5.1 This chapter discusses the Tax Office's policies and procedures for managing Part IVC tax litigation matters. It focuses on the policies and procedures for the management of litigation activities that are generally internal to the Tax Office.
5.2 The preceding chapter focuses on the policies and procedures for the management of activities that involve contact with taxpayers during the course of litigation, that is, on the Tax Office's actual conduct of litigation with taxpayers.
5.3 This chapter discusses a number of concerns about the Tax Office's internal policies and procedures for litigation and sets out a number of recommendations for improvements to these policies and procedures.
5.4 Submissions raised only a limited number of concerns about the Tax Office's internal policies and procedures for managing Part IVC litigation. This is understandable, given that there is very little material that is publicly available on these policies and procedures. The concerns that were raised were as follows:
- The Tax Office's senior management appears to lack awareness of and support for cases that are being litigated.
- The Tax Office does not perceive litigation risks in the same way as a normal litigant.
- The Tax Office's staff do not understand the materials/commercial transactions they are dealing with during litigation.
- Part IVC litigation appears to be initiated at low levels within the Tax Office.
- There are no processes which allow decisions on litigated cases made by any one area of the Tax Office to be reviewed inside that area by other staff who have not previously been involved in the case.
5.5 These concerns and the Inspector-General's overall findings in relation to the Tax Office's internal policies and procedures for litigation are discussed below.
Previous review of Tax Office's internal management processes for litigation
5.6 In 2003 the Tax Office's Chief Tax Counsel commissioned a major review (the Behm review) of its internal management of legal risk, including its management of the risks associated with its conduct of litigation on Part IVC matters. The review was conducted by Mr Allan Behm, Director of Knowledge Pond Pty Ltd, with technical assistance provided by The Value Creation Group Pty Ltd. The final report from this review was prepared in September 2003.
5.7 All the findings and recommendations of the Behm review have been accepted by the Tax Office. The Tax Office is working to implement these recommendations over an approximately two year timeframe.
5.8 The Behm review focused on the activities of the Tax Office's in-house legal area. It was based on the premise that the division of litigation activities within the Tax Office between the business lines, partner areas and the in-house legal area was to continue to be as set out in the preceding chapter. Under this division, the business lines have ownership of a litigated case, the Tax Counsel Network is responsible for determining the technical issues to be argued in the case and the in-house legal area is responsible for acquiring or providing the legal services required by the Tax Office to litigate the case.
5.9 As the Behm review was based on this three-way division of the Tax Office's litigation functions remaining in place, it did not examine any of the internal policies and procedures adopted within the Tax Office's business lines and partner areas for litigation.
5.10 The preceding chapter of this review has recommended that the Tax Office re-consider the above three-way division of litigation functions with a view to establishing a single area of the Tax Office with primary responsibility for litigation activities.
5.11 The Behm review findings and recommendations on the internal management activities of the Tax Office's in-house legal area will remain relevant if a new overall structure for litigation management is adopted. This is because the proposed new area will remain responsible for performing all the litigation functions currently carried out by this in-house area. Accordingly, this chapter discusses these findings and the current status of their implementation.
5.12 The proposed new single area for managing litigation would also assume some of the roles currently carried out by the Tax Office's business lines and Tax Counsel Network. Accordingly, this chapter also examines the current internal policies and procedures for litigation carried out by these areas. It makes certain recommendations for improvements to these policies and procedures.
Key findings of Behm review on Tax Office's internal management of legal activities overall
5.13 The Behm review made a large number of findings on the Tax Office's internal management of its legal activities, as carried out by its in-house legal area during 2003 and previous years. Most of these findings were highly critical. The Behm review findings were, in summary, as follows:
Risk management issues
5.14 The Behm review found that, although the Tax Office did employ reasonably sophisticated risk management techniques across its organisation as a whole, it did not apply risk identification and assessment techniques to its legal risk issues overall (including litigation issues). The Behm review concluded that the absence of this risk management approach to legal risk issues was largely because there was no overall strategic management of the Tax Office's in-house legal practice.
5.15 Legal risk in this context broadly means the risk faced by the Commissioner which arises from uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations. These risks include those which arise from the Commissioner being a party to litigation involving tax laws as well as those which arise from him being a party to litigation involving non-tax laws (such as those involving freedom of information, employment law, privacy law, commercial law) in his capacity as the head of a Government agency.
5.16 The review specifically found that:
- the concept of the legal risk faced by the Commissioner was not well understood either in the Tax Office's in-house legal area or the Tax Office at large;
- the Tax Office's in-house legal area did not take available measures to sufficiently mitigate the Commissioner's legal risk; and
- there was little recognition within the in-house legal area or the Tax Office as a whole of the significant value that could be created through the effective management of client/service provider relationships and the effect this could have on minimising the Commissioner's legal risks.53
5.17 The Tax Office has an internal practice statement — PS CM 2003/02(G) — which states that risk management is to be applied to all its activities. Under this practice statement, the Tax Office is to identify risks that threaten its objectives and to assess, analyse, prioritise, treat and monitor these risks. This risk management process is to be done in an environment where the Tax Office has scarce resources, cannot do everything, operates in a self assessment environment and has to deal with what is material. The Behm review found that this risk management policy had not been applied to the Tax Office's activities which deal with legal risk.
Quality review and other reporting processes
5.18 The Behm review also found that reporting and reviewing processes within the in-house legal area were deficient. These reports did not, for example, address the following:
- the setting and achievement of targets, including the value for money performance of the area; and
- the identification of the Commissioner's needs and the needs and expectations of other areas of the Tax Office and whether those needs were achieved.
Overall management structure and management support systems
5.19 The Behm review found that the Tax Office's in-house legal area generally operated as a loose federation of state-based legal services providers who did not offer coordinated national services based on standardised performance criteria.
5.20 Furthermore, the in-house practice did not have the support systems (particularly precedents, forms and opinions data bases) that were the normal trademarks of a functioning legal practice. It also did not have a national standardised practice management system, with matter management standards and practices and data recording practices varying between different ATO offices. This meant that no useful national performance reports could be prepared on the operation of the practice.54
Performance of Tax Office's in-house legal staff
5.21 The review found that, while the Tax Office's in–house legal staff impressed as dedicated, hard working and enthusiastic55, the in-house legal area had not been able to establish its credibility within the Tax Office as a high performing professional group — in contrast to other areas of the Tax Office such as the TCN.
5.22 The review found that, both amongst staff of the Tax Office's in-house legal practice and across the Tax Office overall, there was a lack of understanding of the in-house area's role, purpose, responsibilities, core business processes and the key services provided.
