ATO disputes [First edition.] 9781925554571, 1925554570

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Disclaimer No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

About Wolters Kluwer Wolters Kluwer is a leading provider of accurate, authoritative and timely information services for professionals across the globe. We create value by combining information, deep expertise, and technology to provide our customers with solutions that contribute to the quality and effectiveness of their services. Professionals turn to us when they need actionable information to better serve their clients. With the integrity and accuracy of over 45 years’ experience in Australia and New Zealand, and over 175 years internationally, Wolters Kluwer is lifting the standard in software, knowledge, tools and education. Wolters Kluwer — When you have to be right. Enquiries are welcome on 1300 300 224. Cataloguing-in-Publication Data available through the National Library of Australia First edition..................October 2017 ISBN 978-1-925554-57-1 © 2017 CCH Australia Limited All rights reserved. No part of this work covered by copyright may be reproduced or copied in any form or by any means (graphic, electronic or mechanical, including photocopying, recording, recording taping, or information retrieval systems) without the written permission of the publisher.

Foreword “In this world nothing can be said to be certain, except death and taxes.” Letter from Benjamin Franklin to Jean Baptiste Le Roy, November 13, 1789 True certainty, as recognised by Benjamin Franklin when writing about the durability of the new American constitution is fleeting and abstract, unknowable in life apart from the expectation of death at the end and taxation up to that point. Death is a consequence of life and taxation is a cost. However, although the expectation of taxation is absolute, there is no equal expectation that the task of taxation will be simple, fair, efficient or unchallenged. Unlike death, the ability of individuals to challenge taxation decisions (whether due to differing interpretations of the law, facts or both) makes it unique and illustrates that while taxation is certain, tax disputes are not only inevitable, they are mandatory. That said, the management of tax disputes can be as creative or unique as the law and policy of the relevant revenue authority allows. Revenue authorities generally have similar dispute management systems which are outlined in legislation

(such as review, appeals and external review via the judicial system). This law is usually refined by policy to ensure the disputation process is cheaper, quicker and more flexible to suit the needs of the parties. In addition to the clear economic benefits of such an approach, it may also assist the revenue authority and the taxpayer in various ways by opening the lines of communication and rebuilding working relations. The purpose of this book is to create a single point of reference for Australian tax disputes, outlining the end to end process of disputation (including litigation). This will also cover the mandates of the relevant legislation and the policy approach of the Australian Taxation Office to dispute resolution and settlement. It will also review relevant strategies that may be used to avoid, minimise, resolve and settle tax and tax related disputes. Andrew Johnston October 2017

Wolters Kluwer Acknowledgments Wolters Kluwer wishes to thank the following who contributed to and supported this publication: Managing Director — Knowledge & Software Solutions: Michelle Laforest Director — Commercial & Strategy: Lauren Ma Head of Content — Tax, Accounting & Superannuation: Diana Winfield Head of Publishing & Digital Strategy: Lilia Kanna Content Coordinator: Hui Ling Lee Editor: Jackie White Marketing & Communications: Eric Truong Cover Designer: Jessica Crocker

About the Author Andrew Johnston has over 15 years’ experience as a tax lawyer in Australia, specialising in resolving tax disputes by negotiation, litigation and alternative dispute resolution (ADR). Since October 2016, Andrew has been on secondment with Wolters Kluwer as a senior taxation writer, working on numerous key products including the Australian Master Tax Guide, CCH iKnow, Australian Corporate Practice Manual, Australian Capital Gains Tax Planner and the Australian Federal Tax Reporter. He also works as a casual academic for Charles Sturt University (administrative law and torts). As a tax lawyer he has occupied a number of senior positions with the Australian Taxation Office (ATO), including Principal Lawyer, National Technical Adviser, ADR Manager and most recently as the Director of Dispute Resolution Strategies. In these roles he has managed complex tax litigation in all Australian jurisdictions (including the High Court), drafted the ATO policy on ADR (including the ATO Plain English Guide to ADR) as well as leading the ATO pilot on in-house facilitation, prior to implementing it as a business as usual process. In 2010, Andrew was awarded the Commissioner of Taxation’s postgraduate scholarship to study a Masters of Law (Dispute Resolution) at the University of NSW. Andrew is a solicitor of the Supreme Court of NSW, an NMAS Accredited Mediator and a professional member of the Resolution Institute. He has also served for two years on the NSW Law Society Alternative Dispute Resolution Committee and since 2015 has served on the committee of Voluntas, an organisation providing volunteer mediation services to resolve disputes in the volunteer sector. He holds a Bachelor of Laws (Honours) with the University of Technology, Sydney and both a Masters of Taxation Law and a Masters of Dispute Resolution with the University of NSW. He can be followed on LinkedIn at linkedin.com/in/andrew-johnston-b1167abb.

