With the recent introduction of the National Court Framework ('NCF'), Chief Justice Allsop has issued new Federal Court of Australia Practice Notes including a new practice note for the management of taxation cases. The new taxation practice note has been in effect from 26 October 2016 and to the extent practicable, apply to proceedings filed before, or after, the date of issuing.

This update considers the changes arising out of the new Federal Court of Australia Taxation Practice Note and the implications for taxation disputes specifically in the context of alternative dispute resolution and the use expert evidence. 

The Changing Landscape in Litigation

The NCF was a fundamental reform of the Court and the way it operates. The key purpose of the NCF is to reinvigorate the Court's approach to case management by further modernising the Court's operations so that it is better placed to meet the demands of litigants and can operate as a truly national Court.[1] 

The stated goals of the NCF are:

  • To organise and manage nationally the whole of the Court's work by reference to the great subject matter areas of the Court's work; 
  • To organise the Court's resources to meet the demands of the broad range of work done by the Court; 
  • To develop the confidence of the profession and the community, particularly in areas requiring a degree of specialised skill and knowledge; and 
  • To broaden the base of judicial knowledge and experience in the Court.[2]

With the introduction of the NCF the Court’s workload has been reorganised into nine National Practice Areas ('NPA'). 

The NPA's are managed by National Coordinating Judges, together with one or more Registry Coordinating Judges in each registry. The structure has been implemented for the following reasons:

  • foster consistent national practice;
  • the utilisation of specialised judicial and registrar skills; and
  • the effective, orderly and expeditious discharge of the business of the Court. [3]

Federal Court Taxation Practice Note (TAX-1)

The new Taxation Practice Note, read in conjunction with the Central Practice Note provides updated guidelines for litigants involved in Federal Court proceedings. As part of the NCF the taxation NPA comprises any proceeding relating to: 

  1. tax appeals to the Federal Court pursuant to Part IVC of the Taxation Administration Act 1953 (Cth) ('Taxation Administration Act') that are relevant to decisions made by the Commissioner of Taxation ('Commissioner'); 
  2. appeals from the Administrative Appeals Tribunal ('AAT') which involve taxation disputation pursuant to s 44(1) of the Administrative Appeals Tribunal Act 1975; and 
  3. any recovery or other proceeding collateral to a tax dispute.[4]

Procedural changes for tax proceedings

To reflect a changing landscape in tax litigation, the new Taxation Practice Note provides for a number of important procedural changes affecting the management of tax proceedings including the following:

1. Notice of Appeals:  to assist the Court to better understand the nature of the case at an early stage, the applicant should now file with the application, a copy of the Commissioner's objection decision, the subject of the appeal;[5]

2. Pro Forma Questionnaire: under the previous practice note, each party was to file and serve a completed pro forma questionnaire within 40 days of the date on which the notice of appeal was served on the Commissioner.[6] Under the new practice note, the Commissioner must file and serve a completed questionnaire within 7 days of the date on which the Notice of Appeal was served on the Commissioner by the applicant. Further the applicant may, but is not obliged, to provide a completed questionnaire 7 days after being served with a completed questionnaire by the commissioner.[7] We note that currently the Pro-forma Questionnaire is undergoing internal consultation and has been issued by the Court as 'interim' form;[8]

3. Commencing Proceedings - Appeals from the AAT: the new practice note advises that the applicant should file with the notice of appeal a copy of the decision of the AAT, subject of the appeal;[9]

4. First Case Management Hearing: The practice note provides guidance in respect of the timing for a case management hearing:

(a) for Part IVC proceedings that are not 'private ruling' cases - not less than 6 weeks from the date of the filing of the Notice of Appeal;

(b) for Part IVC proceedings that are 'private ruling' cases - not later than 3 weeks after the filing of the Notice of Appeal;

(c) for appeals from the AAT and in any other matter - within 5 weeks from the filing of the Notice of Appeal or originating application, wherever possible.[10]

5. Tax Case Management Conference ('CMC'):  The Court may of its own motion, or in its discretion at the request of a party, hold a Tax  CMC to manage a proceeding more intensively. A Tax CMC can be held in addition to, or instead of, a case management hearing. A Tax CMC may be particularly useful in larger and more complex tax cases and its particular objective is for the early management of proceedings and the efficient allocation of resources of both the Court and the parties;[11]

Importantly, the new Taxation Practice Note has placed a renewed emphasis on the use of alternative dispute resolution in taxation disputes and, in relation to expert evidence, the use of joint expert conferences and reports. This emphasis seems to be mainly driven by the case management objectives of the Court. We address those two areas in more detail below. 