Behm review findings on Tax Office's internal management of litigation
5.23 The Behm review made the following specific findings about the in-house legal area's practices with respect to litigation:
- The in-house area's performance in relation to litigation specifically was at best uneven, and at worst poor.
- Some of the litigation work it was carrying out was being duplicated, for example by the AGS.
- The area's relationship with the AGS while adequate in some states, was generally uneven. This reflected a view within the Tax Office that the in-house practice was a competitor with the AGS, rather than working in a collaborative relationship with that agency.
- The quality of briefs prepared by the Tax Office's in-house area for the AGS and adherence to court procedural requirements was uneven.56
- There were no clear procedural guidelines for the management of the Tax Office's Part IVC litigation activities.
- Some parts of the in-house practice had an exaggerated appreciation of their skills and capabilities in providing litigation services.
Recommendations of Behm review on Tax Office's management of its legal activities overall
5.24 The Behm review recommended that the in-house legal area of the Tax Office should be abolished and replaced by a group within the Office of the Chief Tax Counsel. The primary role of this new group was:
- to provide or acquire high quality legal services to meet the legal requirements of the Tax Office; and
- to manage the legal risk that attached to the office of the Commissioner.
5.25 To achieve these two goals, the new in-house area was to deliver a range of legal services — some internally and some externally. For services that were to be provided by external legal service providers the new area was to establish and manage legal services provider panels and monitor the performance of those providers in accordance with memoranda of understanding or legal service provision contracts.
5.26 To achieve these goals the Behm review recommended that the Tax Office should undertake the following steps as regards the management of its legal activities overall.
5.27 The first step was that the Tax Office should define the scope of the Commissioner's and the Tax Office's legal risk in collaboration with other areas of the Tax Office, the AGS and counsel engaged by the Tax Office.
5.28 The second step was that a national identity should be forged for the in-house legal area by:
- establishing a nationally based approach to managing legal risk;
- managing the performance agreements of staff employed in the in-house legal area;
- ensuring that the relationships between the in-house legal area and the business lines are effectively managed at a national level, for example by revising the internal service agreements in place between the in-house legal area and the Tax Office's business lines to ensure that each party recognised the need to meet certain performance standards; and
- instituting a nationally focused continuing legal education system for the Tax Office in-house legal area's staff.
5.29 The third step was that the leadership of the Tax Office's in-house legal area, which was then vested in one person, should be replaced with a leadership team consisting of three executives. The first of these executives was to be responsible for the area's Part IVC and certain other litigation activities. The second executive was to be responsible for the overall management of and delivery of legal services within the Tax Office, including the provision of management reports on these services to the Tax Office's Executive. The third executive was responsible for providing in-house legal advice to the Commissioner on all non-tax technical legal matters.
Recommendations of Behm report on Tax Office's internal management of litigation
5.30 The Behm review made the following three recommendations in relation to the Tax Office's internal management of litigation, including Part IVC litigation.
5.31 Firstly, the Behm review recommended that a small and strong specialist group should be established within the Tax Office to provide the strategic management and conduct of Part IVC litigation and certain other litigation, led by the senior executive responsible for litigation management.
5.32 This group was to undertake the following specific duties as regards Part IVC litigation:
- to establish and manage a strategic litigation program;
- to establish and maintain efficiency and quality standards in the conduct of such litigation;
- to ensure that the Tax Office's legal position on technical issues is properly presented to relevant courts and tribunals and, where doubts arise about the legitimacy or practicality of that view, to ensure that it is reviewed by appropriate areas of the Tax Office;
- to ensure that the impacts of court or tribunal decisions are communicated to relevant areas of the Tax Office and to guide the implementation of necessary changes;
- to document and establish procedural guidelines for the management of this litigation; and
- to represent the Tax Office before courts and tribunals as appropriate.
5.33 The Tax Office considers that the term 'strategic litigation' as referred to in this recommendation is litigation that leverages compliance with the tax laws through clarification of the law in key high risk areas and litigation where law clarification opportunities are not the primary objective but which requires a strategic corporate Tax Office response because of the risks involved in the litigation.57 Strategic litigation embraces priority technical issues cases58, but only those which are considered the most strategically important.
5.34 The second recommendation made by the Behm review for Tax Office litigation was that procedures should be introduced to ensure that more collaborative and effective working relationships exist between all those who are managing litigation services within the Tax Office to minimise the Commissioner's legal risk in this area. To this end, the new specialist litigation group was to undertake the following duties:
- to manage and monitor a new comprehensive Tax Office/AGS memorandum of understanding in litigation matters; and
- to manage and monitor a provider panel for litigation services.
5.35 The third recommendation was that the Tax Office should market-test its in-house litigation services against those which could be performed by the AGS with a view to establishing the effectiveness and cost efficiency of keeping those services in-house.59
Current status of Behm recommendations
5.36 As at the date of this report, the Tax Office has not implemented a number of the major recommendations of the Behm report. The major recommendations that have not been implemented include the introduction of:
- risk identification and other risk management processes;
- reporting systems and review processes which evaluate client satisfaction, the achievement of targets and the value for money of in-house legal area; and
- national support structures for staff of the in-house legal services area.
5.37 The Tax Office has implemented those recommendations of the Behm report which concern management reorganisation.
5.38 This comment leads to the following key finding:
Key finding 5.1
The Tax Office has not implemented some of 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.
5.39 The current status of the implementation of the main Behm recommendations is as follows.
Recommendations relating to overall management of legal activities
5.40 The Tax Office has made its in-house legal area a branch within the Office of the Chief Tax Counsel. The branch does not form part of the Tax Counsel Network. The Tax Office has also instituted a three-person leadership structure for this branch. Initially this three–person leadership structure differed from the structure recommended in the Behm report in that responsibility for managing litigation activities was split between two of the three executives suggested in the Behm report, rather than vesting in one of these executives alone. However, in the latter half of 2005 the Tax Office adopted a leadership structure for litigation that was more similar to the Behm recommendation, under which leadership responsibility for all litigation vested in a single person. The position title for this litigation role is Senior Tax Counsel (Strategic Litigation).
