6.1 This chapter considers in greater detail a number of aspects relating to the Tax Office's management and handling of objections. It draws from both stakeholder concerns raised in the course of the review and also other reviews that have examined internal review systems and the objection framework. This chapter also sets out recommendations that would improve the Tax Office's management and handling of objections and minimise the associated costs for both the Tax Office and taxpayers.
6.2 The objection framework represents an important and necessary function in taxation administration. It provides taxpayers with the opportunity to have an adverse tax assessment or Tax Office view reviewed by the Tax Office without commencing legal proceedings challenging the assessment or view. Furthermore, if the review is not favourable to a taxpayer, it assists in defining the areas of disagreement between a taxpayer and the Commissioner in subsequent legal proceedings. An objection also represents a dispute between the Tax Office and a taxpayer. This dispute arises as a taxpayer disagrees with the Tax Office's view, default notice of assessment or amended assessment. An essential feature of a default notice of assessment or amended assessment is the imposition of a tax liability on a taxpayer and initiated by the Tax Office, which may have serious financial consequences on all types of taxpayers. All these features of objection work make it significantly different from the provision of advice work and amendment requests, with different taxpayer expectations and staff capability requirements.
6.3 The Inspector-General notes the Tax Office's recent efforts to develop a more concerted approach to its end-to-end dispute resolution system as part of its Objections Review Project. The Tax Office has acknowledged a number of indicators which suggest that there is a need to improve its dispute resolution approach, including addressing the cause of different types of objections, the number of objections that are allowed in full or in part, the number of appeals that are settled, conceded or abandoned before being heard in court or the tribunal, the poor objection times and a previous piecemeal approach to improvement. As part of this project, the Tax Office has directed its efforts to improving the dispute system not only at the objection stage, but also at the upstream (audit) and downstream (litigation) stages. The Tax Office states that one significant shift arising from this project has been the desire to move to more differentiated approaches in processing objections, based on risk management principles, rather than a one-size-fits-all approach, and with a greater emphasis on resolving disputes as early as possible.
6.4 The Inspector-General welcomes these initiatives and believes they represent an important change in the Tax Office's philosophy and approach, from one that previously viewed objections as just another process to one that begins to acknowledge the true nature of an objection — namely a dispute between the Tax Office and a taxpayer. However, the Inspector-General believes that the challenge ahead lies in translating these new dispute resolution principles into improvements in the day-to-day management and handling of objections and disputes. The Inspector-General has identified a number of principle areas where he believes that improvements would lead to benefits to taxpayers through a more efficient, effective and timely objection process with flow-on consequences for both the pre-amendment and litigation stages.
- The Tax Office's philosophy and approach to objections and its role in the broader dispute resolution system — alignment with the Tax Office's business intent and the role of internal review and public articulation of this philosophy and approach.
- A greater prominence for the independent role of objections in the dispute resolution process with a clearer articulation of the functions and duties of objection officers and original decision makers.
- An alignment of timeframes for objection decisions in a self assessment environment.
- Improved personal contact with taxpayers at the objection stage.
- A more tailored quality control system to properly evaluate the quality of the Tax Office's end-to-end decision making process.
- Improved reporting and analysis of objections, including the adoption of indicators to evaluate the efficiency and effectiveness of its management and handling of objections.
- Information exchange, including the need to request further information and taxpayers providing new material at objections.
- Promoting robust feedback mechanisms to improve the quality, efficiency and effectiveness of the Tax Office's decision making process.
6.5 The identification of some of these areas as requiring improvement does not necessarily mean an absence of current Tax Office management, systems or processes, although this report has identified a number of shortcomings. Rather, the Inspector-General believes that the successful implementation of an end-to-end dispute resolution system requires a more focused and sophisticated set of management approaches, systems and work practices than currently in place.
6.6 However, the Tax Office's adoption of a greater corporate focus on objections will lead to a number of benefits, including better promoting the importance, role and function of objections in tax administration. It will also serve to reinforce the independent character of objections and help instil a greater sense of value within the community in the objections function. In addition, it can help minimise the level of disputation by acting as a check and gateway to disputes that may go to litigation. This is especially pertinent with the recent Federal Court changes to expedite tax disputes.
The Tax Office's philosophy and approach to objections
Tax Office approach to objections
6.7 The objections statutory framework only sets out how a taxpayer may seek internal review of a tax decision. From a corporate perspective it is important that the Tax Office's philosophy and approach to objections, including how objections are to be managed and handled, be clearly set out. For instance, the 1994 Richardson Review into New Zealand's objection procedures recommended that the approach to dealing with tax disputes should have the following objectives:47
- every practical effort be made to ensure that assessments are correct before they are issued;
- any dispute be identified at the earliest practical time;
- communication between the taxpayer and the revenue be direct and open to ensure that all information relevant to the dispute is available as soon as possible; and
- appropriate independent advice within the revenue authority be provided at the earliest practical time.
6.8 Until recently the objection function was treated as simply another form of advice or technical decision making workload that was processed within the Tax Office; other forms include private rulings and audit decisions. For the Tax Office, all these technical decisions are subject to the overarching philosophy expressed in the Taxpayers' Charter and its commitment to the community to deal with taxpayers fairly and reasonably. While at a very general level it is true that all Tax Office decisions and conduct are subject to this overarching philosophy, the Inspector-General believes that genuine objections cannot be considered as simply another source of technical advice, given that these objections represent a dispute between the Tax Office and the taxpayer.
6.9 However, in the Objections Review Project, the Tax Office has acknowledged the need to take a more 'whole of dispute' approach with an emphasis on managing dispute resolution from a point closer to the original decision. It also recognised that there was a tendency in the past to take a compartmentalised approach with a focus on objections as a discrete work activity (original decision, objection or litigation). Dispute resolution was a more downstream activity, usually considered when a case proceeded to litigation.
6.10 The Tax Office has recently stated that the following principles will now shape its dispute resolution system:
- identification and resolution of disputes as early as possible;
- differentiated approaches to objection processing to improve responsiveness;
- use of alternative approaches to dispute resolution, as appropriate; and
- where tax litigation is inevitable, then the Tax Office is 'litigation ready'.
6.11 The Tax Office's Objections Review Project has identified a number of potential benefits in adopting a 'whole of dispute' approach, including:
- disputes resolved earlier, more efficiently and quickly;
- improved quality of decisions, including responsiveness;
- improved relationships and reputation with the taxpayers and the courts and tribunal;
- reduced rate of disputation (objection and litigation) and reduced rate of cases conceded and abandoned before hearing; and
- improved resource utilisation and reduced cost of litigation with fewer cases and alternative approaches to dispute resolution.
6.12 The Inspector-General supports the Tax Office's newly stated aspirations and dispute resolution principles and considers that they provide a useful foundation for more broad-reaching improvements. However, care should be exercised where tax litigation is inevitable that the Tax Office does not cause the taxpayer delay and increased costs in its attempts to become 'litigation ready'.
6.13 Following on from Recommendation 1, the Inspector-General considers that the Tax Office needs to clearly set out its philosophy and approach on objections in the context of its end-to-end dispute resolution system and the outcomes that it is seeking to achieve through its management and handling of objections. The Inspector-General believes that this philosophy and approach should contain a number of elements.
6.14 First, the objection stage must add value. It should provide opportunities to resolve disputes, to narrow the issues for external review and promote the filter effect of first-tier review, through the use of conferences and the availability of mediation. This means that by the time that the Tax Office has decided to disallow an objection, it is confident that, if a dispute were to proceed to external review, then subject to obtaining further information from the taxpayer, it would have reasonable chances of success.
6.15 The Inspector-General notes that the Commonwealth Legal Services Directions also emphasise the importance of agencies doing all they can to resolve disputes without recourse to litigation. The directions state that the Commonwealth or its agencies are only to start court proceedings if other methods of dispute resolution (for example, alternative dispute resolution or settlement negotiations) have been considered. While the Tax Office does not initiate Part IVC litigation, its conduct and approach during the objection stage has an important bearing on whether a dispute proceeds to litigation.
6.16 Second, it should reflect the fundamental aims of administrative practice in providing procedural justice and a review of the merits of a decision in individual cases. In line with the ARC, the Inspector-General believes that the objection system should have three fundamental roles — to enable taxpayers to test the lawfulness and the merits of a decision that affects them; to ensure the timely resolution of a dispute; and to act as a necessary accountability tool by improving the quality, efficiency and effectiveness of the Tax Office's decision making process.48
6.17 Third, it should be consistent with a self assessment environment, where the original decision maker has ample opportunity to investigate a matter, request and, where necessary, compel the production of relevant information.
6.18 Fourth, the objection framework should be aligned with the Tax Office's business intent of optimising voluntary compliance, and with the role of internal review. To do that the Tax Office needs to look at how it handles objections, not only from an efficiency perspective but also the effectiveness of objections in its end-to-end dispute process.
6.19 The Tax Office must also articulate the risks associated with objections and have a differentiated approach to dealing with different classes of risk. This would require an examination of the taxpayer behaviour and compliance risk associated with the objection. In addition, the Tax Office needs to develop strategies and processes for objections that align with its corporate principles and the role of internal review.
Comprehensive public statement
6.20 Currently, Taxation Ruling TR 96/12 and the Tax Office's ORCLA information system are the key corporate documents on how the Tax Office manages objections and give an insight into how objections fit into the broader advice and dispute resolution framework. ORCLA contains links to procedures for the escalation of issues (including priority technical issues), corporate approach to interpretative work, collaborative work practices, settlements, contact and interaction with internal stakeholders and litigation processes. The Tax Office states that all these links set the scene for how objections fit into the overall technical decision making process and also relate to interactions with original decision makers, providing feedback and escalating issues. The Tax Office advises that ORCLA also has links to practice statements that deal with the linkages between the escalation of technical issues, litigation, objections and advice.
6.21 In addition, Corporate Management Practice Statement 2007/01 and the related procedures and instructions set out the overarching Tax Office policy in relation to the Tax Office's handling of taxpayers' rights of review. These documents provide guidance to Tax Office staff on how to fulfil the Taxpayers' Charter commitments related to respecting taxpayers' rights to a review. It requires staff to follow the principles of the good decision making and judgment models to ensure they make quality decisions and provide an explanation of decisions, to the extent they reasonably can under the law, using clear language to help taxpayers understand the reasons for the Tax Office's decisions.
6.22 It should be noted that Corporate Management Practice Statement 2007/01 and the related procedures and instructions are not publicly available documents.
6.23 While these corporate documents provide some guidance to staff, and to a lesser extent the community, on the Tax Office's management and handling of objections, they do not represent a comprehensive public statement on the Tax Office's philosophy and approach to objections.
