Alternative Dispute Resolution – now is the time to act

In the year ended, 30 June 2013, the ATO had a 32.4 percent increase in the number of cases settled by alternative dispute resolution (ADR) techniques.1  Maddocks Tax Controversy's experience, for the second half of 2013, is that this trend has continued to increase.

A profile of the cases settled in the year ended 30 June 2013 shows there were 339 cases settled with pre-settlement positions of $3,584 million2 and settled positions of $2,034 million, a variance of $1,530 million or a 43 percent discount on pre-settlement positions.3

The largest increase in settlements occurred in the small-to-medium enterprise segment, although there were a number of significantly large settlements for large business. The comparison for settlements in large business between 2011/12 and 2012/13 is noteworthy and demonstrates the large variances historically occurring in this segment.4

Click here to view table.

In the High Wealth Individual segment in 2012/13, 37 cases settled with pre-settlement positions of $418 million settling for 40 percent of that sum, at $171 milion. These figures are expected to be higher for 2013/14.

The alternative dispute processes utilised included:

  • early neutral evaluation
  • mediation by experts (e.g. valuers), retired judges or other accredited mediators
  • direct discussions or negotiations between parties
  • occasionally a blend of early neutral evaluation and mediation
  • independent jointly appointed experts.

The increase in the successful use of ADR follows the release of a report by the Inspector General of Taxation in July 2012, which was followed with the  launch of the ATO's dispute management plan in October 2012.   Two initiatives commenced by the ATO since then are:

  1. A pilot of in-house facilitators to aid negotiations between taxpayers and tax officers in less complex GST cases
  2. An independent review process for income tax disputes for large business, effective from 1 July 2013. Taxpayers must apply for this review within 10 days of receiving the ATO's position paper.

From the settlement matters we have been involved in we have observed that:

  • it is important for taxpayers to appreciate that the ATO does a full due diligence in arriving at a settlement position
  • taxpayers should undertake a pre-settlement due diligence with advisers, independent from those who structured and implemented the disputed transactions
  • the ATO settlement position is often a range
  • the settlement range for interest and penalties may be wider than for primary tax
  • the Commissioner appreciates that litigation risks exist and will reflect that risk in considering an appropriate settlement position (notwithstanding that the risk is one borne by both parties)
  • the ATO will only settle on a principled basis by applying the relevant legislative provisions to the particular facts and assessing strengths and weaknesses in respect of both the ATO and taxpayer's arguments and positions
  • global settlements will generally not occur
  • the ability of the ATO to recover the tax due is a factor that may be taken into account
  • factual disputes are often amenable to settlement
  • the Commissioner aims to apply his view consistently across taxpayers in respect of disputes that turn upon a point of interpretation, and where the Commissioner has an official view
  • repetitious, poor compliance behaviour of a taxpayer may mean settlements at the higher end or may preclude settlement
  • settlement of significant disputes will involve the ATO's senior executive
  • genuine engagement and transparency by both parties is key to productive settlement discussions and that adversarial behaviour is not productive
  • unlike public court hearings, settlement discussions and their outcome can be confidential
  • settlements can provide solutions which a court may not have the power to give, for example, agreements for future action.

From matters in the litigation phase before the Federal Court, in 2012/13, 22 matters were referred to Court Registrars for Court conducted mediation.5 We expect much higher figures for matters before the AAT but these are not available yet.   In May 2013, the AAT appointed an ADR Director for the first time, to focus on improving the Tribunal's ADR performance.   The ATO's focus in 2013/14 will be on settling debt disputes

Following the ATO's statement that settling disputes will be a key focus during 2013/14, the Commissioner will shortly release the next version of his report titled "Your Case Matters". This will provide more insight into the ATO's use of ADR in the 2012/13 year.   In the meantime, if your client has a matter suitable for settlement, now may be the time to consider it.