5.41 The current management structure of the Tax Office's legal services branch (LSB) is shown in Appendix 9.
5.42 The Tax Office has not responded to the major Behm recommendation that it develop a process for identifying and assessing legal risk in collaboration with the AGS and its external legal service providers. The Tax Office has advised that the current extent of risk identification and assessment consists of certain reports made to the Tax Office's Executive on current legal activities. The Tax Office has advised that risk identification processes are currently being considered as part of the implementation of a new law sub plan within the Tax Office.60
5.43 One manifestation of the absence of these risk management processes is as follows. There is currently no internal report prepared by the in-house Legal Services Branch (or by any other area of the Tax Office) to the ATO's Executive which details the overall state of the Tax Office's litigation program, including the revenue tied up in this process and the Tax Office costs incurred to date on either all or any individual cases.
5.44 The extent of Tax Office reporting by the LSB area to the ATO's Executive on the status of litigated cases is that the Senior Tax Counsel responsible for strategic litigation provides to the Commissioner and Treasury, on a monthly basis, a strategic litigation report which describes all strategically important litigation and decisions regarded as being the most significant to the Tax Office.
5.45 This report contains very little material to support a proper risk management approach to these cases.
5.46 The report is divided into two parts — one being for mass marketed cases and the other for non-mass marketed cases — and each of these is prepared in a different format. Both parts of the report contain descriptions of litigated cases which the Tax Office considers to be significant. However, each part does not contain any description of the criteria for classifying cases as being significant, does not list the cases discussed in their order of significance and does not provide the amount of tax, penalties and interest in dispute for all cases. Both parts also do not contain any cost/benefit analysis for any of the cases discussed. Both parts are also lengthy and contain no summary of the relevant cases.
5.47 Each part of the report also does not contain any data — including risk management data such as the total quantum of tax in dispute — for litigated cases that are not considered to be significant.
5.48 Other internal reports prepared on litigation activities by the in-house Legal Services Branch but which are not directly provided to the ATO's Executive are as follows:
- Litigated cases which deal with issues that the Tax Office has identified as priority technical issues are included in a report prepared for a cross-business line committee which deals with priority technical issues.
- Monthly call over reports are prepared, which are sent to the LSB area's administrative manager of all non-strategic Part IVC litigation.
5.49 The Tax Office also has no policy for communicating the status of its litigation program (including the revenue results and/or costs incurred) to the public. Its published compliance results for each year have also not included adjustments to prior year results for credit adjustments arising as a result of litigated disputes being resolved wholly or partly in a taxpayer's favour. However, in October 2005 the Commissioner agreed to update these compliance results for each year to reflect these credit amendments, at least in respect of large business taxpayers.61
5.50 The lack of separate reporting by the Tax Office on the results of its litigation program means that the community is unable to assess whether the Tax Office's overall litigation program is being conducted effectively, fairly and with minimum cost.
5.51 The results of the Tax Office's litigation program published in its Annual Report only give percentages of cases won, lost and partly won by the Tax Office. The Tax Office does not publish in its annual report or elsewhere the total number and dollar value of all litigated cases won, lost or partly won.
5.52 Furthermore, the Tax Office's Annual Report figures on litigated cases won and lost by the Tax Office do not accurately reflect the results of all litigated cases. The percentages reported are based only on cases won, lost and partly won, where the relevant cases have resulted in a court or tribunal decision. These figures indicate that the Tax Office wins the majority of these cases (in 2004/05 the relevant figures were 76 per cent of cases for the AAT, and 63 per cent for court cases62). However, as discussed in preceding chapters, these cases represent only a small proportion of all litigated cases (for example for the eight year period to 2004/05 they were on average only 12 per cent of all AAT tax cases).
5.53 Another manifestation of the absence of risk management in the Tax Office's approaches to litigation is as follows. The Inspector-General found during the course of this review that there were disputed tax cases being litigated by the Tax Office where the result of the case was that the Tax Office was required to make a net payout of tax revenue to the opposing party, even though the case was settled on the basis that the Tax Office won the case.
5.54 In one case, this result came about because of the combined effect of:
- the compensating adjustments made by the Tax Office to other parties related to the taxpayer;
- the Tax Office being required to pay interest on the tax overpaid by some of these parties; and
- the Tax Office being unable to collect the interest on tax underpaid by the other parties in the case.
5.55 If the Tax Office had not challenged the taxpayer's arguments in this type of case, a net revenue payment would not have needed to be made.
5.56 It seems unlikely that, if a risk management approach had been applied to this type of case, the Tax Office would have continued with the case once it became apparent that the case was revenue negative. A formal framework of risk assessment directed at dispute and litigation matters would provide more accountable criteria for making such decisions.
Tax Office's approach to assessing litigation risks
5.57 The above type of case is an example of what can occur as a result of the Tax Office not assessing its litigation risk in the same manner as a normal litigant. Normally a litigant would only continue with a disputed tax case where the expected monetary benefit from the case exceeds the sum of both any internal and external costs incurred in litigating the case.
5.58 The Tax Office has confirmed during this review that it considers that cost/benefit processes of this nature are either not relevant or cannot currently be fully carried out for litigated tax cases.
5.59 Where a litigated tax case is considered to be significant the Tax Office considers that such an analysis is irrelevant. This is because it considers that it will generally be appropriate for the Tax Office to meet whatever external and internal litigation costs are necessary to achieve finalisation of the issue at stake.
5.60 For non-significant cases, the Tax Office has advised that this analysis cannot be currently carried out. This because the Tax Office has no internal costing and reporting processes which allow it to assess its total internal costs of running a litigated case.
5.61 The absence of a risk management approach to litigation means that the Tax Office is not applying its internal practice statement PS CM 2003/02(G) which states that risk management is to be applied to all its activities.
5.62 The above comments lead to the following key findings and recommendations:
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.
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.
Key recommendation 3
The Tax Office should introduce risk management techniques to its management of tax litigation issues. It should start this process by defining the scope of the Commissioner's and the Tax Office's legal risk in collaboration with the Australian Government Solicitor (AGS) and counsel engaged by the Tax Office.
Tax Office response
5.63 We will review our current practices with this recommendation in mind.
5.64 All litigation cases are risk assessed at the commencement of litigation and risks are reviewed throughout the course of litigation. The Tax Office has a practice statement that outlines the process for risk assessment in litigation– see PSLA 2005/22. Although that practice statement focuses on priority technical issues (PTI) it makes it clear that, whether or not a case is linked to a priority technical issue, business lines must adhere to their own governance practices to ensure decision making is made at the appropriate level. Moreover, the Tax Office's Code of Settlement Practice provides guidance for Tax Office staff considering settlement of disputes, which also encapsulates risk management concepts. Where counsel and the AGS are involved in litigation, they assist in identifying legal risks to the Commissioner throughout the course of litigation.