6.24 The Inspector-General considers that such a statement is important for a number of reasons. It will provide clear public guidance on how the Tax Office will serve to advance its role in the tax system as an independent and impartial administrator. It may also act as a yardstick to measure Tax Office performance and set out clear and appropriate expectations for the community on the Tax Office's handling and management of objections. A formal and consolidated public statement will also help to shape and reinforce an appropriate culture within the Tax Office and provide guidance and direction to Tax Office staff on the Tax Office's philosophy on objections. This is consistent with the emphasis placed by the ARC on the importance of culture in promoting independence in the internal review process.
Recent Tax Office improvement initiatives
6.25 The Tax Office is currently enhancing the information available to the public through its website and publications to ensure it is consistent with the whole of Tax Office approach to dispute resolution. In addition, the Tax Office has been developing a publication that states the rights, roles and expectations of the taxpayer and the Tax Office in the management and handling of objections and other reviews. This statement will supplement and be consistent with the Taxpayers' Charter, Taxation Ruling TR 96/12 and internal instructions to staff.
6.26 The Tax Office has already developed a differentiated and risk-based approach on the handling and management of objections within its end-to-end dispute resolution process. The underlying principles of its approach are to resolve the dispute as early as possible, apply differentiated approaches to its handling of objections and to deploy alternative approaches to dispute resolution, as appropriate. This approach builds upon its established foundation of independent review for the taxpayer.
The Tax Office should finalise and issue a comprehensive public statement that sets out its philosophy on, and value-add approach to, objections including the outcomes it is seeking to achieve through its management and handling of objections. It should ensure that this public statement contains a clear commitment to the following critical elements:
- a differentiated and risk-based approach to objections handling and management;
- an emphasis on resolving disputes as early as possible and narrowing issues for potential external review; and
- the Tax Office's business intent of optimising voluntary compliance and the role of an independent internal review.
Tax Office response
6.27 Agree, noting the Inspector-General's acknowledgment (paragraphs 6.25 and 6.26) that work being undertaken by the Tax Office is addressing the recommendation.
Handling of objections arising from genuine disputes
Work practices and independence
6.28 In the course of this review, stakeholders raised issues and concerns in relation to the independence between objection officers and original decision makers, usually auditors.
- The TIA submitted that the organisational structure of the Tax Office into business lines and the fact that objections are handled by the business lines impacts directly on the objection process. This is because it is more likely that the original decision maker responsible for the dispute (or tax officers closely related to the original decision maker) may also be involved in the resolution of the objection, particularly in the early stages of the objection process. The TIA suggested that there was no apparent structural separation within the Tax Office between the assessment process (usually arising from audit action) and the objection process. It was asserted that this gives rise to cases being litigated where the facts have not been properly collected as well as the normal human tendency to defend the position previously taken.
- The Law Council was of the view that decisions on objection were not ordinarily subject to review within the Tax Office by someone entirely independent of the officers responsible for the amended assessment to which the objection relates. It was suggested that the internal review process resulting from the objection should be conducted by a different and independent decision maker and with appropriate legal input.
- Some practitioners even suggested that they see an objection as merely a stepping stone to real independent review, namely external review by the AAT or the Federal Court.
6.29 Submissions also listed instances where Tax Office auditors, during the course of settlement negotiations, have allegedly asserted that if a settlement is not reached then any objection lodged by the taxpayer will be disallowed as a matter of course. The practitioner asserted that this demonstrated a very close liaison between auditors and objection officers.
ARC Internal Review Report and Best Practice Guide
6.30 The ARC made the following important statements about location and independence of internal review officers:49
- There is a need for internal review to be as impartial as possible.
- Internal review, by definition, cannot be completely independent of the relevant agency. However, it should be undertaken by internal review officers who are sufficiently independent of the agency original decision makers whose decision they review.
- The concept of independence, and the desired benefits of internal review systems, proceeds upon the basis that the internal review officer is a reasonably senior and competent person who had nothing previously to do with the case, with whom a disgruntled client can talk on the phone, write, or meet in interview. The effect of this is that an independent officer is available to give a quick review, without any vested interest in the original decision.
6.31 In line with this thinking, the Joint Committee of Public Accounts noted that it was difficult to characterise the function of internal review as one of 'independent review', given that objection officers will be subject to the same culture, corporate goals and values as the rest of the Tax Office.50
6.32 The ARC emphasised the importance of culture in promoting independence in the internal review process. It said that it was important that a strong message be sent that the role of review officers is different from that of mainstream operational objectives.51
6.33 The ARC believed that the promotion of an appropriate culture within internal review sections would be greatly assisted if formal responsibility for internal review lay with a senior agency executive.52 That effect would be strengthened if that role was combined with formal responsibility for overseeing the promotion within the agency of the general effects of review tribunal decisions on the quality of the agency's decision making.
6.34 The ARC noted that one key aspect that will affect the actual and perceived independence of the internal review process includes the proximity to original decision makers. It observed that it was important that an agency was structured so that internal review officers are 'organisationally distinct' from original decision makers so as to reflect the nature of the internal review task.53 By 'organisationally distinct' the ARC was referring to a situation where, within the structure of the agency, internal review officers are kept separate from the original decision makers whose decisions they review. Examples of ways in which this could be achieved include having internal review officers in physically separate locations, not having internal review officers as part of the same team as original decision makers or supervised by the same manager, having the salaries of internal review officers funded from a separate part of the organisation, and having appropriate protocols in place with a view to maintaining an arm's length relationship.54
6.35 The ARC considered that proximity to original decision makers, either physically or organisationally, posed real risks to the independence of internal review officers. If internal review officers have close links with the original decision makers, then there is a danger that internal review officers will lose the objectivity required for undertaking internal review effectively.55 This may include internal review officers finding it more difficult to overturn decisions, or applicants lacking confidence that they will receive an independent review from internal review officers that they perceive to be closely associated with the original decision maker.
6.36 The ARC suggested that one way to achieve physical and organisational separation was through the centralisation of internal review officers in a relatively small number of locations away from the offices in which original decisions are made.56 It indicated that this would be more appropriate for agencies where original decision making is not already centralised. However, it also noted that centralisation could have disadvantages, including where the technical expertise to review the primary decisions is only available at the original decision making location.
6.37 The ARC commented that the aim of achieving a separate internal review culture was only realistic and appropriate where internal review officers had that role as their sole or primary task.57
Review findings and conclusions
6.38 The Inspector-General found that in most of the relatively simple cases there is an 'independent' review of decisions by objection officers with an understanding of the respective roles of the objection officer and the original decision maker, in particular where a taxpayer is able to substantiate or provide evidence of what they assert happened. In a significant proportion of cases, the taxpayer does not disagree with the Tax Office view but rather the Tax Office's application of that view to the facts as established by the available evidence.
6.39 The Inspector-General also found that most business line work practices emphasise the importance of ensuring independence between the objection officers and the original decision makers.
6.40 However, the Inspector-General found that the division between the respective roles of the objection officer and the original decision maker becomes blurred in more technical and complex matters. Due to the complexity of the facts or the law, there is a tendency for the objection officer to seek greater assistance from the original decision maker, or technical experts involved at the earlier stage, in understanding the facts and evidence and in seeking to make a decision. The Inspector-General believes that in such complex cases there are benefits in the original decision maker or technical expert providing relevant input to the objection officer. In fact, some practitioners note their frustration at having to go over with the objection officer issues and material that they went through with the original decision maker during the audit.
6.41 The Inspector-General also notes the stakeholders' sentiments that there is a greater need for the objection function to be seen as an independent review and separate from the business lines. Clearly, the stakeholder feedback to date does not suggest that the current management and handling of objections is perceived as being 'independent'. This contrasts sharply with the New Zealand and United States experiences, where many accounting and legal firms believe that the adjudication area (the New Zealand equivalent of an objection) and the Appeals (the United States equivalent of an objection) is impartial and independent.
6.42 The Inspector-General believes that the Tax Office has to take further steps, along the lines suggested by the ARC, to reinforce the role of objections in tax administration and to promote its independent character. The Tax Office's current organisational arrangements generally satisfy the ARC framework, with a division between officers handling audit work and those handling objections. However, the Tax Office needs to place greater importance on culture in promoting independence in the objection process. It needs to send out a strong message to its staff and the community that the role of objection officers is different from that of mainstream operational objectives. The Inspector-General considers that the Tax Office needs to reinforce the role and aims of objections and promote an appropriate culture within its objection role. It is also important that the Tax Office clearly sets out the respective roles of original decision makers and objection officers, including the type and level of input of the original decision maker and, where the objection officer has sought such input on material facts, evidence or technical view, how it will communicate that to taxpayers and provide an opportunity to respond or comment.
6.43 The Tax Office also needs to adopt considerations and approaches it is already taking at pre-litigation with the aim of minimising the number of genuine disputes going on to external review to only those cases where all avenues of resolution (including settlement considerations) have been exhausted. This also involves the Tax Office adopting a more differentiated approach with the aim of resolving the dispute in a timely and effective manner.
6.44 For example, there may instances where the objection officer determines that the original audit decision was made without all the necessary information. The objection officer should promptly request this necessary information (if it was not already included with the objection) and then re apply the Tax Office view on the available facts and evidence. The request for necessary information at the objection stage should not be the norm, given that the Tax Office would have had ample opportunity at the audit stage to obtain all relevant information through a comprehensive investigation and to make a well reasoned decision. The need for the objection officer to have to do so should form part of the quality control process and feedback to auditors.
6.45 Alternatively, a taxpayer may have failed to respond properly to Tax Office requests for further information, which has led to the issuing of an amended assessment. The assessment may crystallise the issue for the taxpayer who may then include the requested information with their objection. If not, good administration requires the Tax Office to again seek all necessary information from a taxpayer or other appropriate sources before proceeding to determine the objection. Following the receipt of further information, or if the taxpayer still does not respond within a reasonable period, the objection officer should promptly determine whether the Tax Office view has been correctly applied and is supportable on the available facts and evidence.
6.46 Where the objection officer determines that the Tax Office view is not supportable on the available facts or evidence or has been incorrectly applied, then the Tax Office should proceed to allow the objection.
6.47 Where the objection officer determines that the Tax Office view has been correctly applied and is supportable, then they should consider whether the dispute can be resolved through dialogue, mediation and arbitration. The Inspector General notes that the Commonwealth Legal Services Directions also emphasise the importance of agencies doing all they can to resolve disputes without recourse to litigation. The directions state that the Commonwealth or its agencies are only to start court proceedings if other methods of dispute resolution (for example, alternative dispute resolution or settlement negotiations) have been considered. While the Tax Office does not initiate Part IVC litigation, its approach during the objection stage has an important bearing on whether a dispute proceeds to litigation.
