On Friday 27 February, the Assistant Treasurer released a report by the Inspector-General of Taxation (IGT) on The Management of Tax Disputes. The IGT report recommends structural change within the Australian Taxation Office (ATO) through the creation of a separate internal Appeals Group that would be dedicated specifically to managing tax disputes. The group would be available to all taxpayers and its involvement would start even prior to the issue of amended assessments. The group would also handle objections and litigation on behalf of the ATO.
An Appeals Group for all taxpayers
Although the IGT report on The Management of Tax Disputes was prepared to assist with large business and high wealth individual themes in the House of Representatives Standing Committee on Tax and Revenue’s Inquiry into Tax Disputes, the recommendation is not confined to particular classes of taxpayers and would be applicable to all disputes handled by the ATO. If the recommendation is implemented, all taxpayers would have access to pre-assessment reviews, which are currently limited only to large business taxpayers. Pre-assessment reviews, which are a relatively new feature of the ATO disputes process, are currently conducted after the ATO issues its position paper, but prior to the issue of amended assessments. These reviews often act as the first circuit breaker in large business taxpayer disputes and were a welcome change for taxpayers who were able to access this process.
Concerns with the current disputes process
The recommendation for a separate Appeals Group was spurred by concerns about the independence of the ATO’s current review processes and in particular the extent of the influence or purported influence arising from “the present system [being] too dependent on the views and ideals of ATO senior executives of the day.” Additional checks and balances were found by the IGT to be necessary in order to bring the ATO in line with taxation authorities in comparable jurisdictions:
The underlying cause of the concerns raised, with respect to the ATO’s management of tax disputes, is a lack of independence between its original decision makers and its officers reviewing such decisions upon the taxpayer’s request. Arguably, the ATO has had the least amount of separation between these functions when assessed against revenue authorities of comparable jurisdictions. It is, therefore, not surprising that many taxpayers felt that their cases were not being independently reviewed and that the system was not treating them fairly and equitably.
The IGT has recommended a legislatively created separate Appeals Group within the ATO, to be headed by a new and dedicated Second Commissioner, responsible for managing tax disputes for all taxpayers:
To bolster the actual and perceived independence of the proposed Appeals Group, it would be ideal for its officers to be recruited from outside the ATO… However, the IGT acknowledges that in the short term this may not be possible....
The Appeals Group would be involved in pre-assessment reviews, objections, litigation and alternative dispute resolution (ADR). Its functions would include identifying test cases and providing oversight on settlements, as well as facilitating the use of ADR to increase the efficiency of dispute resolution and to minimise instances of unnecessary litigation.
The IGT report also recommends “establishing a framework for the development of communication protocols between the Appeals Group and other areas of the ATO to ensure that the Appeals Group is, and is seen to be, independent in its dispute resolution function.”
If the IGT recommendations are adopted by the Government, the Appeals Group would review the decisions of the compliance team and would sit independently alongside the “law design and practice” and “compliance” groups. This structure would be an improvement over the current ATO structure and would bring Australia’s tax system broadly in line with its peers in the United States, Canada and New Zealand.
Although its brief would include all taxpayer disputes, we anticipate that an Appeals Group would focus on specific high value disputes (such as highly technical large business disputes) and on classes of disputes with similar fact patterns that could benefit from a consistent approach to difficult questions of law. Under this model, the Appeals Group would require technically strong leadership with significant experience in disputes. The proposed model has clear benefits not only for taxpayers, but also for the ATO compliance team which would itself be strengthened by having a strong internal Appeals Group as opposed to the other alternative considered by the IGT: Creating an entirely independent agency to manage tax disputes.