5.65 Nevertheless we will review our current practices to ensure that the proposed litigation practice statement clearly articulates how we approach litigation in cases which do not involve PTIs, including a better articulation of the factors that underlie our risk management approach.
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
5.66 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
5.67 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.
National support structures
5.68 During the fieldwork stage of this review, the Tax Office advised that it has constructed a national opinions data base for the LSB area and that opinions are progressively being loaded onto this data base. Case management systems are being reviewed as part of the Tax Office's overall change program. A professional development project is under way. Capability profiling has been completed to identify capabilities required for work in the in-house legal area. Individual staff capabilities have been ascertained and gaps identified. Development of a continuing legal education curriculum is well advanced.63
5.69 The above comments indicate that at the time of the Inspector-General's fieldwork there was 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.
5.70 The above comments lead to the following key findings and recommendations:
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 that are responsible for the actual conduct of cases.
Tax Office response
5.71 We agree with subsidiary recommendations 5.3 and 5.4, but not with key finding 5.4.
5.72 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.
5.73 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.
5.74 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.
5.75 We will review existing support tools to ensure they are adequate.
5.76 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.
Status of Behm recommendations relating to litigation activities
Strategic litigation program
5.77 As discussed in the preceding chapter, the Tax Office has established a strategic litigation program to identify and manage strategic litigation cases. This review has not performed a detailed assessment of this program. However, the fieldwork conducted for this review, discussed in the preceding chapter, suggests that this internal management program is producing benefits. These benefits include the establishment of a Tax Office wide internal policy which sets out uniform processes that are to be applied to these cases. There is however, no similar program in place for the management of non-strategic litigation cases.
Establishment and documentation of procedures for litigation
5.78 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. This material is also spread across a number of different sources. There is currently no single reference document available to any of its staff (including staff in its in-house legal area) which lists all of the sources of both policies and procedures for litigation.64
5.79 The available reference material on policies for litigation has been listed in the preceding chapter. The available reference material which describes the procedures for litigation consists of the following:
- ATO legal practice bulletins;
- an ATO Litigation Reference Manual;
- an Appeals Litigation handbook; and
- certain publicly available practice statements.
5.80 The LSB area is currently engaged in a project to update all this material.
5.81 Under this process, and during the course of this review, a practice statement (PS LA 2005/22) has been published which explains the Tax Office's internal processes for handling disputes which involve priority technical issues. There is no similar draft or final practice statement which deals with all aspects of the Tax Office's processes for handling litigation disputes which do not involve priority technical issues. The Tax Office has advised the Inspector-General that it considers its internal litigation reference material, once updated, and governance measures within its business lines will address this issue and that there is no need for a separate practice statement.65
5.82 The Tax Office is preparing a draft practice statement which, when finalised, will explain the Tax Office's processes for handling the management of the outcomes of decisions arising from all litigated cases.
5.83 The above comments lead to the following key finding and recommendations:
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.
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
5.84 We agree with subsidiary recommendation 5.4.
5.85 The Tax Office will develop a single document which will consolidate procedures for handling litigation matters which do not involve a Priority Technical Issue.
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 priority technical issues.
Tax Office response
Nature of case management procedures within LSB
5.87 Case management procedures within LSB for a case that involves a decision being handed down by a court or a tribunal have been established and documented during the course of this review in a draft practice statement. The LSB area is working on establishing and documenting procedures for other aspects of litigated cases. These procedures are currently embodied in draft flow charts.
5.88 The case management procedures for a decision which has been handed down by a court or tribunal are set out in Appendix 10.
5.89 A principal feature of these procedures is that the LSB officer who has been designated as the relevant case manager for the case must convene a number of strategic internal litigation committee (SILC) meetings with other Tax Office staff within certain time periods after the relevant decision is handed down. These meetings must, as a minimum, be held with the officer that has been designated by the relevant business line or area as being its case officer for that case. Other attendees will vary according to the nature of the case. For example, they may include a member of the Tax Counsel Network (if they are involved in the case) and members of other business lines. The Tax Office expects these meetings to be documented on the relevant case file and also expects that the LSB file for the case will contain all other key materials associated with the case.
Extent to which case management procedures are presently followed within the LSB area
5.90 Fieldwork by staff of the Inspector-General indicates there is a lack of adherence to case management procedures which deal with proper record-keeping procedures within the LSB area.
5.91 A significant percentage of the LSB files examined by staff of the Inspector-General were of poor quality. Deficiencies in these files included the absence of key internal documents (such as records of SILC meetings), the absence of key external documents (such as briefs to counsel and counsel's subsequent advice) and an absence of any material which indicated how the case was eventually resolved.
5.92 The above comments lead to the following key finding and recommendation:
Key finding 5.6
A significant percentage of the case files in the Tax Office's legal services area examined by staff of the Inspector-General indicated that 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 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
5.93 There is room for improvement in our file and record-keeping procedures.
5.94 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.
5.95 The Tax Office has no set of policies for the quality control of litigation. It considers that the inherent nature of litigation and the manner in which it is managed by the Tax Office ensures that there are a number of checks on the way cases are conducted. These checks include:
- the involvement (via the SILC process) of a number of different business lines and areas in any decisions that are made concerning a particular litigated matter;
- the involvement of a number of external parties in all litigated cases, including the AGS, external barristers and the courts and tribunals which hear the case; and
- the ability of taxpayers to appeal a case to a higher level tribunal or court.
5.96 A number of submissions made to this review suggested that the Attorney-General's model litigant rules were a sufficient set of quality control policies for the Tax Office's conduct of litigation. However, the previous chapter has noted that there is a lack of awareness of these rules amongst taxpayers, advisers and within the Tax Office and that these rules are not actively enforced by the Office of Legal Services Coordination within the Attorney-General's Department.
5.97 The fieldwork by staff of the Inspector-General discussed in this and the preceding chapter indicates there is a need for specific quality control processes to be introduced by the Tax Office into litigated tax cases.
5.98 The fieldwork discussed in the preceding chapter indicates that there is a need for appropriate evidence on litigated tax cases to be obtained earlier in the dispute process, for ensuring that the technical position being relied upon in the case is confirmed by internal or external Tax Office technical staff rather than compliance staff at an early stage and that all Tax Office staff involved in a case understand why a case is being litigated.
5.99 The fieldwork discussed in this chapter indicates that there is presently a lack of quality control to ensure that internal Tax Office procedures (for example in relation to the documentation of SILC meetings and proper file maintenance) are being followed.