6.48 When it is clear that a matter will not be able to be resolved by dialogue or mediation, then provision should exist for the matter to move quickly to resolution through the AAT or the Federal Court. This should mean that, where the Tax Office disallows an objection in full or in part, it is satisfied that it has reasonable prospects for its decision being upheld at litigation.
Reconsideration of Tax Office view at objections
6.49 A tax practitioner association submitted that the objection process does not lead to a reconsideration of the correctness of a Tax Office view or ruling. As such, the objection process seems inherently incapable of resolving a dispute a taxpayer may have with the correctness of the Tax Office's position on a particular matter of law. This is a costly exercise for the taxpayer and may result in further redress through more expensive external review avenues. The submission suggests that the objection process should be able to resolve disputes according to the law, whether complex or simple, and currently there is a risk that the objection process amounts to no more than ensuring that current Tax Office policy has been applied and enforced, even though this may not always be the correct position at law. The submission recommended that the Tax Office should implement measures that improve the likelihood of achieving the correct legal outcome at the objection stage.
6.50 The Tax Office has established processes for resolving technical issues and establishing the Tax Office view. First, the business lines are responsible for managing the taxpayer relationship, identifying and managing risks and applying established precedent to the facts of the case, including complex factual situations, unless there is some question about the technical correctness of the Tax Office view, or concern that the view produces an anomalous or unintended outcome. Business lines, which would include objection officers, are required to apply the established Tax Office view, even though the taxpayer may disagree with the correctness of this view. This may be the same precedential Tax Office view that was applied by the original decision maker during audit and which the taxpayer subsequently disagrees with in the objection. Importantly, objection officers are not able to re-examine or redetermine the Tax Office view. This responsibility lies with the Tax Counsel Network (in relation to priority technical issues) and the Centres of Expertise (establishing precedential view).
6.51 The Inspector-General considers that it is important that where taxpayers are challenging the correctness of a Tax Office view at objection, there is due reconsideration of that view by a person of sufficient technical authority. This will not only promote the independence of the objection stage but will also ensure that the technical view adopted by the Tax Office would be defensible at litigation.
6.52 The Tax Office has a duty to administer tax legislation and policy responsibly and reasonably, and to provide accurate, appropriate and unambiguous advice. Where the Tax Office has acted unreasonably, or provided wrong or ambiguous information, which leads to a financial (and sometimes non-financial) loss, then it may provide compensation for the loss under the scheme for Compensation for Detriment caused by Defective Administration.
6.53 If the correctness of its technical view proceeds to litigation, and there is no additional information either provided by the taxpayer or requested by the Tax Office, then compensation could be warranted where taxpayers have incurred unnecessary litigation costs where the Tax Office concedes or abandons the case and a taxpayer has acted in good faith. Other circumstances that may warrant relief could include instances where the Tax Office concedes or abandons a case at litigation due to a change in the Tax Office view, or it comes to the conclusion that there was insufficient admissible evidence to support the Tax Office's decision. Each case would need to be considered on its own merits and in accordance with Finance Circular 2006/5.
6.54 The Inspector-General believes that it is important that the Tax Office acts as a good and fair administrator. Wherever possible the Tax Office should, in the context of resolving disputes, take steps to mitigate the financial burden on taxpayers arising from defective administration where there are no other established avenues for that burden to be addressed. An example of other established avenues is the ability to obtain an award of costs from the Court at the conclusion of proceedings. Of course, a taxpayer's success in accessing such relief will in part be influenced by the extent to which the taxpayer has acted in good faith. Where a taxpayer has unreasonably delayed, obstructed or obfuscated the progress and resolution of a dispute, then this would significantly diminish the basis for a successful claim for compensation. The Inspector-General considers that the Tax Office should seek to take into account such considerations as part of its new dispute resolution system. One possibility could be identifying, as part of its quality review processes, systemic issues that may at times lead to instances of possible defective administration.
Recent Tax Office improvement initiatives
6.55 In 2008, the Online Resource Centre for Law Administration (ORCLA) enhanced its policy on independence (Independence in the review process) by providing additional guidance on what are independent reviews, as well as conduct and roles of officers involved. The Tax Office has also provided linkages to relevant online learning resource packages as well as embedding the whole of dispute resolution approach (identification and resolution of disputes as early as possible, differentiated approaches to objection processing, deployment of alternative approaches to dispute resolution and ensuring all relevant information and evidence have been captured) within the documentation.
6.56 In early 2009, the Tax Office amended Law Administration Practice Statement PS LA 2004/04 Referral of interpretative issues to Centres of Expertise for the creation of the precedential Tax Office view, and early engagement of internal technical specialists in active compliance cases to include a paragraph on reviewing the existing precedential Tax Office view. This amendment states that the officer undertaking the review is to be independent from the original decision maker and to have the skills and authority to carry out the review.
6.57 In terms of the fast-tracking of cases, the Tax Office advises that it already applies differentiated approaches to the handling of objection cases based on risk assessment, particularly in the MEI and Superannuation business lines. The Tax Office is expanding the application of differentiated approaches into other business lines involved in processing objections.
6.58 Law Administration Practice Statement PS LA 2007/23 Alternative Dispute Resolution in Tax Office disputes and litigation instructs tax officers on what policies and guidelines must be followed when attempting to resolve or limit disputes by means of alternative approaches to dispute resolution. The Tax Office has also established the Dispute Resolution Network, a group of experienced officers who can assist case officers in determining the various avenues of dispute resolution that might be used at any stage in a dispute.
6.59 The Tax Office has developed a risk-based indicator tool together with supporting documentation that requires case officers and their manager to assess whether alternative approaches to dispute resolution (such as case conferencing, mediation, conciliation, settlement, access to expert technical skills etc) would be beneficial. This tool will be deployed into the Tax Office's case management system soon.
6.60 The Inspector-General considers that the following recommendation, which sets out a number of work practices and considerations, will promote the independent character of objections and allow for a timely reconsideration of a disputed Tax Office decision. The Inspector-General notes that the Tax Office has already moved to address some of the points in the following recommendation and welcomes the Tax Office's commitment to improving its work practices and procedures.
The Tax Office should continue to develop work practices and procedures that recognise and respect the role of objections within an end-to-end dispute environment and promote a culture consistent with the function of internal review. The Tax Office should ensure that its work practices and procedures incorporate the following measures to implement these arrangements.
- The respective roles of the original decision maker and objection officer are set out to ensure that they are understood and adhered to.
- Objection officers promptly consider whether the Tax Office view is correct and supportable on the available facts and evidence.
- Objection officers consider whether alternative approaches to dispute resolution, such as settlement or mediation, may be appropriate, how the dispute could be resolved without recourse to litigation, when escalation should occur and when case-conferencing could be appropriate. This should also involve providing expertise to assist objection officers in determining what approaches to use with specific cases.
- A fast-tracked process to external review be made available that would allow an objection decision to be expedited where resolution of the dispute at the objection stage is unlikely as it deals with the Tax Office view of the law (as expressed in a ruling, determination or other interpretative advice) and the facts are agreed.
- Where an objection officer has sought input from the original decision maker on material facts, evidence or technical view, and the objection officer is likely to disallow the objection, the taxpayer is given an opportunity to respond on these material facts, evidence or technical view.
- Objection officers have the skills and authority to decide the objection, or the ability to access appropriate skills and escalate the case to a person of sufficient authority where required. Where the Tax Office's technical view is challenged, this should result in its reconsideration by a person of sufficient technical authority.
- Appropriate training is developed for objection officers in line with its philosophy and approach on objections in the context of its end-to-end dispute resolution system.
Tax Office response
6.61 Agree, noting the Inspector-General's acknowledgment (paragraphs 6.55 to 6.60 inclusive) that work being undertaken by the Tax Office is addressing the recommendation.
Alignment of time frames with a self assessment environment
6.62 The Ombudsman indicated that one of the more common areas of complaint with respect to the objection process is delay. The Ombudsman's submission pointed to investigations which showed that there was ongoing scope for the Tax Office to improve its administration in particular instances to minimise the potential for unnecessary delay and poor communication with the taxpayer and their representatives. The Ombudsman suggested that there may be some scope for the Tax Office to consider and implement an improved early detection and intervention strategy whereby it advises taxpayers in appropriate cases that it is not likely to be able to decide the objection within the relevant timeframes, and draws to the their attention section 14ZYA of the TAA.
6.63 One tax practitioner believed that the Tax Office sees an objection as just part of the pre-litigation process and not to be taken seriously in itself. The tax practitioner suggested that the Tax Office seems unconcerned as to the cost that taxpayers have to bear in preparing detailed objections and in preparing matters for litigation. The submission goes on to mention examples where disputes have been very close to being listed for a hearing and the Tax Office has for the first time paid serious attention to the objection and subsequently allowed the objection in full. The submission suggested that this is evidence that the objections were not properly considered at the time that the objections were determined.
6.64 Another tax practitioner submitted that the Tax Office was unconcerned at the costs which it caused taxpayers to bear as a consequence of raising amended assessments, causing taxpayers to object against the amended assessments and then to appeal against objection decisions. The submission suggested that a regime should be introduced to cause the Tax Office to act more responsibly in the issuing of amended assessments and in disallowing objections. One possibility put forward was the Tax Office bearing taxpayers' costs where it issues amended assessments or disallows objections where objectively it was not reasonable for the Tax Office to have done so.
ARC Internal Review Report and Best Practice Guide
6.65 The ARC stressed the importance of agencies taking active steps to ensure that reviews are conducted in as timely a fashion as possible. In its Better Decisions report, the ARC noted that:
This criticism is particularly relevant in cases where the internal review affirms the agency's decision: the applicant may view the internal review as being nothing more than an impediment (because of the additional delay and cost) to reaching the external review stage, and this can contribute to 'appeal fatigue'.58
6.66 The ARC also commented that the problem of internal review being seen as an impediment to external review is heightened where internal review is a compulsory step prior to external review — where delay occurs, it will certainly cause frustration to those applicants who would have preferred to omit the internal review step.59
Review findings and conclusions
6.67 The Tax Office has a number of performance standards for objections. The Taxpayers' Charter sets a '56-days available-to-the-Tax Office or as otherwise negotiated' (the 56-day finalisation standard) for the finalisation of objections not arising from a private binding ruling request and a 14-day standard for further information requests. A 'stop-the-clock' mechanism applies for the 56-day standard where the Tax Office is awaiting further information from a taxpayer or where the Tax Office has requested further information.
6.68 The Tax Office also measures its performance against a 120-day standard for the completion of objections (the 120-day completion standard) although this is not a Taxpayers' Charter standard. The 120-day completion standard measures the total time (elapsed days) taken to finalise an objection irrespective of Tax Office or taxpayer delays.
