for the benefit of the community'.

A.3e.97 The fact that the Commissioner has funded some cases of his own volition in the interests of the administration of the tax system indicates that the Commissioner is prepared to fund cases in addition to those that have gone through a Test Case Panel process.

Have the decided cases which have been funded under the program met the stated purpose of the program?

A.3e.98 The Inspector-General finds that in 25 per cent of cases that were finalised by way of a court hearing no principle of law was established, with the case being decided on its facts or on other grounds. The relative value of cases can be a subjective analysis.

A.3e.99 The nature of tax cases is such that they can often tend to turn on their facts, and despite the arguments advanced it is a matter for the courts to determine how they will decide cases and how they will apply, distinguish, extend or create legal principle.

A.3e.100 We note that in any event the Inspector-General concludes that 'the test case program has been worthwhile'.

Stone's case

A.3e.101 The Inspector-General noted that a number of submissions asserted that Stone's case was an example of a case which should not have been funded under the program as it was decided on issues of fact and, therefore, will not directly apply to other similar taxpayers

A.3e.102 The High Court does not grant special leave in cases that it expects will simply turn on their facts — AGC (Investments) Ltd (1993). Secondly, in granting special leave to the Commissioner, the court accepted that the case involved important matters of principle. The report itself recognises that only exceptional cases are granted special leave to appeal, and these cases need to give rise to a question of fundamental principle before the High Court will grant special leave.

Record keeping

A.3e.103 The Inspector-General's review, rather than reviewing existing systems, somehow became a review of the Test Case Litigation Program over its 10-year life. Most of the test case records had long since been archived. We did have some initial difficulty in finding records of some of the meetings held prior to 1999. However, we did provide minutes from panel meetings in May 1997154, October 1998 and December 1998155, as well as the yearly spreadsheets of cases considered under the program156, NTLG records157 and annual report records158. To further assist the Inspector-General's review we undertook an extensive call back of files in June 2005.

A.3e.104 All cases under the program are given a corporate file. All electronic records are now kept on a Tax Office share drive for future reference. Whatever might be said about record management in the early years of the program, we believe we have had very good record keeping in recent years.

Taxpayer awareness of test case criteria

A.3e.105 The Inspector-General makes the finding that applications by taxpayers were poorly drafted and did not address the test case criteria. The Inspector-General somehow finds that the Tax Office is responsible for this. It is suggested that applicants might not have been aware of the relevant guidelines that were applied. The former test case booklet provided guidelines for applicants to prepare their submission for funding. Page 14 of the booklet states:

A submission must be prepared in order to apply for test case funding.

The submission needs to show how the issue in question relates to an area of the tax law that needs clarification and how it affects a significant number of other taxpayer.

In addition to explaining how your submission meets the objectives of the Test Case Litigation Program, you can support your argument by addressing any of the additional criteria listed below.

A.3e.106 It is difficult to understand the Inspector-General's alternative suggestion that poorly drafted applications reflect the applicant's belief that the funding application would be denied and that therefore there was no reason to put much effort into the form of the application.

Funding processes

A.3e.107 The Inspector-General notes that the six-monthly terms of payment are not consistent with normal commercial terms for the payment of legal bills. In cases that are not test case funded, if the taxpayer succeeds and has costs in their favour they do not get their costs until the proceedings have concluded. That may well be after all appeal processes are concluded.

A.3e.108 The payment of taxpayer's costs at six-monthly intervals in test case proceedings is not unreasonable. Further, the current arrangements make it clear that alternative arrangements may be negotiated.

Inspector-General's comments on Tax Office response

Stone's case

A.3e.109 The submissions referred to in the report state that the outcome of the High Court's decision in Stone's case was that it was a case decided on its facts. The issue of whether the High Court considered, at the time of granting leave to appeal in the case, that the case gave rise to questions of principle is not relevant to the point being made in these submissions. A determination by the High Court, prior to the case being heard, that the case involves questions of principle provides no guidance on the actual outcome of the case. The outcome of any case is affected by developments which cannot be known at the time when leave to appeal is granted.

Record-Keeping

A.3e.110 The Inspector-General flagged that the test case program may be the subject of review in late 2003. Since early 2004, record-keeping for the program has improved.

Taxpayer awareness of test case criteria

A.3e.111 The report nowhere makes an assertion that the Tax Office is responsible for taxpayers not addressing test case criteria in their applications. The report merely notes that some test case applications were poorly drafted and offers some possible reasons for this.

Funding processes

A.3e.112 The Tax Office confirms that six monthly terms of payment for test case funding is the norm but also notes that alternative arrangements can be negotiated. However, no details have been publicly provided of the circumstances which will lead to such a re-negotiation.

A.3e.113 The Tax Office's assertion that its payment terms are not unreasonable does not address the report's statement that these terms are not consistent with normal commercial terms for the payment of legal bills.


141 Test Case Litigation Program April 2005 http://www.ato.gov.au/taxprofessionals/content.asp?doc=/content/57395.h….

142 Taxation, Annual Report, 1998-99, p 20.

143 Commonwealth Ombudsman, The ATO and Budplan–Report of the Investigation into the Australian Taxation Office's handling of claims for tax deductions by investors in a tax-effective financing scheme known as Budplan. Report under section 35A of the Ombudsman Act 1976, June 1999. The report considered 1600 complaints and concluded in part '… it is my opinion that the Commissioner's actions are fair and could not be regarded in any way as being unjust, oppressive or improperly discriminatory.'

144 Economics References Committee, Inquiry Into Mass Marketed Tax Effective Schemes And Investor Protection 2002, Interim Report paragraph 6.26.

145 Ibid. Chapter 4 generally, but paragraph 4.35 particularly.

146 'Test Case Litigation Program Application & Guidelines'.

147 [2002] FCA 246 at paragraph 3.

148 [2002] FCA 246 at paragraph 132.

149 From the criteria contained in the Test Case litigation Program booklet that existed at the time of the decision.

150 Senate Economics References Committee, Inquiry Into Mass Marketed Tax Effective Schemes And Investor Protection 2002, Interim Report paragraph 6.26.

151 Senate Economics References Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection Final Report 11 February 2002 paragraph 3.45.

152 Solicitor/client costs are the costs which a solicitor charges the client for legal services. They relate to costs payable as between a solicitor and a barrister and their respective clients. Party/party costs are costs which the court usually orders another party to pay. Solicitor/client costs are almost always higher than party/party costs because party/party costs only cover costs that are necessary to the court proceedings and do not include other expenses, such as the costs of taking instructions and giving advice to the client.

153 The taxpayers had briefed counsel at an agreed commercial rate. By the time funding was agreed, counsel had already provided substantial work on the cases and it was important to the timely and efficient resolution of these factually complex cases that the counsel arrangements were not disturbed late in the day.

154 Minute 26 of 2005.

155 Minute 39 of 2005.

156 Minute 16 of 2005.

157 Minutes 22, 60 of 2005.

158 Minute 26.