Alternative Dispute Resolution

Part 9 of the Central Practice Note to which the Tax Practice Note refers, provides guidance to litigants in relation to the effective and efficient use of ADR processes, highlighting that ADR options should be viewed by the parties not only as a means of possible resolution of the whole dispute, but also as a means of limiting or resolving issues by agreement and of resolving interlocutory disputes.[12]

The Court has put litigants on notice that it expects parties to place themselves in the most informed position possible for any ADR process, including agreeing on categories of information or limited documentation necessary to exchange in advance of mediation and other ADR processes so that those processes are truly effective.[13]

When attending mediation, parties and their legal representatives must attend for the purpose of participating in good faith negotiations and must have the ability, in a practical way and with flexible instructions, to participate meaningfully in negotiations with a view to narrowing the issues in dispute and reaching a mutually acceptable resolution between them by way of compromise.[14]

The Taxation Practice Note, provides more targeted guidance to litigants in relation to tax proceedings by encouraging parties to consider the thoughtful and creative use of ADR techniques including mediation and confidential conferences for both substantive and procedural issues in resolving or streamlining tax cases. It further notes that parties should also consider the merits of the use of other ADR techniques particularly relevant to tax cases, such as "early neutral evaluation” where parties to a dispute present their respective arguments and evidence to a neutral evaluator, usually a legal practitioner, who seeks to assist in resolving the matter by identifying and limiting the issues of fact and law that are in dispute.[15] 

Conference of Experts/Joint Expert Reports

The Expert Evidence Practice note, read in conjunction with the Taxation Practice Note, provides guidance to litigants who seek the use of expert evidence.

The use of expert evidence in proceedings, often in relation to complex and technical subject matter, is for the court to receive the benefit of objective and impartial assessment of an issue from a witness with specialized knowledge.[16]

The Expert Evidence Practice note emphasizes that where it is considered that expert evidence will be required in a proceeding, at the earliest opportunity, parties should discuss and inform the Court whether a conference of experts and/or a joint report by the experts may be desirable to assist both parties and the Court in the giving of expert evidence in the proceeding.[17]

The Court may, in order to facilitate the proper understanding of the issues raised in expert evidence, require the experts who have produced reports or are to give evidence to meet for the purposes of identifying and addressing issues that are not in agreement with a view to reaching agreement where possible. This conference of experts may be facilitated in appropriate circumstances by a registrar of the Court.[18]

The purpose of a conference of experts is for the experts instructed in the proceedings to meet and have a comprehensive discussion through which they will identify matters of which they are in agreement in part or in full and to identify matter which they do not agree. Importantly the experts must provide detailed reasoning as to their conclusions in respect of the matters they are in agreement and disagreement so that the Court may adequately consider their views. As mandated, lawyers for the respective parties should not be in attendance at the conference of experts but will be provided with a copy of any conference report.[19] 

There are various circumstances where a Court may order that a conference of experts occur, including the following: while a case is in mediation, before experts have reached a final opinion on a relevant question or after the experts' reports have been provided to the Court but before the hearing of the experts' evidence.[20]

At the conclusion of the conference of experts, unless the Court deems it unnecessary to do so, the experts will provide a joint report in respect of issues of which they agree, partly agree or disagree.[21] The joint report should provide a summary of the views of experts, including concise explanations for the findings contained in the report including differences of opinion and is to be provided in the manner requested by the Court.[22] Relevantly the contents of any report prepared by an expert witness including any joint report should be in line with the guidelines set out in the 'Harmonized Expert Witness Code of Conduct'.[23]

In some matters the Court may determine that it is appropriate, with consideration given to the nature of the expert evidence for experts to be available at trial to give some or all of their evidence concurrently at the final (or other) hearing.[24]

In tax cases, parties can expect that the Court may consider it appropriate that expert witnesses prepare and file a joint report containing their views on the issues in dispute, with clear and concise explanations of any differences of opinion and the nature and significance of any such differences.[25] The Tax Practice Note states that it is intended that such a report, as a joint-report, will stand alone as the evidence of the experts in the proceeding without the need to refer to earlier reports or evidence from them.[26]

In tax proceedings where expert evidence is utilized, litigants should have regard to the recommendations proposed in the Tax Practice Note. In practice the use of the conference of experts and/or a joint expert report at the outset of proceedings is a consideration tax litigants should be mindful of. Further litigants must be mindful of the requirement that the expert should remain independent all times and not be seen as the party's advocate. Parties to a proceeding must avoid taking any action that can have a bearing, even a perceived one, on the experts independence and it is important to consider the nature of the communications with the expert while they are compiling their reports. Parties should ensure that all necessary documents and information are provided to experts at the outset, so that the report that is compiled is one of assistance in the determination of the case.  

Application of the Practice Note to Existing Proceedings 

To the extent practicable the new practice note applies to proceedings that commenced prior to its introduction and implementation. Consequently, parties to proceedings initiated prior to the issue of the new practice note must consider how the directions apply to those proceedings. An example of this can involve considering the use of various ADR mechanisms and issues in relation to expert evidence. 

As the use of expert witnesses may be relevant in the conduct of particular tax proceedings, regard should be had early in the proceedings to the guidelines contained in the tax and central practice notes in relation to a conference of experts and/or the use of joint expert reports where it is considered that the use of expert evidence is necessary. 

As a result all litigants who are, or may be likely to be involved in Federal Court tax proceedings are strongly advised to carefully consider the application of the Tax Practice Note and other related practice notes to the proceedings, particularly when making strategic decisions concerning procedural and evidentiary parameters of the dispute.