6.69 The Tax Office's information management systems show that over a three-year period approximately 22 per cent of objections were not finalised within the 56-day finalisation standard. It also shows that approximately 28 per cent of objections were not completed within the 120-day completion standard. It should be emphasised that the above proportions represent instances where the delay in the finalisation or completion of the objections can be attributed solely to Tax Office action or inaction. This is because for the 56-day finalisation standard there is a 'stop-the-clock' mechanism if the Tax Office is awaiting information from a taxpayer or there is taxpayer delay. Likewise, the Tax Office has set itself a benchmark of completing 99 per cent of objections within the 120-day elapsed timeframe irrespective of further information requests.
6.70 The Inspector-General believes that, in confining objections to genuine disputes (which would reduce current numbers), the administrative performance standards need to be revised to bring them into line with a self assessment environment and with the recent changes introduced as a result of the RoSA report.
6.71 After discussions with the Tax Office, the Inspector-General took into account the following dependencies in arriving at the recommendation:
- the need for a two-year timeframe to allow the Tax Office time to review its performance standard, allow for the continued roll-out of its Siebel case management system and the successful implementation of recommendation 1; and
- the need for the performance standard to properly distinguish between routine and complex cases, by making an allowance for complex cases (assuming that up to 15 per cent of all objections will be complex).
6.72 The Inspector-General considers that there are strong grounds for the Tax Office working toward the revised performance standard.
- Objections to private rulings, after the changes introduced by RoSA, involve similar considerations and approaches to objections arising from audit. That is why the Inspector-General has included both types of objections under the definition of genuine dispute. Taxpayers may now introduce new material and the Tax Office may request further information if there is a dispute regarding the application of the law to the facts. For objections to private rulings, the performance standard is currently 85 per cent in 28 days, and the Tax Office met this standard in 2007-08. The Inspector-General sees no reason why this cannot also be the target that the Tax Office works towards achieving in two years.
- The Tax Office already uses this performance standard for other objections and the ARC has indicated that a 28-day standard would generally be appropriate.
- The report acknowledges the ARC comments on timeliness standards and the need to balance them with realism. The Inspector-General considers that it is important that the Tax Office needs to commit to working towards a particular performance standard, which is already used for other genuine dispute objections, so as to bring it into line with community expectations and best practice.
Over the next two years, the Tax Office should work towards revising its performance standard for the finalisation of objections from the current 70 per cent in 56 days to 85 per cent in 28 days in line with other relevant Taxpayers' Charter and Tax Office standards.
Tax Office response
6.73 Agree in part.
6.74 The Tax Office is committed to reviewing our performance standards to improve services to the community. However, we are not in a position to commit to the standards specified in this recommendation. We plan to have made appreciable progress over the next two years; however, the rate and extent of change is dependent on a variety of matters, including those mentioned at paragraph 6.71 of the Inspector-General's report.
Tax Office delay
6.75 The Inspector-General considers that it is not fair and reasonable that GIC be imposed where there has been Tax Office delay in finalising an objection. A delay in the finalisation of an objection beyond 60 days available to the Tax Office and which is not caused by the taxpayer should lead to a full remission of the GIC for periods beyond 60 days. For example, this should include instances where the Tax Office has not finalised an objection within 60 days and there is no further information that is to be provided by the taxpayer or that has been requested by the Tax Office. It is appropriate for a stop-the-clock mechanism to apply where the Tax Office is awaiting further material information from a taxpayer or where the Tax Office has requested further information within the 14-day service standard period.
6.76 The Inspector-General believes there are strong grounds from a fairness perspective for the adoption of such a position.
6.77 First, section 8AAG of the TAA provides the Tax Office with the broad power to remit GIC in certain circumstances. This includes where the delay in payment was not caused by the taxpayer and the taxpayer has taken reasonable action to mitigate the delay. In addition, the Commissioner may remit all or a part of the GIC if he is satisfied that there are special circumstances that make it fair and reasonable to remit all or a part of the charge, or it is otherwise appropriate to do so.
6.78 Second, and consistent with the approach adopted by RoSA in relation to the SIC, remission should generally occur where circumstances justify the revenue bearing part of the cost of delayed receipt of taxes. Such circumstances would include delay, contributory cause or fault on the part of the Tax Office in finalising an objection and where the taxpayer has acted in good faith.
6.79 One example of when remission would generally be appropriate is where the Tax Office has taken longer to finalise an objection than could reasonably have been expected, having regard to all the facts and circumstances of the case.
6.80 The Inspector-General is of the view that a reasonable, maximum period of time to finalise an objection would be 60 days 'available to the Tax Office' after the objection was lodged, consistent with the rights of taxpayers to give the Commissioner written notice requiring an objection decision to be made. Remission of the GIC would then apply for time taken by the Tax Office to finalise the objection beyond this 60 days 'available to the Tax Office' period.
6.81 In line with the Tax Office's position in Practice Statement PS LA 2006/8, where the taxpayer unreasonably delays, obstructs or obfuscates the progress of an objection, and the objection is finalised beyond the 60 days 'available to the Tax Office' period, then remission will not generally be warranted. Examples of such conduct include:
- repeated failure by the taxpayer to keep appointments or supply information; or
- repeated failure by the taxpayer to respond adequately to reasonable requests for information. This will include excessive or repeated delays in responding, not replying to the request for information, giving information that is not relevant or does not address all the issues in the request or supplying inadequate information. This would include circumstances where the taxpayer has failed to reply to further information requests during audit and subsequently provides that additional information during the objection stage.
6.82 A stop-the-clock mechanism should apply where the Tax Office is awaiting further information from a taxpayer or where the Tax Office has requested further information within the 14-day service standard period. If information is not requested within 14 days, the full period up to the time the request is made should count towards the 60-day maximum interest period.
6.83 As part of the objections acknowledgment letter, taxpayers should be informed of their right to compel the making of an objection decision within 60 days, pursuant to section 14ZYA of the TAA.
6.84 Where the Tax Office first requests further relevant information at the objection stage, and it would be expected that this information should have been requested during audit, then the Tax Office should consider whether the remission of the GIC to the SIC rate is appropriate. Again, in circumstances involving blatant obstruction, delays or obfuscation this remission should not apply.
The Commissioner should remit the general interest charge for the time taken by the Tax Office to finalise an objection beyond a 60-day 'available to the Tax Office' period where the taxpayer has acted in good faith.
Tax Office response
6.86 The Tax Office's ATO Receivables Policy currently provides a broad and well balanced approach to the recovery of disputed debt and the remission of GIC, and appropriately addresses any instances of Tax Office delay in resolving objections. Remission decisions will be based on all the facts and circumstances of the case and will not follow any pre-determined formula.
Personal contact with taxpayers
6.87 The Law Council submitted that communication between taxpayers, their representatives and objection officers is limited, making it more difficult for the parties to engage in discussion which might assist in the early resolution of a dispute.
6.88 The Law Council went on to state that, where the Tax Office is not undertaking a detailed factual enquiry of its own volition (as the Tax Office does not have the resources to chase taxpayers for detailed information prior to determining every objection), then it is suggested that the Tax Office be required to write to taxpayers asking them to provide any information which they believe may be relevant in determining their objection. This may provide an informal process for the provision of additional information to the Tax Office before objections are determined.
6.89 The ICAA submitted that, in some taxpayers' experience, the Tax Office decides objections on technical grounds without giving the taxpayer an opportunity to fully present the relevant facts and provide any necessary explanations. In this situation, to avoid incurring unnecessary costs in escalating the matter to the litigation stage, the preference is for an opportunity to discuss and settle issues with the Tax Office at the objection stage. This raises the issue of the extent to which the Tax Office is prepared to embrace mediation as a means of settling disputes — tax practitioners believe that the Tax Office could utilise such procedures to a far greater extent.
ARC Internal Review Report and Best Practice Guide
6.90 The ARC commented that a common criticism of internal review procedures is that they are undertaken by the internal review officer without any personal contact with the applicant, with reliance being placed on slow, written and bureaucratic correspondence.60 In an earlier report, the ARC noted that often it is not until the external review stage that an applicant will have an opportunity to put her or his case personally.61 The ARC also indicated that, without an appropriate level of contact with applicants, an agency's internal review system may be prevented from satisfying the need for natural justice. However, this must be appropriately balanced with other aspects of best practice, including ensuring efficiency in the internal review system.62
6.91 The ARC stated that most commentators and agencies recognise the desirability of having more personal contact with applicants at an earlier stage of the review process. Even in seemingly straightforward cases where the internal review officer is satisfied they have all the relevant information, there is still value in contacting the applicant as it is consistent with the principles of natural justice to give a person an opportunity to have their say (if desired). Similarly, it is good administrative practice to update an applicant on the progress of their application.63
6.92 The ARC Internal Review Best Practice Guide recommended that agencies should encourage internal review officers to attempt to contact all applicants as a matter of course and those internal review officers should be allocated enough time per review for this to be possible.64
Review findings and conclusions
6.93 The Tax Office requires both auditors and objection officers to provide explanations for their decisions in writing. It states that the level and type of interaction between decision makers and taxpayers will vary considerably with the type of taxpayer and the nature and complexity of an issue. For instance, personal contact with taxpayers or their representatives is integral to work practices in the large market, while for taxpayers in higher volume market segments with generally less complex issues, communication channels will depend on the circumstances. The Tax Office believes that decision makers need to be given a degree of discretion and personal judgment to determine the most appropriate form of communication — being too prescriptive with procedures for communication can be counter-productive.
6.94 While the Tax Office acknowledges that there may be evidence that communication practices in individual cases could sometimes be improved, it does not believe that there is any evidence that there is a systemic problem with contacting taxpayers and explaining decisions, pointing to its technical quality review results. The Tax Office states that strategies, such as skilling and mentoring, are currently in place to encourage improvements in communication, both in the form of ongoing reviews of letters as well as providing feedback where issues are identified at the objection stage.
6.95 The Tax Office has published a practice statement on alternative dispute resolution in dispute and litigation cases. Case conferencing is part of the suite of alternative methods available to staff in order to resolve the dispute as early as possible. The use of such alternative methods is emphasised in the procedures and documentation associated with the risk-based indicator that has been developed and is soon to be deployed in its IT system.
6.96 The Inspector-General believes that the Tax Office's current communication strategies at the objection stage fall short of the ARC standards, and clearly the stakeholder submissions seem to confirm this view. The objection stage should represent an opportunity for communication, discussion or personal contact between the taxpayers, their representatives and the Tax Office. This would have many benefits, not only as a means of potentially resolving the dispute, but also to reinforce the role and independence of the objection officer.
