TaxTalk—Insights Tax Controversy & Dispute Resolution Parliamentary Committee recommends fairer ATO processes and an independent Appeals area 1 April 2015 In brief On 26 March 2015, the House of Representatives Standing Committee on Tax and Revenue (the Committee) released their report on tax disputes. The report included 20 recommendations and followed a 10 month inquiry process that considered 34 submissions and 9 days of public hearings. The Committee’s main finding from the inquiry is that while the Australian Taxation Office (ATO) is a well-run, highly professional organisation, and the vast majority of tax disputes are handled in an appropriate and fair manner, some taxpayers have not been treated fairly by the ATO during their dispute. The most significant recommendation was for the establishment of a separate Appeals area within the ATO under the leadership of a new Second Commissioner. The Appeals area would be responsible for all ATO independent reviews, objections and litigation functions. The Committee believes that changes to ATO practices are warranted in addition to the reforms that the Commissioner is already undertaking. Other significant recommendations of the Committee were in relation to improved audit processes, particularly in relation to information requests, more leniency in relation to interest charges, and better handling of ATO claims of taxpayer fraud or evasion. If implemented, the recommendations will collectively promote fairer processes that lead to more effective resolution of tax disputes, with fewer issues proceeding to litigation. Why was this inquiry conducted? The inquiry was established to review the way in which the ATO handles tax disputes. Stakeholders and taxpayers had expressed concerns that the ATO does not always use its powers in a judicious manner and does not always treat taxpayers fairly. The Committee accepted that the ATO needs strong powers to administer the tax system, but questioned how these powers are applied in tax disputes and whether taxpayers feel that they are being treated fairly and with respect. The Committee acknowledged that there had already been improvements in the way in which the ATO handled tax disputes. Chris Jordan, the relatively new ATO Commissioner, had already embarked on a project of reinventing the ATO – and the way in which the ATO manages tax disputes is one of his key focus areas. Over recent years under his direction, the ATO has focused on dispute prevention, early resolution, and alternative methods for resolving matters – like mediation, direct conferencing, use of independent facilitators and sensible settlement. Stakeholders and taxpayers have acknowledged the positive impact of the new approaches, but there is wide agreement that more work needs to be done. The terms of reference and the Inspector General of Tax At the time the inquiry commenced in June 2014, the Committee requested that the Inspector General of Tax (IGT) undertake an inquiry into tax disputes for large businesses and high wealth individuals. This left the inquiry to focus on tax disputes for individuals and small to medium enterprises. The IGT conducted his review and provided his report to the Assistant Treasurer, who in turn publicly released the report on 27 February 2015. The views of the Committee and the IGT across many areas of the inquiry were broadly similar. The primary recommendation: a new, dedicated Appeals area The Committee and the IGT were aligned in recommending a new Second Commissioner be appointed to lead a separate and dedicated Appeals Group within the ATO. This was also consistent with the recommendations made in the PwC submission. The Appeals area would be dedicated to all objections and litigation functions, operating under clear independence protocols regarding communication between appeal officers and compliance officers. The new area and Second Commissioner would be empowered to independently assess and determine whether matters should be settled, litigated or otherwise resolved. The Committee believes that a separate Appeals area would address the single biggest criticism of the previous ATO approach to objections and appeals – that it was overly influenced by its location within business lines and its proximity to and contact with ATO compliance officers (auditors). It predicts that a new area will build a culture of independence and resolve the numerous other taxpayer concerns around fairness of process. PwC considers this recommendation by the Committee to be both sensible and important. Its adoption would allow a new ATO area to independently consider disputes in a structure that enables the building of a specialist and dedicated team of ATO officers. Our experience tells us that tax disputes can be very complex, and there is a myriad of factors to consider when managing a dispute. Having a dedicated and separate ATO Appeals area would allow the development of knowledge, skill and experience over time and would allow a fresh and impartial view of disputes earlier in the process. We believe this will help taxpayers feel they are being treated fairly by the ATO during a tax dispute, and will lead to better outcomes for taxpayers and also the