Author’s Dedication I dedicate this book to my beautiful daughter, Scarlett.

The disputes process Introducing the disputes process

¶1-010

The change from full assessment to self-assessment

¶1-020

Evolution of the ATO decision review process

¶1-030

The current taxation disputes process — a brief outline of Pt IVC ¶1-040 Part IVC compared to the previous system

¶1-050

Reviewing and improving the disputes system

¶1-060

Example of a tax dispute

¶1-070

Part IVC — Disputing a tax decision — Flowchart

¶1-080

¶1-010 Introducing the disputes process “The hardest thing in the world to understand is the income tax.” Albert Einstein, physicist 1 The Australian taxation system sets out a comprehensive regime for the resolution of tax disputes under Tax Administration Act 1953 (TAA) Pt IVC. In addition to this, the Australian Taxation Office (ATO) has implemented various policies that its staff are obliged to follow, which interpret and provide guidance as to how the ATO will apply this legislation. Although this chapter concentrates on the formal process for challenging tax liabilities, it is important to note that the legislative regime does not account for all types of dispute involving the Commissioner of Taxation, which can lead to confusion and anomalies as different types of disputes fall outside this process and will each be reviewed in turn: • complaints (Chapter 9) • debt recovery and insolvency (Chapter 7) • judicial review (Chapter 6), and • freedom of information (Chapter 3). It is important to recognise that invariably disputes will involve numerous elements and complexities, meaning that an appreciation of the entire tax disputation framework (including how the current system has developed) is essential when attempting to understand, prevent, engage and resolve disputes with the ATO. Equally it is important to understand that the taxation laws in Australia (despite the desires of some) do not operate in an independent parallel legal vacuum, where tax disputes are only decided by tax courts (the Australian Constitution specifically accounts for this)2. Therefore tax law, although complex, is not “special” and is interpreted in the same manner as any other law made by the Australian Government and is similarly subject to influence from other relevant laws (such as the Public Service Performance and Accountability Act 2015 and the Attorney-General’s Legal Services Directions 2005, issued pursuant to the Judiciary Act 1903 s 55ZF). In this context, the formal tax disputation process will be analysed, from its origins to its present day application. This is particularly important to note because the Commissioner of Taxation is subject to the “rule of law”3 (as established by the Australian Constitution)4, which means that he must not only apply the law, he is also subject to it.5

Finally, the ATO administers a wide variety of taxes in addition to the superannuation system. Although the disputes are broadly similar for all, for the sake of simplicity and consistency, this text primarily addresses the income tax system (unless stated to the contrary). Footnotes 1

Internal Revenue Service, Tax Quotes (23 September 2016) .

2

Michael Kirby, “Down with Hubris! A Message on Tax Reform for Australian Tax Specialists” (Paper presented at The Institute of Chartered Accountants in Australia National Tax Conference, Melbourne, 7 April 2011) 15.

3

Commonwealth Attorney-General’s Department, Rule of Law (28 November 2016) .

4

Australian Communist Party v The Commonwealth (1951) 83 CLR 1.

5

Geoffrey de Q Walker, The rule of law: foundation of constitutional democracy, Melbourne University Press, 1988.