6.97 The Inspector-General considers that this could be achieved by the Tax Office adopting the practice of case conferencing at objections. Along the lines of what is undertaken by the AAT when a dispute proceeds to external review, this would require objection officers and taxpayers (or their representatives) to discuss the issues in dispute, identify any further relevant information that may assist the resolution of the dispute, and explore whether the matter can be settled. Case conferences would also provide an opportunity to discuss the future conduct of the objection and, in particular, whether another form of alternative dispute resolution may assist in resolving the dispute.
6.98 Objection officers should also take this opportunity to explain the role of objections and its independence from the audit process. The Inspector-General believes that this should occur in the early stages of the objection decision making process.
Recent Tax Office improvement initiatives
6.99 The Tax Office has documented procedures to accompany the recently developed and soon to be deployed risk-based indicator that require officers to discuss appropriate cases with taxpayers to ensure that a common understanding of the issues and respective positions are reached. (Such arrangements may not be appropriate in low-risk objections where the matter will be resolved in the taxpayer's favour.)
6.100 Further, the risk-based indicator tools and supporting documentation will help identify cases that may benefit from alternative approaches to resolution (such as case conferencing, mediation, conciliation, settlement, access to expert technical skills, etc). Where such a case is identified, the Dispute Resolution Network can also provide advice on whether alternative approaches to dispute resolution are appropriate, and which approach would be most beneficial.
6.101 The Inspector-General considers that in deploying this risk-based indicator care should be exercised that contact and discussion with taxpayers with the view to resolving a dispute is not discouraged simply because an issue is considered low-risk. As emphasised by the ARC, it is desirable to have more personal contact with applicants at an earlier stage of the review process even in seemingly straightforward cases.
In the early stages of the objection process:
- the Tax Office should continue to encourage objection officers to contact taxpayers with the view of exploring opportunities for early resolution of the dispute; and
- where it could be of some benefit in resolving a dispute, the Tax Office should continue to adopt the practice of case conferencing, in which the objection officer, the taxpayer and Tax Office technical experts discuss the issues in dispute.
Tax Office response
6.102 Agree, noting the Inspector-General's acknowledgment (paragraphs 6.95, 6.99 and 6.100) that work being undertaken by the Tax Office is addressing the recommendation.
Quality control systems
ARC Internal Review Report and Best Practice Guide
6.103 The ARC considered that agencies should have in place quality control systems for internal review to ensure that the internal review system was meeting its defined aims and objectives.65 It listed some common methods, including:
- quality assurance processes;
- maintaining statistics of the numbers of reviews, timeliness standards, and the success and failure rates of appeals;
- general scrutiny by management; and
- internal review officers giving feedback to primary decision makers and management.
6.104 The ARC also listed a number of benefits in undertaking such analysis, including being able to identify why previous reasons for decision were set aside, the ability to explain variations in the set aside rates, identifying problems in policy or legislation and being able to provide feedback and training to primary decision makers.66
6.105 The ARC also noted the importance of monitoring external review rates as part of an agency's overall quality control systems.67 The ARC Internal Review Best Practice Guide recommended that quality control systems for internal review should include mechanisms for giving internal review officers regular feedback about their decision making process.68
Current Tax Office quality control systems
6.106 Quality control systems for objections include prescribed quality assurance processes, monitoring and analysing of objection workflows, outcomes and drivers at a business line level.
6.107 The Tax Office's work processes require that a completed objection must be sent to an authorising officer for quality assurance (QA) before a final letter is sent to a taxpayer. Controls over who can authorise an objection are maintained by the level of access granted to an officer. Authorising officers are always independent of the original decision maker and are generally more experienced senior officers who have the necessary skills to review and authorise the particular objection.
6.108 When an objection officer wishes to send a case for QA, their choice is limited by the system to a defined list of officers whose access profile matches the authorisation level appropriate for the classification of that case. Once the case is QA passed, the objection will be locked and the objection officer will not be able to edit any fields or letter but can then send the authorised version of the finalisation letter.
6.109 The Tax Office also states that quality control is evident in the management of objections with high-level strategic direction and process improvements being driven through the law sub-plan while delivery and day-to-day management rests within the compliance sub-plan. Within most business lines, the management of objections is centralised into specific teams or areas with overall responsibility resting with a senior executive leader in each line who often also has responsibilities for advice. The Tax Office advises that, through the Executive Leadership Forum, these senior executive leaders collaborate in the ongoing monitoring of objection matters (including performance measures) and set strategic directions for management and improvements in the processing of objections. The Tax Office points to the two cross-business line objections taskforces as cases in point.
6.110 Currently, the Tax Office's key quality assurance process for objections is its bi-annual Technical Quality Review (TQR). This requires each business line to report on the quality of their technical decisions based on the review of a representative sample. The Tax Office states that its aim is to ensure that taxpayers receive written advice that is accurate, consistent, relevant and clearly explained. The TQR process is one method that the Tax Office adopts to assess its performance in these areas. The Tax Office states that the TQR process also assists in the identification of systemic issues that may need to be addressed to continue to improve the quality of decisions and to assess the level of compliance with mandatory work practices and procedures.
6.111 Along with considering the quality of the decision, the TQR process also examines whether the case officer has conformed to various practice statements and work practices.69 The TQR results are then required to be distributed widely in each business line, with strategies to rectify any deficiencies identified. This is to incorporate individual feedback to officers involved in the case, including the case officer and approving officer, especially where improvement is necessary.
6.112 The Tax Office recognised that TQR does not review all aspects of the end-to-end decision making process and work was initiated as early as mid-2004 to develop and implement an improved quality review process. Some of the shortcomings identified in the TQR process included the need to identify root causes of quality gaps, providing better feedback to case and approving officers and identifying technical and procedural 'hot spots'.
6.113 As a result, an Integrated Quality Framework (IQF) has been designed. The IQF has been implemented for in-scope interpretative assistance products including objections.
6.114 The principles and features of the IQF include:
- a systemic focus, including end-to-end processes and business process improvement, in addition to product and transactional quality;
- systemic quality improvement based upon bona-fide best practice, including the Business Excellence Framework and the relevant international standard for managing quality;
- real-time or close to real-time assessment of quality and integrated quality reporting;
- processes to link management of quality, people capability, continuous improvement activity and culture;
- a widened, inclusive definition of quality including but not limited to factors such as: effectiveness, efficiency, integrity and timeliness, with a higher degree of specificity for quality elements; and
- improved infrastructure for managing and improving quality.
6.115 The IQF will incrementally replace the current TQR process. The Tax Office points to other ongoing improvements in quality control processes including office-wide consistency of approaches and a focus on developing mandatory quality control points in all case work.
Review findings and conclusions
6.116 The Tax Office agrees there is a need for improvements in the current TQR process so as to better measure the quality of the end-to-end dispute resolution process, of which the pre-amendment and objection stages are critical stages. In its current form the TQR process only provides a snapshot view of the quality of a decision and does not measure the quality of the end-to-end decision making process.
6.117 The Inspector-General believes that the Tax Office's implementation of the IQF is a step in the right direction. A more tailored quality assurance process, taking into account the nature of objection work, will allow the Tax Office to better measure the quality of the objection decisions and decision making process. The Inspector-General considers that a greater emphasis on root cause analysis and real-time evaluation will also greatly assist the Tax Office in developing a more proactive culture in relation to decision making generally and to all work processes.
6.118 However, there is a pressing need for more specific quality assurance processes that can adequately measure the efficiency and effectiveness of objections in the context of its end-to-end dispute resolution system. This is necessary given the important role of objections in tax administration and the consequences for taxpayers where a dispute remains unresolved. As was stressed by the ARC, quality assurance processes should be one input into an examination of the Tax Office's management and handling of objections. It should also include the analysis of statistics of the numbers of reviews, timeliness standards, and the success and failure rates of appeals, general scrutiny by management and team leaders and objection officers providing and receiving feedback.
The Tax Office should continue with its development of the Integrated Quality Framework and ensure that the quality control system:
- includes features to properly evaluate the quality of the Tax Office's end-to-end decision making process;
- is applicable to key objection work practices;
- includes mechanisms for objection officers to provide and receive feedback as a means to improving the decision making processes;
- identifies whether critical objection work practices that assist in the resolution of disputes are being followed and applied consistently across the business lines; and
- includes examination and analysis of further information requests to ensure that relevant information is sought at the earliest opportunity.
Tax Office response
Information exchange and interaction with taxpayers
6.120 The ARC considered that if internal review is to add value to the decision making process, the review officer needs to do more than reconsider the same papers already perused by the original decision maker.70 In order to fulfil the aims of internal review, the review officer should take additional steps to obtain relevant information and to analyse and evaluate the information supplied.
Current Tax Office approaches and results relating to further information requests
6.121 The Tax Office's taskforce report found that for audit-sourced objections approximately 73 per cent were lodged with new information or evidence across the sampled business lines. For GST, the report stated that 92 per cent of objections were lodged with new information or evidence.
6.122 The taskforce report found that of the sampled objection cases, 52 per cent required the Tax Office to request further information after the lodgement of the objection. In the GST business line, approximately 65 per cent of objections required further information to be requested, which is significantly higher than the other business lines, which ranged between 37 per cent and 55 per cent.
6.123 The report suggested that the high number of objection cases that required further information indicates that there is a need to educate taxpayers regarding the need to detail circumstances in full and provide supporting documentation when lodging an objection.
6.124 The taskforce report also found that in 57 per cent of audit-sourced objections and 49 per cent of taxpayer-amendment sourced objections further information was requested after the objection was lodged.
Source: Tax Office.
6.125 The taskforce report found that in 65 per cent of GST audit-sourced objections further information was requested after the objection was lodged. It found that this was higher than the average across the sampled business lines and was significantly higher than the lowest business line rate (MEI — Micro at 45 per cent). The taskforce report concluded that these rates were high, especially given the high proportion of audit-sourced GST objections being lodged with new information or evidence.
6.126 The taskforce report suggested that the high proportion of objections in some business lines that required the Tax Office to request further information may be explained by some taxpayers having less experience interacting with the Tax Office and less awareness of the requirement to provide supporting documentation and factual information when lodging an objection.
Reasons for requesting further information
6.127 The taskforce report found that substantiating facts and obtaining further information were the two primary reasons for requesting further information for objections. A request to substantiate facts was defined as a request to obtain proof or evidence in relation to the objection, whilst a request for obtaining factual information was to establish the circumstances of the case.
6.128 The taskforce report concluded that a more detailed examination of the similarities between the subject matter of the objection and the exact details of the further information was needed to understand the reasons for seeking further information.
6.129 However, the taskforce report found that with 55 per cent of the cases requiring further information requests to substantiate the facts of the case it was clear that more work was needed to educate taxpayers regarding the requirement to provide supporting documentation when lodging an objection. Table 6.2 outlines the taskforce's break-up by way of business line.
Source: Tax Office.