5.100 The establishment of a new independent area for the management of litigated disputes recommended in the preceding chapter will of itself introduce a quality control mechanism into current procedures for litigation, but this area needs to develop its own quality control procedures.
5.101 The above comments lead to the following key finding and recommendation:
Key finding 5.7
The Tax Office has no structured internal quality control processes for litigation.
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
5.102 Agreed in principle.
5.103 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.
Maintenance of Tax Office technical views and guidance on results of court decisions
5.104 The Tax Office's progress on the Behm recommendations for ensuring that Tax Office technical views are maintained or reviewed during litigation and that guidance is provided on the results of court decisions is discussed in detail in the last chapter of this report.
5.105 The Tax Office has engaged an external consultant to review its existing Memorandum of Understanding with the AGS. The new memorandum is to incorporate an evaluation process for both parties to the memorandum.
5.106 While the Tax Office has now established panels of external providers for debt litigation work and commercial and general law advice, it has not yet established a similar provider panel for Part IVC litigation services.
Tax Office's internal policies and procedures for managing litigation outside the Legal Services Branch
5.107 The Tax Office's internal policies for managing litigation do not consist solely of the policies and procedures applied by its in-house legal area. They also consist of policies and procedures that are applied by the other areas of the Tax Office that have a role in litigation — namely the Tax Counsel Network and business lines.
Nature of policies and procedures for litigation applied by the Tax Counsel Network
5.108 The Tax Counsel Network (TCN), which comprises around 76 Tax Office staff, has no uniform policies and procedures for its role in the management of tax litigation.
5.109 The role of this area in respect of litigation is currently described in PS LA 2005/22, but only in very general terms. In accordance with this practice statement, TCN is responsible for forming the Tax Office technical view that is to be applied in all cases involving priority technical issues (PTIs).
5.110 In practice, members of TCN have generally taken this statement of their role to mean that, where they are involved in a PTI case, they are responsible for all key decisions that are required by the Tax Office on the case, including the settling of the wording of court and tribunal documents and the nature of submissions that are to be made during the hearing. The relevant business line is not therefore responsible for these decisions.
5.111 However, the degree of involvement by any TCN member in any case (including a PTI case) is at the sole discretion of that TCN member. This is explicitly permitted by PS LA 2005/22.
5.112 TCN's role in a case can also be affected by the degree to which a Tax Office business line resists the technical views of TCN in relation to the case. If these views differ, the matter can be escalated to higher management levels within the Tax Office for a decision on which view will prevail.
5.113 Under the Tax Office's current management chart for litigation as set out in Appendix 9, two separate senior members of the Tax Counsel Network have ultimate technical responsibility for all cases involving aggressive tax planning and GST issues. However, the nature of the relationship of these positions to the TCN position within the LSB area which is responsible for strategic litigation is not clear, as it is not set out in any formal Tax Office internal policy document.
5.114 The Inspector-General considers that it is undesirable for the role of any tax officer to be either unclear or left to the discretion of that officer. The Inspector-General considers that the Tax Office should establish and enforce a uniform, written and clear set of internal management policies and procedures for the litigation roles which are currently carried out by TCN members.
5.115 The Tax Counsel Network is not required to prepare any management reports to the ATO's Executive for any cases for which it is effectively responsible. The litigation management activities of this network are also not subject to quality control processes.
5.116 The above comments lead to the following key finding:
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 ATO's Executive for any cases for which it is effectively responsible. The litigation management activities of this network are also not subject to adequate quality control processes.
Nature of policies and procedures for litigation within business lines
5.117 For most business lines, the only written statement of their overall policies and/or procedures for litigation is contained in service agreements they have entered into with the Tax Office's in-house legal area. Until recently, the terms of these service agreements have differed between each business line. However, the Tax Office has recently produced a single, standardised service agreement for all business lines.
5.118 Under this generic service agreement the business lines are responsible for the following elements in relation to the management of litigation66:
- development of the Tax Office position on the issues to be litigated and the arguments to be run (both subject to relevant escalation processes within the Tax Office);
- the gathering of evidence; and
- the management of the ongoing relationship with the opposing party.
5.119 The draft service agreements contain the following details of the procedures to be followed by each business line in relation to litigation:
- The lines are to provide the LSB area with instructions. These are to include the facts of the case, the Tax Office position on the issues to be litigated, the arguments to be put and all details and documents that establish the relevant facts and arguments.
- The line is to collaborate with the LSB to prepare any necessary court or tribunal documents. For AAT matters, the line is to actually prepare a draft of the relevant tribunal documents and send this to the LSB area. These documents are to be finally approved by the business line before they are filed in the relevant court or tribunal.
- Where AGS and/or external counsel are to be engaged for the case, the LSB area will engage these parties if the matter involves tied work (that is, work which can only be performed by the AGS under the current Commonwealth Legal Services Directions for engaging solicitors). The LSB area will only engage these parties for non-tied work if the business line agrees. In all cases the LSB area will prepare the brief required by these parties.
- Litigation strategy and non-technical decisions made in the conduct of the case are to follow the agreement on these matters reached between LSB and the business line at relevant SILC meetings.
- Where a decision is handed down, the business line is responsible for all follow-up work in relation to the case (including the issue of assessments and the payment of interest).
5.120 Generally, other than for the GST business line, the only other procedural documents which are available to business lines to guide them on carrying out the above responsibilities are the same procedural documents currently available to LSB officers. As discussed above, these documents are largely unhelpful as they are either incomplete, out of date or spread across a number of different sources. However, the LSB area is engaged in a process to update these documents.
5.121 The GST business line recently developed a manual for staff involved in litigation activities.67 It is also preparing a draft procedural document on declaratory proceedings. During the course of this review, in September 2005 this business line also developed a document setting out the various governance processes in the GST business line for managing litigation.
5.122 The business lines' role throughout the litigation process, as stated above, is far wider than that of the LSB area. While the LSB area is working towards improving documentation of its role and procedures in the litigation process, apart from in the GST business line, there is only limited work that has been undertaken or is under way within the business lines to prepare policy and/or procedural documentation which would guide their officers on how to carry out all of their significant litigation responsibilities. If the Tax Office creates a single area responsible for all aspects of the management of litigated disputes, the current state of this documentation in relation to these responsibilities will need to be addressed.
Business line governance processes in relation to litigation
5.123 The business lines' responsibilities in relation to litigation also include responsibilities for ensuring that there are appropriate governance processes (including quality control processes and the provision of reports to the ATO's Executive) for the litigation activities for which they are responsible.
5.124 The business lines are also responsible for the payment of all costs incurred by the Tax Office in relation to litigation.