¶1-020 The change from full assessment to self-assessment The era of full assessment Tax disputes, along with the entire Australian taxation system, changed significantly in 1986 when it shifted from full assessment to self-assessment. Full assessment involved ATO assessors reviewing each return, applying the law to the facts provided and then issuing an assessment.6 Disputes could only occur if the ATO amended the return because it subsequently established that either the taxpayer had not provided all of the facts or they objected to an original (or amended) assessment. Objections were decided within the ATO and if a taxpayer was still unsatisfied with the decision, they could appeal to the “Taxation Boards of Review”. The Boards could refer matters to the State Supreme Courts to consider questions of law. Taxpayers could also appeal directly to the State Supreme Courts to determine the dispute de novo (from the beginning).7 In turn, the full assessment system limited the possibilities for disputation as the ATO was (albeit in an increasingly limited fashion) verifying the facts and applying the law to every taxpayer’s individual return every single year. As long as a taxpayer provided all relevant information to the ATO, upon receiving their notice of assessment they could be assured that there would be no dispute (unless they wished to challenge the assessment themselves). The full assessment process ensured disputes were minimised by the ATO front loading its efforts into the assessment process. In this system, the ATO carried dual burdens: making decisions on each return as to how the law operated in each particular factual matrix, and the labour burden, where a large workforce struggled to manage increasing tax returns (both in number and complexity). “By far the biggest change of the 1980s was the introduction of self-assessment in 1986, revolutionising the ATO. Assessing was at the heart of the ATO and everything including its training, advancement, social structure and culture had been built around it. However, assessing had become unsustainable by the mid 1980s, in 1984–85 the ATO received 9.03 million income tax returns and assessors were doing little more than giving each return a cursory examination in order to keep up.”8 As became clear, full assessment was no longer possible nor practical. Assessors were only giving each return the slightest attention and were struggling with the amount of work expected and concentration required of them. The full assessment system had reached the end of its lifespan as it was unsustainable. A working group considering the problem came to the conclusion that full assessment was inefficient,

ineffective as a deterrent and the assessors were unhappy.9 The move to self-assessment Change needed to occur and the first tranche of that change was the introduction of self-assessment from 1 July 1986. The move to self-assessment changed the relationship between the ATO and taxpayers significantly. The risk shifted from the ATO to the taxpayer to apply the law to the facts and make the right decision at assessment. This allowed the ATO to accept tax returns without review and shift its assessors into audit and investigation. The key was to ensure taxpayers complied voluntarily and this was achieved by selective auditing, whereby the ATO publicised that it was catching those evading tax, ensuring that people did their best to comply upfront.10 Self-assessment brought new importance to the “Notice of Assessment”. Although most taxpayers were happy with their assessment upfront (unless they had made a mistake), if they were audited and an amended assessment issued, they could object to the assessment under the Income Tax Assessment Act 1936 (ITAA36) s 175A. This in turn gave the taxpayer the right to dispute a tax liability under TAA Pt IVC, and established a comprehensive regime for objecting to a Notice of Assessment and appealing against an unfavourable decision. Self-assessment resulted in an immediate reduction in objection numbers, allowing the ATO to shift staff into the critical areas of investigation, audit and advice. Footnotes 6

ATO, Working for all Australians 1910–2010 (2010) 38.

7

IGT, Review of the Management of Tax Disputes (2015) 5.

8

ATO, Working for all Australians 1910–2010 (2010) 161.

9

Ibid, 161–162.

10

Ibid, 168.

¶1-030 Evolution of the ATO decision review process Dispute resolution under the full assessment regime Prior to the introduction of self-assessment, the ATO could only amend an assessment if the taxpayer had not provided sufficient facts with their return. In turn, taxpayers could only object to either the original or amended assessments.11 Objections that turned on the “facts” were managed by the original ATO assessor, while objections that turned on the “law” were sent to another section of the ATO called “appeals”.12 The objections process was complex, lengthy and convoluted. At its simplest, objections limited to the facts were managed by the original assessor, who if upon reviewing found they had made a mistake, they would correct the error and amend the assessment. However, if the issue was not limited to the facts and relied on legal interpretation, the dispute was referred to the appeals section and then the process really slowed down.13 When the dispute was referred to the appeals section because it turned on the legal interpretation of the tax law, the dispute was written up in detail by the original assessor and sent to “Head office for further consideration”. This was a costly and time-consuming process. The appeals area would either concede, settle by negotiation or continue the dispute (ultimately either at the Board of Review or in court). However, the appeals section was very cognisant of the fact that any adverse decisions would create a