Methods for requesting further information
6.130 The taskforce report found most of the business lines utilise requests by way of letter to obtain further information.
6.131 The taskforce also reported that the paper response times were similar across all business lines; however, the GST business line had the greatest proportion of responses received after 43 days. The report stated that this may have been due to clearer work practices surrounding further information requests in the other business lines and the actioning of objections prior to reaching a similar response period.
6.132 In respect to phone response times for further information, the taskforce report found there was some variation between business lines. Between 39 and 44 per cent of phone requests made in the MEI — Individual, MEI — Micro and Superannuation business lines were responded to within seven days of making the request. In contrast, only 17 per cent of responses to GST further information requests were received within seven days.
6.133 The report also found that the number of instances where taxpayers failed to respond to further information requests varied greatly between the business lines, with 52 per cent of GST phone requests for further information generating no response. In contrast, only 10 per cent of MEI — Individual phone requests for further information generated no response.
6.134 The taskforce also observed that 40 per cent of requests for further information made after the original request for further information were for new information. The report suggested that the reasons for subsequent requests for new information might be due to that information not having been correctly identified as relevant in the early stages of the objection. Alternatively, the report suggested that the additional information being provided by the taxpayer might lead to further information being required by the Tax Office before it can finalise the objection.
6.135 The taskforce report concluded that the significant variation between business lines in relation to response times and instances of non-response for further information could be explained, in part, due to the inconsistent work practices across business lines when making multiple requests for the same information. MEI — Individual and MEI — Micro have implemented work practices for managing a taxpayer's failure to respond to a further information request. For example, in the MEI — Individual business line a taxpayer is given 28 days to respond to a further information request. If the taxpayer has not provided the information within 28 days, or the taxpayer has not requested further time to provide the information, then the taxpayer is given a reminder (by way of telephone or letter) with a further seven days to provide the requested information. If the taxpayer does not respond within the further seven days, then the Tax Office proceeds to determine the objection on the available information.
6.136 Previously, within the GST business line, a taxpayer would be given 28 days to respond to a further information request. If a taxpayer did not provide the requested information then they were given 28 days to respond and if there was still no response, a further 14 days. The taskforce report noted that often there were numerous Tax Office requests for the same information over many months and also telephone requests for further information appeared to be made on an ad hoc basis. The taskforce reported that this was a significant contributor to the ongoing aged case volumes in the GST business line's objection and litigation workload.
6.137 The report noted that GST had since changed this work practice as part of a strategy to reduce aged objection cases. This now allows a taxpayer 28 days to respond to a further information request. If the taxpayer does not respond to this request, then the tax officer will proceed to determine the objection on the available information.
6.138 The Tax Office's taskforce report also considered that a consistent approach to requesting further information and work practices for when taxpayers fail to respond to such requests should be developed for objections.
6.139 The Tax Office advises that it has enhanced its guidance on making requests for further information in ORCLA. These instructions advise that case officers must attempt to identify all additional information required and make one contact with the taxpayer rather than multiple requests. Case officers must ensure that information is not requested that has already been provided or is irrelevant to making the decision. Case officers are directed to consider the most appropriate channel of communication with taxpayers.
6.140 This guidance also includes reasonable timeframes for taxpayers to reply to a request for additional information. The timeframes are differentiated, based on the source and complexity of the objection.
6.141 The taskforce report also made a number of recommendations regarding ways that the Tax Office could better understand and interact with taxpayers at objection. Some of these included:
- reviewing the finalisation letters provided by compliance areas to ensure that the requirement to provide all supporting document when lodging an objection is clearly communicated;
- influencing the culture to encourage objection officers to take a risk-based approach to limit requests for further information;
- changing the culture to encourage objection officers to make phone requests for further information more frequently in order to reduce cycle times;
- conducting a detailed end-to-end analysis (for example, from audit commencement to finalisation of the objection or litigation) of cases from all business lines to identify opportunities to improve existing processes;
- identifying methods to effectively educate taxpayers regarding the need to provide supporting documentation and detail circumstances in full at the time of lodging an objection; and
- documenting and implementing a consistent method for requesting further information and managing non-responses by taxpayers across all business lines for objection work.
6.142 The Tax Office states that these recommendations have been addressed in a number of ways.
- Changes to active compliance letters to advise taxpayers to provide supporting documentation have been piloted in one business line. When this pilot is evaluated, expansion across all compliance lines will be implemented.
- Guidance on when it is appropriate to request further information is published on ORCLA. This also provides that phone contact is the preferred channel where further information is required during objection. In addition, ORCLA sets out a consistent approach to requesting further information and managing non-responses.
- The Objections Review Project has conducted an end-to-end review of the dispute process, has designed improvements based on those findings and will continue to identify and design improvements in conjunction with the business lines.
- The Tax Office has recognised that anyone lodging an objection may need assistance. The Tax Office has provided broad-based assistance through the provision of objection forms (in both tax professional and non-tax professional styles), and publishing on the website information on how to lodge an objection and supporting documents that should be included with an objection. Based on feedback gathered through the Tax Office Provision of Written Advice survey in 2007, respondents indicated that when they used the Tax Office forms and associated documents, they were more satisfied with the outcome of their objection and the timeliness of the decision.
Review findings and conclusions
6.143 In contrast to the taskforce report findings, the Tax Office's case management system shows that approximately 60 per cent of objections did not require further information prior to finalisation. Where there is a further information request, then over three-quarters of such cases fail the Taxpayers' Charter further information request standard.
6.144 An examination of sample cases indicates that in a large number of cases the receipt of new information is an important factor in the outcome of the objection. New information becomes available either through the taxpayer providing further material with the lodgement of the objection or the Tax Office requesting further information in the course of determining the objection.
6.145 These findings raise two questions — firstly, why do so many further information requests fail the Taxpayers' Charter service standard and secondly, why is relevant information not provided or obtained earlier in the dispute?
6.146 Audit work processes and the quality of decision making at the primary decision maker level, particularly with regard to evidence collection and the giving of reasons, have an important bearing on the management and handling of objections. Where an audit decision does not clearly set out the relevant issues or facts or the evidence that is being relied upon to support those facts, then it will be difficult for the objection officer to quickly determine what further information is both relevant and required.
6.147 In respect of the second issue, the Inspector General found that either there was no request for that relevant information at the audit stage or, if it was requested, then it was not provided by the taxpayer.
6.148 Where the Tax Office has requested further information from a taxpayer and provided a reasonable period of time to provide that information, then it should not be making multiple information requests. The Inspector General does not believe there is any benefit to have a large number of cases awaiting further information for long periods of time. Taxpayers, when they lodge an objection, have an obligation to provide all necessary and relevant information.
6.149 In circumstances where taxpayers have not provided the requested information, then the Tax Office should be seeking to review the case based on the best available facts and evidence and to make a timely decision so as to determine the objection. In such instances, simply determining the objection on the best available facts and evidence and allowing taxpayers to explore their external review rights if they are still dissatisfied would be an appropriate course of action. Where this happens the Tax Office should be able to flag these cases as potential litigation.
6.150 The Tax Office also needs to include a more thorough examination and analysis of further information requests as part of its quality assurance processes for objections. It needs to better understand why relevant information is either requested by the Tax Office, or provided by taxpayers, at later stages in the dispute. It must also be confident that it has requested relevant information at the earliest stage possible. Where a dispute is resolved because of further or new material at later stages in the dispute (objection or litigation), then the Tax Office should be able to attribute that to a failure by the taxpayer to provide information rather than the Tax Office not asking for it. Such an assurance should be included as part of its broader quality control system.
6.151 The Inspector General considers that it is incumbent on the Tax Office to make clear in its further information requests why the information is relevant and how it relates to the issue in dispute. This would benefit both the Tax Office and taxpayers and encourage a more timely resolution of disputes.
6.152 Further information requests examined in the course of this review tended to set out the class or name of the document or information being requested with little or no explanation of the purpose or importance of that information in resolving the dispute. It is also important that the Tax Office provide assistance to taxpayers, especially those that are self represented, to strengthen their applications for internal review. Such assistance could take the form of pointing out obvious gaps or omitted detail in applications for review, explanations of the review process and explanations of how the objection could be successful.
Recent Tax Office improvement initiatives
6.153 The Tax Office has recently taken steps to review and improve the way case officers request further information and encourage all reasonable avenues to facilitate early resolution. This includes introducing differentiated approaches based on risk, for example, simple information requests for low-risk taxpayers and telephone calls to request further information are now acknowledged practice. Similarly for high-risk, complex taxpayers with a history of delaying proceedings, formal access and evidence gathering powers can also be utilised.
6.154 In addition, the objections 'request for further information' letter now includes an explanation of why the information is needed. This ensures that information that is not required is not requested.
6.155 The Tax Office is also enhancing the information available to the public through its website and publications to ensure it is consistent with its approach to resolve the dispute as early as possible. The Tax Office website is being restructured and rewritten to provide clear information to taxpayers intending to object. This includes guidelines on documents that should be provided to support an objection.
6.156 The supporting documentation for the risk-based indicator, about to be deployed, encourages discussion with the taxpayer to ensure all information required is obtained and to clarify issues in dispute.
6.157 Finally, the Tax Office has commenced work on developing a dispute risk indicator, similar to the risk-based indicator. It is intended to reduce the number of objections as the aim of this tool is to resolve the dispute at its source.
The Tax Office should continue to implement work practices and procedures that address the following:
- when asking for information during objections, the Tax Office should ensure that information requests are tailored to the dispute on hand by clearly articulating the type of information it is seeking and the purpose and relevance of the information to the issues under examination;
- self represented taxpayers in particular should be provided with plain language advice on making objection applications and assistance in ensuring that all relevant information and evidence is before the objection officer for reconsideration of the earlier Tax Office decision; and
- communications between the objection officer and the taxpayer should also be aimed at improving understanding of the reason for the objection to facilitate early resolution of the dispute.
Tax Office response
6.158 Agree, noting the Inspector-General's acknowledgment (paragraphs 6.153 to 6.157 inclusive) that work being undertaken by the Tax Office is addressing the recommendation.
Reporting and analysis of objections
ARC Internal Review Report and Best Practice Guide
6.159 The ARC noted that an analysis of statistics of internal review can be used, among other purposes, to monitor trends, identify problems in policy and legislation, and identify training needs. It stated that such statistics, if collected and analysed in a sufficiently detailed fashion, are a useful tool that can be used by agencies to maximise the normative impact of internal review.71
6.160 The ARC also listed some of the problems identified through internal review mechanisms, including:72
- lack of evidence, investigation and fact finding by original decision makers to support their decision;
- lack of understanding among original decision makers of the legal requirements or policy applying to decisions;
- bias on the part of original decision makers;
- carelessness or not listening properly; and
- poor documentation, systems errors and inexperience.