5.125 As noted above, the Inspector-General found during this review that there were no structured quality control processes in relation the Tax Office's litigation activities. This finding also applies to the litigation activities for which the business lines are responsible.
5.126 As also noted above, the Inspector-General found that there is no management report prepared anywhere in the Tax Office for the ATO's Executive which details the overall state of the Tax Office's litigation program, including the revenue tied up in this process and the Tax Office costs incurred to date on either all or any individual cases.
5.127 There are also no such reports prepared for the ATO's Executive by any of the business lines in respect of the litigation for which they are responsible. This absence of written reports by the business lines to the ATO's Executive extends to strategically important litigation. This is the case, even though the ATO's Executive regards the business lines as having the primary responsibility to provide timely advice to both it, the Treasury and Treasury Ministers on the progress and implications of at least all strategically important litigation.
5.128 The actual nature of the internal management reports that are prepared by each business line varies considerably between each business line and is discussed further below.
Nature of policies and procedures (including reporting processes) within each business line
Large business and international
5.129 The Tax Office estimates that as at June 2005 there were 128 litigated cases involving the Large Business and International business (LBI) area. The total number of all Tax Office litigated cases at that date was 2,666. During the 2004/05 year, this area finalised 72 cases. The total number of all Tax Office litigated cases finalised during this year was 1,166.
5.130 The LBI area considers that the majority of all its litigated cases involve priority technical issues.
5.131 There is no specific team in this area which handles litigation. Staff teams in this area are organised into teams that focus on particular clients. As a result, a litigated matter is handled by the team responsible for the relevant client who has the case which is being litigated.
5.132 The LBI case officer who handles the original dispute decision is also the staff member who has primary carriage of any subsequent litigation.
5.133 There is no process for an internal review within the business line of any decisions made by this LBI case officer during the litigation process. This same officer has the prime responsibility for developing any strategies that arise as a result of a decision in a litigated case.
5.134 Submissions made to the Inspector-General during the course of this review provided a number of examples of cases where it was asserted that an internal review of decisions made by LBI litigation case officers responsible for the case would have led to the cases being resolved much earlier in the litigation process.
5.135 An LBI National Litigation manager has overall responsibility for litigation within the line. This manager chairs a four–person Litigation Strategy Committee which held its first meeting during the course of this review. This committee meets quarterly to review litigation cases and practices within the line.
5.136 LBI also has a litigation coordination unit which provides statistical data and reports on certain details of litigation cases involving LBI clients and acts as a liaison point between the business line and the LSB area.
5.137 The reports prepared by this unit consist of:
- a litigation cases spreadsheet. This is circulated to the Litigation Strategy Committee and to various segment leaders within the business line, but not to the line's Executive team; and
- narrative comments on certain litigated cases which are included in a monthly report prepared for the business line's Executive team.
5.138 The line prepares no specific reports to the ATO's Executive on litigated cases.
5.139 The line is in the process of developing a website to provide LBI staff with additional support around litigation practices and procedures.
5.141 For cases handled by the Small Business (SB) area, a litigation coordinator is assigned to each litigated case. This person is additional to the officer who handled the original dispute which gave rise to the litigation. The litigation coordinator must prepare the draft set of tribunal documents for AAT matters and must attend all SILC meetings held on the case. The original dispute officer usually however maintains an involvement throughout the litigation and may attend SILCs.
5.142 The coordinator plays no role in determining the objection decision or reviewing any other decisions made earlier in the dispute process. Once the objection decision is referred to a court or tribunal, the litigation coordinator can then review the original decision and determine that the case should not proceed. However, the coordinator cannot overturn an objection decision at this stage if they consider that the objection decision is incorrect because it applies a settled Tax Office technical view which the coordinator considers is incorrect. In this case, the coordinator needs to escalate the matter both within their business line and to the Tax Counsel Network for a decision on how to proceed.
5.143 There is no further internal review process for any litigation decisions made by the litigation coordinators.
5.144 Submissions made to the Inspector-General during the course of this review provided a number of examples of cases where it was asserted that an internal review of decisions made by SB litigation coordinators responsible for the case would have led to the cases being resolved much earlier in the litigation process.
5.145 A monthly report is prepared within the business line providing a summary of the majority of cases on hand. This report is available to the business line's executive team. There is an expectation (but no formal requirement) that litigation coordinators will inform the national manager responsible for litigation of all significant litigation cases. Whether a case is significant is determined by the litigation coordinator. On a quarterly basis, the national manager within SB conducts a review (call over) of all SB litigated cases.
5.146 The business line's executive is not currently briefed on the more important litigation matters on hand but it is proposed that such briefings will be conducted on a three monthly basis.
5.147 Follow-up action required as a result of a decided case is carried out by the technical area within the business line responsible for the relevant issue.
5.148 The line prepares no specific reports to the ATO's Executive on litigated cases.
5.149 Part IVC litigation matters which involve the Serious Non-Compliance area of the Tax Office are litigated by the SB area. This arrangement is managed under a draft Memorandum of Understanding between these two areas.
5.150 The total number of cases the Personal Tax (Ptax) area was handling as at June 2005 was 124. During the 2004/05 year, it finalised 91 cases.
5.151 There is a small team of around 6-7 people involved in the supervision of Ptax litigation, headed by a litigation manager. Members of this team are all members of the business line's tax technical team, which is separate from the line's audit area. The team only handles matters that have reached the stage of litigation and play no role in determining original objection decisions. However they do review these objection decisions once they have reached the litigation stage.
5.152 No further internal review process exists for any steps taken in the litigation beyond this stage.
5.153 The Ptax litigation team rates litigation cases into three categories according to risk — with category 1 and 2 cases being the highest risk cases. Decisions to proceed with these two categories of case are made by senior officers of the Tax Technical network who are outside the litigation team. Decisions to proceed with category 3 risk cases (the lowest risk cases) are made by the manager who is in charge of the area's litigation.
5.154 The Ptax area handles a relatively small number of cases but, as a number of these cases can affect a large number of taxpayers, it has detailed processes for preparing communication plans which outline the communication strategies that need to be adopted following the outcome of cases with wide impact.
5.155 The only management report where litigated cases are reported is in a weekly 'Heartbeat' report. This contains short one-paragraph narratives on litigated cases considered to be of interest to the business line's executive.
5.156 The line prepares no specific reports to the ATO's Executive on litigated cases.
5.157 The GST business line had 98 litigated cases it was handling as at June 2005. In the 2004/05 year, the line finalised 70 cases.