precedent that would shape the tax law for the future and potentially erode the tax base. Accordingly, a great deal of thought went into the selection of any disputes that were to be contested.14 In the four years between 1970 and 1974, objections more than doubled from 8,18215 to 18,63316, creating significant stresses on the ATO, courts and Board of Review. Establishing the Board of Review From the establishment of the ATO (as it is presently known) in 1910 to administer only land tax under a Commissioner of Land Taxation, disputes have been a common theme. Initially, taxpayers who were unhappy with the Commissioner’s decision could take the matter to court for a de novo hearing. However, as still occurs, the process was expensive and long, with uncertain results. To address this, in 1922 a Board of Appeal for income tax was established to take the pressure off the judicial system and provide quicker and cheaper decisions.17 To be an enduring solution, the Board of Appeal needed to be able to withstand a High Court challenge to its constitutional validity. This challenge invariably came in British Imperial Oil Co Ltd v FC of T (1925) 35 CLR 422, where the High Court found that the Board was unconstitutional because judicial power was given to a non-judicial body (to be a judicial body, the members of the Board would need to be appointed as justices for life subject only to s 72 of the Constitution).18 The key reason for this was that the Board stood as a decision maker above the Commissioner, which gave it judicial power. This spelt the end for the Board of Appeal and all appeals then went back to the slow and expensive courts. Not to be deterred, in 1925 the Australian Government passed legislation to create a new body for the review of taxation decisions, to take the pressure off the courts and make the process quicker and cheaper. This new body was constituted as the Board of Review, which in reality was identical to the Board of Appeal, but had one key difference — the Board stood in the Commissioner’s shoes as delegate. This important change meant that the Board was not exercising judicial power, rather it was only exercising the Commissioner’s administrative power and would withstand the expected constitutional challenge. The challenge came in Shell Co of Australia v FC of T [1931] AC 245, where the Privy Council agreed that the Board’s decisions were not judicial and therefore the Board of Review was constitutional. Following on from the success of the Board of Review, in 1929 valuations boards were established to reduce the costs and delays associated with appealing land tax decisions in court.19 As neither board was exercising judicial power, any taxpayer that was unhappy with the decision of either board could still appeal to the court on a question of law (or bypass the board to have their matter heard by the court de novo), albeit accepting the additional cost, time and risk associated with proceeding along that path. Moving to the Administrative Appeals Tribunal However, the appeals process was still too slow, with 100,000 appeals awaiting finalisation in 1985.20 This was negating much of the benefit of having a Board of Review, so in 1986 the boards were dismantled and their jurisdiction transferred to the Administrative Appeals Tribunal (AAT)21, with the jurisdiction of the State Supreme Courts moved to the Federal Court of Australia on 1 September 1987.22 These changes, along with self-assessment and a renewed focus on making the right decision on objections and appeals the first time, and communicating them better, assisted the ATO in reducing its outstanding number of appeals from 100,000 in 1985 to approximately 32,000 in 1989.23 About the AAT The Administrative Appeals Tribunal Act 1975 (AATA) commenced on 1 July 1976. Until this time the review of government administrative decisions was fragmented, inconsistent and not accessible to most.24 The review of government decisions could only be done via parliament (by changing the law), courts (deciding on the legality of the decision) or specific purpose bodies (such as the Board of Review). Each of these bodies had their own bureaucracy, inconsistencies, performance measures and were largely unknown by the public.25 It was decided to create a single general forum that could provide a “merits review” for a range of administrative decisions (a world first).26 The AAT is somewhat unique in that it has always had key objectives that guide its conduct while implementing its core purpose of conducting a “merits review” of government administrative decisions (see further at ¶5-090).