ATO. The ATO’s response From the outset, the ATO welcomed the Committee’s focus on the management of tax disputes and emphasised its new focus on resolving disputes as early as possible, in a way that is efficient, respectful and fair. The ATO provided a comprehensive submission to the inquiry (and three supplementary submissions) as well as attending numerous days of the public hearings. During the inquiry, the ATO clearly indicated its support for the idea of further separation of the disputes function within the ATO, but did not believe that doing this by legislation and adding a Second Commissioner position was the most effective and efficient means of delivering the best outcomes for government and taxpayers. In the ATO’s preliminary response to the report, it acknowledges the findings that while the ATO is a professional organisation, historically a very small number of disputes have been dealt with poorly. The ATO also notes the positive feedback and reports of change that were presented to the Committee as evidence that the ATO’s improvement strategies for effective and fair dispute resolution are working. The ATO will be examining the report in further detail and making a formal response. Summary of recommendations Chapter Category # Recommendation Chapter 2: Performance and reporting Key Performance Indicators (KPIs) 1 The ATO should develop and report against a KPI measuring taxpayer ‘perceptions of fairness’ in tax disputes. Chapter 3: The legal framework Late interest charges 2, 3 Laws and processes should be amended so that interest charges cannot be used as leverage against taxpayers during disputes. Automatic interest remission should apply when the ATO takes longer than 60 days to finalise an objection or the ATO changes its arguments postassessment. Findings of taxpayer fraud or evasion 4 - 7 Findings or suspicion of fraud or evasion should only be made by an ATO Senior Executive Service officer. Allegations should be addressed as soon as practical during review or audit. For fraud, allegations should require clear evidence. The burden of proof should be placed on the ATO for allegations of fraud and evasion after record keeping requirement timeframes have lapsed. Departure Prohibition Orders (DPOs) 8 Judicial approval should be required for the Commissioner to issue a DPO. Model litigant rules 9, 10 The ATO should better communicate with taxpayers what the model litigant rules require of the ATO. The ATO should develop best practice standards in complying with the model litigant rules. Small Taxation Claims Tribunal 11 The necessity of the Small Taxation Claims Tribunal should be reviewed. In any case, the $5,000 limit should be increased. Chapter 4: Readiness to engage Alternative Dispute Resolution (ADR) 12 The ATO should consciously and more frequently engage in conferences with taxpayers at multiple stages throughout dispute and consider ADR. Information requests 13 Information requests should include reasons and the ATO’s risk hypothesis. A minimum of 28 days should apply for all requests and taxpayers should have an opportunity to seek an extension. Early escalation procedures 14 Early in a dispute, matters should be capable of escalation to senior ATO officers. Chapter 5: Other administrative matters Formal interviews 15 The ATO should give notice of issues and questions to be raised in interviews. Compensation 16 The ATO should improve its compensation processes, liabilities and amounts. Chapter 6: The governance framework Independence processes 17, 18 Information passed between an auditor and an objection officer surrounding a dispute should only consist of the factual case documents and the audit conclusion. Individual Tax Counsel Network officers should only provide advice at the audit or objection stage of a dispute, not both. Separate Appeals area 19, 20 The ATO establish a separate Appeals area under the leadership of a new Second Commissioner to carry out the objection and litigation function for all cases. Clear protocols should be established regarding communication between Appeals officers and Compliance officers. The appeals function should independently assess and determine whether matters should be settled, litigated or otherwise resolved. The Committee’s other findings and recommendations Overall In most respects, the Committee’s findings were similar to those of the IGT. With the preface that tax disputes are an unavoidable feature of our tax system, the Committee identified a number of trouble spots with current ATO procedures. The Committee recommended changes in relation to audit independence processes, imposition of interest charges, claims of taxpayer fraud or evasion, implementation of model litigant rules, information requests and early resolution. The Committee’s recommendations had the uniform theme of ensuring a sense of fairness is experienced in tax disputes. Although a number of concerns were raised in the report, it is also important to consider the areas acknowledged by the Committee. The report recognised ATO efforts in pursuing early engagement, Alternative Dispute Resolution (ADR) and independent review procedures. The Committee expressed the sentiment that most ATO