6.161 The ARC set out a number of recommendations on how reporting and analysis of internal review can encourage an overall improvement in decision making. It recommended that agencies should gather detailed internal review data that can be analysed to monitor trends and identify problems. Also, internal review officers should be encouraged to communicate with managers of original decision makers about problems they may have detected with administration and decision making. As far as possible, such problems should be acknowledged and acted upon.73
Current Tax Office reporting and analysis practices
6.162 The Tax Office employs two levels of reporting — the first is at the business line level which then feeds into the sub-plan report and its corporate reporting processes. Two reports are prepared for the objections work category, with one detailing the 'on hand' position while the other sets out the finalised case outcomes for the month. Analysis of workflows occurs at a number of levels from the whole sub-plan level at Compliance Executive Meeting and Executive Leadership Forum through to individual business line executive teams, management teams or segments.
6.163 Business line level reports contain detailed business line-specific management information, mostly on efficiency and cycle times, and analysis. The Tax Office states that many business lines create their own line-specific reports to meet the needs of their management or executive teams. The Tax Office notes that business line reports and analysis are driven by business needs and vary between business lines and also over time as risks and issues change.
6.164 Business lines monitor statistics on numbers of cases received, finalised and on hand as well as age profiles of cases, sources of disputes, outcomes, cycle times and certain service standards. The Tax Office states that analysis of reports and causes of anomalies, such as that undertaken by the MEI business line to determine the cause of a 'spike' of objection receipts in July and August 2007, are investigated in order to ensure that adequate strategies and resources are in place to manage the additional work and, if possible, to address the cause of the unexpected increase.
6.165 The Tax Office also states that the focus and frequency of monitoring and analysis depend on the nature of the work and the level of case turnover in a particular business line. For example, the ATP business line does very little analysis on the source of objections as compared to other business lines as objections emanate almost exclusively from audit. Likewise, as LBI has a well-established taxpayer relationship focus and a relatively small taxpayer base, which means that its knowledge of trends and causes relies much less on frequent statistical analysis. LBI reporting and analysis focuses more strongly on active case management aspects to ensure that issues are resolved in as timely and effective a manner as possible.
6.166 Feedback may be sought from the business lines on the reasons for unusual increases in case receipts or for increasing work backlogs and strategies in place to deal with them, reasons for increases or decreases in performance against the Taxpayers' Charter service standards or completion targets, or perhaps advance notice of anticipated workflow impacts from such things as increased audit activity or new legislation.
6.167 Responses to these business line-based reports are then collated and a final report is submitted for inclusion in the compliance sub-plan Heartbeat report that covers all work done in the sub-plan and is not limited to objections. In respect of objections, the information contained in this report is confined to performance against the Taxpayers' Charter finalisation standard, the Tax Office's completion standard, case cycle times, the case status of unfinalised objections and the trends of received and finalised objections.74
6.168 The Tax Office advises that specific issues or strategies relevant across business lines will be identified through this reporting process and discussed at its monthly Executive Leadership Forum. Additional analysis and reporting will occur whenever anomalies in reported figures (at either the sub-plan or the business line level) indicate that closer scrutiny is required. The Tax Office states that this approach is driven by the fact that it can obtain better intelligence by analysis at the business line level where there is a deeper awareness of the specific business needs and levels of risk involved.
6.169 In relation to the use of internal review to detect problems in administration and policy, the Tax Office states that business line analysis of objection statistics and trends is used to improve management and work practices overall. The Tax Office pointed to examples of this, including its GST penalty decision making workshops and its work on additional training on alternative dispute resolution, evidence and audit techniques in anticipation of additional micro and serious non-compliance objections.
6.170 The Tax Office, under the Change Program initiative, has been progressively moving the whole of the Tax Office on to one case management system. From July 2009 it is expected that all work types in the end-to-end dispute process will be recording data in the same system and using consistent templates to gather consistent data. As well as being able to perform similar analysis across the different business lines, there will be a single window on interactions between taxpayers and the Tax Office.
6.171 The Tax Office has been developing an improved quality improvement and assurance framework (the IQF) since mid-2004. The purpose of the IQF is to ensure that the Tax Office produces work of a consistent and sustainable high standard, and that its people, products and processes continuously improve. The IQF has been piloted with a range of products and business lines and is scheduled to replace the TQR process during 2009. The IQF entails processes for managing quality, people capability relative to quality, quality assessment, integrated quality reporting, continuous improvement; and quality-related aspects of organisational culture. Its features include a risk-based approach to assurance. Integrated quality reporting allows for different case types to be compared.
6.172 The Tax Office has developed a series of indicators which will improve data capture and quality, and will enable the analysis of the source, type and trigger of the objection. These indicators will be deployed into its IT system soon.
6.173 The Tax Office is developing effectiveness indicators for the whole end-to-end dispute resolution process.
6.174 The Tax Office has reviewed the Early Resolution Report process and is currently improving the work practices and procedures that support the process, in particular, enhanced data capture, analysis and feedback to audit teams on identified systemic issues.
Review findings and conclusions
6.175 The Tax Office must have in place indicators to be able to evaluate the efficiency and effectiveness of its management and handling of objections. These indicators should evaluate the extent to which the Tax Office's objectives and desired outcomes have been achieved. The performance of the Tax Office in meeting these indicators should be the catalyst for improvements in upstream processes that have an impact on objections. For example, an efficient and effective merits review system requires that the first tier of review, in this case objections, must act as an appropriate filter of cases proceeding to external review.
6.176 An examination of some examples of existing management reports and business line practices shows some variation in their purpose and content. For example, the Excise report lists subject description, whether a penalty was imposed and whether it was remitted, the outcome of the objection and the reason for that outcome. The Excise business line states that it is currently improving its reporting for objections to examine trends, including those across issues, time, and industry groups and is also looking at recording amounts in dispute into future reports. In the LBI business line, monthly Heartbeat reports are prepared for the LBI Executive that contain a range of objection data, including stocks and flows, aged cases, cycle and elapsed times and a case event summary. It also provides a short commentary on any trends, reasons for delays and emerging key issues. The MEI business line also prepares reports in relation to provision of advice work, including private rulings, advice and objections. It contains data on the number of objections received and finalised, outcomes, trends and topics.
6.177 The Inspector-General is not entirely convinced by this level of reporting and analysis. In looking at various business lines' reports, the Inspector-General has found that each business line captures its own set of information. There is no standard report that examines and brings together at a corporate level a range of performance and quality markers, both from an efficiency and effectiveness perspective, which relate to objections. The two corporate reports only include some analysis and commentary on objections, but predominantly monitor the age of both work on hand and work that has been finalised.
6.178 The Inspector-General also believes that there should be greater emphasis on the analysis of trends and outcomes at a corporate level for the purposes of maximising the normative effect of internal review. While there is a large quantity of information being reported at different levels of the Tax Office (aged case status reports, certain performance standards reports and technical quality review reports), there is no overall and ongoing analysis that brings all this information together to identify trends and problems in the objection process and the broader dispute resolution framework. There is also some variation within business lines in the collection and analysis of statistics relating to objections, in particular when more detailed reports and analysis are undertaken.
6.179 Quite often, more detailed reporting and analysis is reactive, that is, trying to determine the cause of some already identified anomaly such as a backlog of objections, rather than proactive in the sense of trying to determine the cause of disputes and emerging trends regarding both the efficiency and effectiveness indicators. For instance, why is the Tax Office consistently not meeting its performance against the completion standard and the Taxpayers' Charter further information request standard? Is this due to the provision of taxpayer information, the resolution of technical issues or the quality of the audit? The very fact that the Tax Office cannot adequately articulate why it cannot, and has not, met its own performance standard indicates a shortcoming in its current approach to identifying and analysing trends and problems.
6.180 Reporting and analysis of objections should encourage an overall improvement in decision making. To do this effectively, the Tax Office should move to a position where it has greater confidence in its corporate case management system so that it can begin to use such data for the purposes of examining any trends in what type of issues are being objected to and the outcomes. Such analysis is an important part of properly understanding the drivers of objections and putting in place pre-emptive strategies to minimise disputes. There also needs to be a more corporate focus in using objection data, including court and tribunal settlement rates, as a means to detect problems in administration and policy.
6.181 The Tax Office's public reporting of its performance regarding objections is very limited and confined to its performance against its 56-day service standard. The Inspector-General considers that the Tax Office should include in its annual report its performance against all of its Taxpayers' Charter service standards relating to objections. Other measures and indicators relating to objections should also be reported externally, where appropriate.
Aligned with the Tax Office's philosophy, approach and agreed outcomes on objections, the Tax Office should continue to design, monitor and report against a broad range of indicators and measures that allow it to evaluate the quality, efficiency and effectiveness of the objections function within its end-to-end dispute process. Some of these measures and indicators should be reported externally, where appropriate, with consideration being given to:
- the level of disputation in the tax system including the source, cause and nature of objections;
- all its service standards (completion and further information requests) included in the Tax Office's annual report;
- outcomes; and
- age profiles.
Tax Office response
6.182 Agree in principle.
6.183 The Tax Office already reports against a broad range of indicators and measures including some of those suggested in the recommendation. In our ongoing work to improve reporting measures, we will give careful consideration to the Inspector-General's suggestions and we note the Inspector-General's acknowledgment (paragraphs 6.170 to 6.174 inclusive) that work being undertaken by the Tax Office is addressing the recommendation.
The Tax Office should adopt a more corporate emphasis and better analyse the trends and outcomes of objections and litigation as a source of improvement of its end-to-end dispute resolution process and feedback to both objection officers and primary decision makers. This analysis should include the identification of potential systemic issues in the end-to-end dispute resolution process and the effecting of improvements.
Tax Office response
6.184 Agree, noting the Inspector-General's acknowledgment (paragraphs 6.170 to 6.174 inclusive) that work being undertaken by the Tax Office is addressing the recommendation.