5.158 This area has established the most extensive policies and procedures of all business lines for litigation.
5.159 The line has a number of internal committees which consider aspects of litigated cases. For example, it has an internal technical priority issues committee which reviews the priority and status of priority technical issues including those which are or may become the subject of litigation. It also has an issues management committee which monitors priority technical and other critical issues.
5.160 As regards individual cases the following processes apply.
5.161 With the exception of 'penalty only' matters, in almost all GST litigation cases a Tax Counsel Network member is allocated to assist in the carriage of the case, regardless of whether or not the case involves a priority technical issue. This arrangement dates from the beginning of the introduction of GST in mid 2000.
5.162 The GST line's policy is also that, with the possible exception of Small Taxation Claims Tribunal cases, generally at least a junior external counsel and possibly a junior and senior counsel (depending on the issue) may be briefed for a GST case.
5.163 The GST business line has a formal review and litigation team, headed by a Review and Litigation Director and comprised of about 55 staff in seven teams which are located across Australia. These teams review all objection decisions prior to their finalisation. If the case proceeds to litigation, the same review and litigation team officer who made the original objection decision will become the business line's litigation coordinator for the case and will attend all relevant SILC meetings.
5.164 The GST area also assigns a senior executive as 'risk owner' to each litigated case. This senior executive is responsible for assigning an appropriate mentor/subject expert to the case. This expert will attend all SILC meetings not attended by the senior executive risk owner.
5.165 Decisions to proceed with all litigated cases are made by the relevant senior executive risk owner.
5.166 These processes mean that a minimum of three GST business line officers are actively involved in any one GST case. The GST litigation manual states that at least five GST business line members are to be invited to all SILC meetings for GST cases. These numbers greatly exceed the number of business line officers actively involved in litigated cases run by other business lines. These numbers can grow depending, for example, on the significance of the case and can, on occasion, reach levels which are clearly excessive. For example, in one case reviewed by staff of the Inspector-General during this review there were seven GST business line staff involved in a GST litigated case involving disputed tax of only $1818.
5.167 The GST line's practices exhibit more elements of an internal review process for litigation decisions than any other business line. The line's litigation manual states that it has an informal review process which arises from the Taxpayers' Charter. Under this process a taxpayer may seek an informal review of a decision made by one GST business line officer, with this review generally being conducted by an officer who was not previously involved in making the original decision. However, this internal review process is only informal (that is, taxpayers have no formal rights under which they can request this review process).
5.168 However, despite the GST business line's practices, cases are still proceeding to litigation and are subsequently settled as a result of the necessary facts and evidence and/or correct technical views being obtained only at this stage and not earlier in the dispute resolution process.
5.169 As discussed above, the GST line has developed more detailed internal written procedures for its litigation than any other business line. It has a manual for staff involved in litigation and has also developed a draft practice statement on declaratory proceedings involving GST.
5.170 Written reports to the GST Executive team on litigation matters consist of the following:
- A report is prepared by the Issues Management Committee which will touch on litigation where a key event occurs for an issue and this event relates to litigation.
- A fortnightly GST Litigation report is prepared which is reviewed by the GST Executive. This report is comprehensive in many respects and includes details of the tax and penalty involved in each case. Unlike any other business line litigation report or any report prepared by the LSB area, it includes cost/benefit analyses for most cases on hand, although the costs recorded are only those which have been incurred externally by the Tax Office. However, the report does not summarise the total GST that is currently the subject of litigated disputes.
- On a monthly basis, the Review and Litigation Director will forward to the Deputy Commissioner for GST the significant litigation report prepared by the LSB branch with briefing notes on any significant changes for GST cases.
5.171 The line prepares no specific reports to the ATO's Executive on litigated cases.
5.172 The Superannuation business line was handling 37 litigated cases as at June 2005. During the 2004/05 year it finalised 57 cases.
5.173 Management of litigation in the Superannuation business line is undertaken by the Superannuation Centre of Expertise (COE) area which is separate from the business line's audit area. A litigation manager in this area monitors the overall progress of all cases. The Tax Office advised that from early 2006 the management of litigation within this business line was to be moved to a Complex Technical Unit (CTU) area which is currently involved in providing certain reports on litigation. The CTU area is also separate from the business line's audit area. The COE area would continue to be involved in litigation if the matter is precedential or a high risk case.68
5.174 Currently, case officers for particular litigated cases are selected by other managers within the COE area and these case officers report directly to the managers who have appointed them. Technical arguments are agreed between the case officer and their respective manager in conjunction with the LSB area. All decisions on cases are made by the case officers in conjunction with their managers.
5.175 Where a case involves complex technical issues, views will be sought from the Complex Precedent team within the Centre of Expertise.
5.176 The regular written reports to the Superannuation area's Executive team on litigation matters consist of weekly 'Heartbeat' and monthly 'Line Delivery' reports. These record the number of litigation cases on hand and (in certain cases) the number of cases finalised during the relevant period.
5.177 The line has prepared a one-off superannuation court case analysis covering the period from August 2003 to June 2005. This analysis provides further information on the characteristics of litigated cases during this period, including the number of cases involving particular areas of superannuation law, the issue that was involved, and the average time to complete cases. However, this analysis is not part of its regular reporting processes.
5.178 The line prepares no specific reports to the ATO's Executive on litigated cases.
Aggressive tax planning
5.179 As indicated in an earlier chapter, aggressive tax planning cases account for the majority of all cases litigated by the Tax Office.
5.180 The Tax Office estimates that as at June 2005 there were 1,500 cases in the Aggressive Tax Planning (ATP) area which were at the stage of litigation. The number of cases finalised by the line during the 2004/05 year was 597.
5.181 The ATP area has only a very small number of staff dedicated to working in this area. The remaining staff who work on ATP matters are drawn from the Tax Office's business lines (chiefly the Small Business line). A specific TCN officer is dedicated to coordinating strategic ATP litigation. The area has no procedural documents which set out its processes for managing ATP litigation.
5.182 Management reports for the ATP area (including those prepared for the ATO's Executive) do not separately identify ATP disputes which are at the stage of having been appealed to a court or tribunal from those which have reached the objection stage.
5.183 ATP dispute cases do not have an individual case manager assigned to each case. All ATP cases are managed by the Tax Office on a bulk basis. The Tax Office has an agreement with the AAT that it can initially lodge standardised documents to record the issues in dispute for these types of cases. These standardised documents are later tailored to the individual facts of the case once the matter proceeds to a hearing.