disputes are handled fairly, however recognised that when taxpayers are not treated fairly, the consequences can be severe and taxpayers have limited recourse. It is within this context that the Committee provided the following recommendations for improvement. KPIs measuring ‘fairness’ The Committee recommended that the ATO implement measurable KPIs based on ‘taxpayer perceptions of fairness in tax disputes’ that are measured by the ATO regularly and reported in the ATO Annual Report. The ATO indicated its agreement on this recommendation during a public hearing of the Committee. This measure should help to ‘level the playing field’ in tax disputes. Traditionally, taxpayers have faced the majority of the risks, costs and burdens associated with tax disputes. The adoption of this recommendation will mean that the ATO would measure and be much more cognisant of unfair taxpayer treatment. Remission of interest when the ATO causes delay The Committee recommended that the Government and ATO adopt measures so that interest charges do not act as leverage against a taxpayer during a tax dispute. The Committee recommended that the ATO amend its guidance so that it remits interest where its officers take longer than 60 days to finalise an objection or the ATO changes arguments after assessments have been made (such as during an objection or litigation). In reaching this recommendation, the Committee referred to comments by PwC about eliminating interest charges as a ‘point of leverage’. The recommendations included introducing clearer standards about timeframes for remission decisions, converting all interest charges to Shortfall Interest Charges (which is at a lower rate than General Interest Charges), and providing the ATO the power to remit or increase interest based on taxpayer conduct. We believe these recommendations are fair and should provide taxpayers with additional certainty about penalties during disputes. Lower interest rates for cooperative taxpayer behaviour, or higher rates for uncooperative behaviour, will also assist in fostering a collaborative and open relationship during disputes. The statutory remission of interest where the ATO is causing delays should also encourage the quicker resolution of tax matters. Restrictions when alleging fraud or evasion The Committee recommended that: only Senior Executive Service officers should be capable of a finding or suspicion on fraud or evasion the ATO may only make allegations of fraud where evidence of fraud clearly exists the ATO should ensure that allegations of fraud or evasion are addressed as soon as practicable in an audit or review, and the burden of proof should be placed on the ATO in relation to allegations of fraud and evasion after the record keeping requirement dates have lapsed. The Committee made these recommendations after it observed some examples of inappropriate ATO allegations of fraud or evasion. The Committee recognised the seriousness of such allegations, and stressed that such allegations should not be taken lightly. It emphasised the need for senior ATO officers to specifically turn their minds to the evidence supporting the allegation, and resolve any fraud or evasion allegation early in an audit (where possible). This is especially important for ‘aged tax assessments’, where the ATO is out of time to amend a taxpayers’ assessment under normal provisions, however has an unlimited review period if an allegation of fraud or evasion is sustained. Requirements for ATO information requests The Committee recommended that ATO information requests should provide: a minimum 28 day response timeframe taxpayers an opportunity to seek extensions upon receipt, and reasons for the information request, typically a risk hypothesis. In making this recommendation, the Committee referenced submissions by PwC about the ATO’s occasional ‘scattergun’ approach to information gathering via extensive and multiple information requests without transparency or engagement. The Committee anticipated that its recommendation will ensure ATO officers ‘stay their course’ and limit information gathering to issues that were identified during risk profiling procedures. This recommendation will also allow parties to more quickly get ‘to the heart’ of the dispute and reach an efficient resolution. The takeaway The recommendations made by the Committee will collectively promote a more diligent process for taxpayers and the ATO. Many of the recommendations will prompt the ATO to go further with the reinvention of dispute management and to continually focus on processes that are fair for taxpayers. Parliament and the ATO will now have an opportunity to consider the Committee’s recommendations. We anticipate most recommendations will be adopted over time, positively impacting the strategy and procedure of future tax disputes of all taxpayers. Let’s talk For a deeper discussion of how these issues might affect your business, please contact: Michael Bersten +61 (02) 8266 6858 firstname.lastname@example.org Judy Sullivan +61 (02) 8266 0197 email@example.com Ashley King +61 (03) 8603 1363 firstname.lastname@example.org © 2015 PricewaterhouseCoopers. 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