Contact between internal review officers and primary decision makers about specific decisions
ARC Internal Review Report and Best Practice Guide
6.185 The ARC considered that it is important to foster a culture where overturning a decision does not necessarily mean that the original decision was 'wrong' or that it is intended as a criticism of the standard of original decision making.75 The ARC pointed to examples of where original decision makers' suspicion of internal review officers was overcome by internal review officers explaining to them why the appeal was conceded. The ARC believed that contact between internal review officers and original decision makers is important in fostering cultural acceptance of internal review decisions and facilitating the improvement of decision making. The ARC identified a range of reasons for contact between internal review officers and original decision makers before an internal review decision, including to discuss the facts, the reasons for decision and the application of the law. Contact could also be made to clarify an aspect of the decision or to discuss matters of procedure, such as the way the original decision maker included evidence.76 The ARC also found that contact with the original decision maker after internal review was less frequent. Most often the reason for this contact was to explain the reasons for decision, to explain why the decision has been changed and to give feedback to the original decision maker.77
6.186 The ARC Internal Review Best Practice Guide recommended that agencies should encourage internal review officers to contact the original decision makers in every case under review, whether to raise issues prior to internal review being completed, or to discuss the review officer's decision and the reasons for it.78
6.187 The ARC noted as internal review officers are required to use the same policy guidelines as those used by original decision makers, the overturning of decisions was likely to represent differences in decision making such as taking into account new evidence, or the weighing of different factors, rather than a new and different interpretation of the law.79
6.188 The ARC emphasised the importance of promoting contact, discussion and the exchange of ideas between internal review officers and original decision makers.80 The methods for doing so may vary from agency to agency, but one suggestion was regular meetings between internal review officers and original decision makers, both at a formal and informal level. The ARC also recommended that both internal review officers and managers should place a priority on giving feedback to original decision makers.81
Review findings and conclusions
6.189 The Tax Office states that it promotes contact between objection officers and original decision makers, as evidenced by the existence of feedback loops from objection officers to other decision making areas.
6.190 It states that these processes are necessarily crafted differently in each business line in order to suit its organisational structure and general nature of its case work. Feedback most often goes back to the original decision maker but it may also include the relevant risk owner in the compliance area.
6.191 The Tax Office advises that liaison is also encouraged throughout its end-to-end disputes process through the various litigation networks between Legal Services and all business lines. For instance, the Strategic Internal Litigation Committee processes in litigation matters support feedback to all stakeholders in the decision making process by encouraging the active involvement of original decision making areas as well as objection officers. The Tax Office also points to other efforts to improve networks and build technical capability across all industry segments.
6.192 The Tax Office's objections checklist requires objection officers to provide feedback to the original decision maker in line with business line rules, where they are applicable.
6.193 The Inspector-General notes that there is significant variation in the nature and level of contact between original decision makers and objection officers in each of the business lines. For instance, the Tax Office's work processes currently contain very limited information on the type and level of such contact required, apart from stating that before sending a case to be quality assured an objection officer will need to have the final decision affirmed by the original decision maker. Where the original decision maker (generally this is an auditor) does not agree with the proposed decision, then the issue must be escalated. This in itself raises issues regarding the independence of objection officers, although the Tax Office acknowledges that the wording referring to affirming the decision needs revision as it reflects neither Tax Office policy nor actual business practices.
Influence of internal review on decision making process
ARC Internal Review Report and Best Practice Guide
6.194 The ARC observed that the prospect of internal review can have varying effects on original decision making. On the positive side, internal review can provide an incentive to make the right decision, taking a beneficial view of the facts if the case was close and making primary decision makers more thorough in their work.82 However, the ARC found that internal review can sometimes have a negative impact on decision making, with the availability of an appeal sometimes being used an excuse for less than thorough work or failure to deal properly with a dissatisfied client.83
6.195 The ARC noted that it was unrealistic to place too heavy a responsibility for improving original decision making on an internal review system in situations where poor decision making is due to systemic factors, such as lack of training for original decision makers, and complexity of policy and legislation making correct decisions more difficult.84
6.196 The ARC Internal Review Best Practice Guide recommended that agencies should recognise the importance of training for primary decision makers. One area of potential need identified is training in the skills required for client contact and the explaining of decisions to clients. In agencies where the legislation and policy administered by primary decision makers is progressively becoming more complex, training strategies should attempt to recognise and address this.85
Review findings and conclusions
6.197 Although the Inspector-General has not conducted a survey of Tax Office original decision makers and objection officers, it nevertheless believes that the risks identified by the ARC are equally relevant to the Tax Office. In particular, the possibility that the availability of an objection right may lead to less than thorough work during audit or a failure to try and resolve a dispute at an earlier stage has been specifically raised as a stakeholder concern.
The effect of external review tribunal decisions on internal review
ARC Internal Review Report and Best Practice Guide
6.198 The ARC considered that the greater the levels of acceptance by an agency of the role of merits review, then the easier it is for the agency to benefit from its positive effects.86
6.199 The ARC found that more than half of its surveyed population believed that the prospect of external review had no effect on the way they internally reviewed their agency's decisions.87 Of those who did think there was an effect, the most commonly cited was that the decisions would be written on the basis that they might go to external review. Other effects included not pursuing a dispute which would be lost on appeal, looking at previously decided cases, providing further information, that pressure on internal review officers was relieved by knowledge of the availability of external review and taking a beneficial view of the facts when the case was close. The ARC mentioned that some additional effects of external review include the uncovering of problems in the decision making process or interpretation of policy and the encouragement of some cases toward external review as test cases.88
6.200 The ARC Internal Review Best Practice Guide recommended that where an agency does not have mechanisms for feeding back the results of external review into its decision making process, then consideration should be given to introducing these.89 The ARC found that for maximum effect, the existence of mechanisms for the distribution of information must be coupled with work practices that allow officers the time to read and digest information on a regular basis, and ideally provide the opportunity to discuss the information with other officers.90
Review findings and conclusions
6.201 The Tax Office states that the effect of external review decisions on objections is managed partly through the litigation networks mentioned previously and such initiatives as the recent Decision Impact Statements. The Strategic Internal Litigation Committee and Early Resolution Report (ERR) processes are further mechanisms by which feedback and discussion are encouraged both for cases decided by the courts and those settled prior to hearing.
6.202 Following the Inspector-General's Review of Tax Office Management of Part IVC litigation, the Tax Office introduced Decision Impact Statements, which set out the Tax Office's position in relation to a tribunal or court decision and how the law will be administered as a consequence of the decision. Decision Impact Statements have positively influenced the Tax Office's processes for feeding back to original decision makers and the community the impact of a court or tribunal decision on the Tax Office view.
6.203 The Inspector-General observes that the Tax Office has also introduced ERRs, which seek to gather information on why a case that proceeded to litigation was subsequently settled without going to a hearing. The ERR is intended to capture whether any errors occurred during the assessment and objection stages, whether any systemic problems underlie the assessment and objection process, whether the Tax Office can learn anything from the outcome or whether the outcome was unavoidable. The ERR requires the litigation officer to select the main reason the case was settled, to advise how the litigation phase of the case could have been avoided, and to suggest the possible implications for the business lines audit or objection processes. The report lists the management of follow-up actions arising from the case, including the responsible areas, the contact officer and the target completion date. The ERR is submitted to the Strategic Litigation area within the Legal Services Branch, which forwards the final ERR to both the Law Practice Improvement Project team and the Business Line Coordinator. The project team collates and reviews all ERRs so as to identify any systemic problems in the pre-litigation process. The business line coordinator provides feedback to objection and active compliance officers on the outcomes and any learnings.
6.204 While both these mechanisms are important for feeding back the results of the decision making process, there is some uncertainty around how the findings from the Tax Office's ERR will translate into improvements, especially where shortcomings have been identified at the upstream processes. For instance, the Inspector-General has found that, to date, there has been little analysis or follow-up action of the information contained in these reports, in determining which issues require attention, and in successfully implementing any changes to the Tax Office's decision making process.
47 Organisational Review of the Inland Revenue Department, Report to the Minister of Revenue, Organisation Review Committee, April 1994.
48 ARC, Internal Review of Agency Decision Making, paragraph 1.7.
49 ARC, Internal Review of Agency Decision Making, paragraphs 3.16-3.18.
50 JCPA, An Assessment of Tax, paragraph 14.9.
51 ARC, Internal Review of Agency Decision Making, paragraph 3.31.
52 ARC, Internal Review of Agency Decision Making, paragraph 3.32.
53 ARC, Internal Review of Agency Decision Making, paragraph 3.21.
54 ARC, Internal Review of Agency Decision Making, paragraph 3.22.
55 ARC, Better Decisions report, paragraph 6.61.
56 ARC, Internal Review of Agency Decision Making, paragraph 3.27.
57 ARC, Internal Review of Agency Decision Making, paragraph 3.33.
58 ARC, Better Decisions report, paragraph 6.55.
59 ARC, Internal Review of Agency Decision Making, paragraph 5.22.
60 ARC, Internal Review of Agency Decision Making, paragraph 5.2.
61 ARC, Decision Making Best Practice Guide 3, paragraph 6.64.
62 ARC, Internal Review of Agency Decision Making, paragraph 5.5.
63 ARC, Internal Review of Agency Decision Making, paragraph 5.6.
64 ARC, Internal Review of Agency Decision Making, Recommendation 21, p 69.
65 ARC, Internal Review of Agency Decision Making, paragraph 6.36.
66 ARC, Internal Review of Agency Decision Making, paragraph 6.39.
67 ARC, Internal Review of Agency Decision Making, paragraph 6.40.
68 ARC, Internal Review of Agency Decision Making, Recommendation 29, p 70.
69 Further information on topics for consideration as part of the TQR process is available in Chapter 4 of this report.
70 ARC, Internal Review of Agency Decision Making, paragraph 5.14.
71 ARC, Internal Review of Agency Decision Making, paragraph 7.34.
72 ARC, Internal Review of Agency Decision Making, paragraphs 7.37-7.39.
73 ARC, Internal Review of Agency Decision Making, Recommendations 35 and 36, p 71.
74 Case status events indicate whether the objection is in progress, awaiting quality assurance or pending taxpayer or Tax Office action and the clock has stopped for Taxpayers' Charter standard purposes.
75 ARC, Internal Review of Agency Decision Making, paragraph 7.15.
76 ARC, Internal Review of Agency Decision Making, paragraphs 7.18-7.19.
77 ARC, Internal Review of Agency Decision Making, paragraph 7.21.
78 ARC, Internal Review of Agency Decision Making, Recommendation 32, p 71.
79 ARC, Internal Review of Agency Decision Making, paragraph 7.26.
80 ARC, Internal Review of Agency Decision Making, paragraph 7.29.
81 ARC, Internal Review of Agency Decision Making, Recommendation 34, p 71.
82 ARC, Internal Review of Agency Decision Making, paragraphs 7.7-7.8.
83 ARC, Internal Review of Agency Decision Making, paragraph 7.9.
84 ARC, Internal Review of Agency Decision Making, paragraph 7.11.
85 ARC, Internal Review of Agency Decision Making, Recommendation 31, p 71.
86 ARC, Internal Review of Agency Decision Making, paragraph 7.40.
87 ARC, Internal Review of Agency Decision Making, paragraph 7.49.
88 ARC, Internal Review of Agency Decision Making, paragraph 7.50.
89 ARC, Internal Review of Agency Decision Making, Recommendation 38, p 72.
90 ARC, Internal Review of Agency Decision Making, paragraph 7.54.