5.184 An ATP litigated case will have a Tax Counsel assigned to the case once it has been identified as having lead case status. A case will have lead case status if it becomes the first case that will be heard by a court or tribunal on a particular aggressive tax planning arrangement.
5.185 There is no general internal review process for matters litigated by the ATP area. However, internal review processes have been established for certain ATP cases that have reached the stage of litigation. Examples include the internal review process established for taxpayers who were involved in pre-1999 mass marketed tax effective schemes and were not eligible for the concessional settlement offer made in 2002 for those schemes, and the internal review process that has been established for taxpayers involved in employee benefit arrangements.
5.186 Decisions to appeal ATP cases are, unlike all other litigated cases, not made by the Deputy Chief Tax Counsel who is part of the Tax Counsel network. These decisions are made by the business line executive who heads the ATP area.
Adherence by business lines to internal business line procedures for litigated cases
5.187 The scope of this review did not extend to conducting an examination of the extent to which the above policies and procedures for litigation by each business line are followed by relevant Tax Office staff.
5.188 However, the fieldwork conducted by staff of the Inspector-General for this review did indicate possible concerns in this area. For example, although it is the policy of each business line to maintain files for litigated matters that are separate from those maintained by the LSB area, a significant percentage of those files were not able to be located when requested by the Inspector-General. Furthermore, those files that were located and examined by staff of the Inspector-General were generally of extremely poor quality. Key deficiencies in these business line files included the absence of key external and internal documents relevant to the case and an absence of any material indicating how the case was eventually resolved.
5.189 The above comments lead to the following finding.
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.
Conclusions on stakeholder concerns and on Tax Office policies and procedures for litigation
5.190 The material discussed in this chapter confirms that the first of the concerns raised by stakeholders in relation to the Tax Office's internal policies and procedures for litigation — namely, that the Tax Office's senior management appears to lack awareness of and support for cases that are being litigated — is valid.
5.191 The material discussed in this report confirms that the only management report provided to the Tax Office's Executive on litigated cases is the significant litigation report prepared by the LSB area. This report contains very little material to support a proper risk management approach to these cases — such as that contained in the ATO's internal practice statement on risk management69. This report also contains no data — including risk management data such as the total quantum of tax in dispute — for litigated cases that are not considered to be significant. There is also considerable variation in the quality of management reports on litigation being provided to lower levels of management within the Tax Office.
5.192 The second issue raised by stakeholders — that the Tax Office does not perceive litigation risks in the same way as a normal litigant — is also valid.
5.193 The third concern was that the Tax Office's staff do not understand the materials/commercial transactions they are dealing with during litigation. The Inspector-General's review found that there is a lack of educational support given to officers of the LSB area. Therefore, to the extent that this absence of support leads to LSB officers not being fully trained on the materials or transactions they are dealing with, the Inspector-General believes that this concern is valid for these officers. This review did not examine the educational support processes for business line officers who may be involved in litigated cases.
5.194 The Inspector-General considers that the fourth stakeholder concern — that Part IVC litigation appears to be initiated at low levels within the Tax Office — is not valid to the extent that it suggests that litigation is initiated by the Tax Office. As discussed in a previous chapter, litigation with the Tax Office is initiated by taxpayers in all cases, although certain Tax Office decisions can play an important role in the creation and/or continuance of that litigation.
5.195 The Inspector-General also considers that this fourth concern is also not valid to the extent that it suggests that the fact that a litigated case is handled by a relatively junior ATO officer is prima facie evidence of a systemic problem in the Tax Office's management of litigation. While this chapter and other chapters of this report discuss certain systemic problems in the Tax Office's management of litigation, none of these suggest that there is a systemic problem in the manner in which the Tax Office can allocate responsibility for litigated cases to certain relatively junior staff.
5.196 The fifth stakeholder concern was that there are no processes which allow decisions on litigated cases made by any one area of the Tax Office to be reviewed inside that area by other staff who have not previously been involved in the case. This concern differs from the concern of stakeholders about the absence of an internal review process that is discussed in the preceding chapter of this report. In this chapter, the concern is the absence of any internal review process inside any one area of the Tax Office with responsibilities for litigation decisions. In the previous chapter, the concern related to the absence of any process which allowed litigation decisions made by one area of the Tax Office (for example the business lines) to be reviewed by another, separate area of the Tax Office.
5.197 The findings set out in this chapter confirm that this fifth concern of stakeholders is valid for all areas of the Tax Office which play a role in litigation. While some areas do have elements of such an internal review process, other areas (such as the LBI area) have none at all. For those areas which do have certain elements of an internal review process, this process is not fully effective. For some business lines, such as the Ptax and SB area, this internal review process stops at an early stage in the litigation. For all business lines, a formal internal review process cannot be initiated by a taxpayer.
5.198 The Inspector-General considers that the above comments, together with the other key findings referred to in this chapter, reinforce the recommendations for changes in the Tax Office's approach to litigation made in the preceding chapter. In particular, these comments and findings strongly support the need for the Tax Office to establish a separate single area of the Tax Office which is responsible for all aspects of the management of litigation. The Inspector-General considers that a single area of this nature with a single litigation management focus is more likely to generate better internal management processes for litigation (including appropriate internal review processes) than those which currently exist inside the Tax Office.
53 pp 16-17.
54 p 13.
55 p 7.
56 Paragraphs 5.15, 5.16 and 5.23.
57 Practice Statement LA 2005/22 at paragraph 6.
58 These cases have been defined in the previous chapter.
59 Paragraph 4.2.2 p 17.
60 Attachment to ATO Minute No: IGT 76-2005, p 9.
61 Commissioner of Taxation, Large Business and Tax Compliance, address to the International CFO Forum, Sydney, Australia, 13 October 2005.
62 Commissioner of Taxation, Annual Report 2004-05 p 233.
63 Minute 76.
64 The internal bulletin which the Tax Office has issued to staff in its in-house legal area (Bulletin 99/02) does not, for example, list as a source of litigation policy, speeches that have been given by the Commissioner or a Second Commissioner. However, as noted in the previous chapter, during this review senior ATO staff involved in litigation pointed to a particular speech by the Second Commissioner for Taxation as being a particularly important guiding statement as to its philosophy on litigation.
65 ATO Minute No: IGT 87-2005, dated 16 December 2005 p 27.
66 Service agreement at clause 7.4.
67 ATO Minute No: IGT 65-2005, dated 13 October 2005.
68 ATO Minute No: IGT 86-2005, dated 13 December 2005.
69 ATO Practice Statement PS CM 2003/02(G).