Key objectives of the AAT The key objectives of the AAT as they currently stand are outlined in AATA s 2A: “In carrying out its functions, the Tribunal must pursue the objective of providing a mechanism of review that: (a) is accessible; and (b) is fair, just, economical, informal and quick; and (c) is proportionate to the importance and complexity of the matter; and (d) promotes public trust and confidence in the decision-making of the Tribunal.” Prior to 2014, the key objectives simply stated that the AAT had to abide by para (b) above. Although there has been no judicial guidance on these provisions since then, the High Court has provided direction on the effect of the previous provisions, stating that the objectives are only “intended to be facultative, not restrictive. Their purpose is to free tribunals, at least to some degree, from constraints otherwise applicable to courts of law, and regarded as inappropriate to tribunals”.27 Although s 2A in its prior form was interpreted by the AAT to be limited to procedural matters,28 the High Court gave some pertinent guidance about case management generally in Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27, impressing that although parties are to be given the opportunity to present their case, it is appropriate for limits to be placed on the leniency allowed and those limits are to be guided by ensuring the time and cost involved is kept to a minimum. In addition to this, the AAT places shared responsibility for achieving s 2A objectives on the ATO and the taxpayer,29 meaning that although the objectives in s 2A are to some extent aspirational, they are required of the AAT by law and in turn, of the parties to a taxation dispute by the AAT. Accordingly, parties should expect their cases in the AAT to be managed in accordance with the principles outlined in s 2A and to be aware that it is in their mutual best interests to manage their cases accordingly. The most beneficial use of this objective (given there is disagreement on when a breach would occur and the recourse for any breach) is to be proactive with regard to what is in your control. This means to progress your dispute as quickly and efficiently as possible, in a manner appropriate to the nature of the dispute, and approach the AAT for appropriate orders if the dispute is not progressing in a manner intended by the legislation. The second key element with regard to how the AAT reviews its decisions (including tax) is that it conducts what is commonly known as a “merits review”, or what is commonly referred to as reaching “the correct or preferable” result.30 This goes further than deciding on “legal error” (as is the purview of the courts), but also allows the AAT to review the discretionary matters before the original decision maker. In addition to this, the AAT is empowered by the AATA to stand in the shoes of the original decision maker and affirm, vary or set aside and substitute its own decision using “all the powers and discretions that are conferred by any relevant enactment on the person who made the decision”. It is this power to stand in the shoes of the decision maker that makes the AAT so important generally, but specifically in the context of tax disputes as it allows the AAT to review the entire decision of the Commissioner and change that decision if that is the correct outcome. This is a wider scope than given to the Federal Court (which can only review the legal correctness of the decision, not the merits) in what is hopefully a much quicker, cheaper and less formal forum. It is the element of standing in the decision maker’s shoes (not above the decision maker) that also allows the AAT to withstand constitutional challenge and stand as a unique administrative tribunal (with general jurisdiction and no international peer).31 Role of the Federal Court The final avenue of review is directly to the Federal Court which is able to look at whether the decision was made correctly at law. As outlined above, this is a much narrower scope for review than what is provided by the AAT, the benefit for which is limited to very distinct disputes (discussed in more detail in Chapter 6). Unifying the process for tax disputes — TAA Pt IVC

The final legislative change towards creating the current tax disputation framework was the enactment of TAA Pt IVC, which sets out a complete framework for disputing taxation decisions made (or a failure to make) under a Commonwealth Tax Act. Part IVC was enacted by the Taxation Laws Amendment Act (No 3) 1991 and commenced on 1 March 1992. Until this time, each individual Commonwealth Tax Act contained its own procedures for disputing taxation decisions, including applying to the AAT or appealing to the Federal Court. This change unified the process for tax disputes, ensuring consistency and greater simplicity by reducing the amount of legislation covering this single area. Footnotes 11

IGT, Review of the Management of Tax Disputes (2015) 5.

12

ATO, Working for all Australians 1910–2010 (2010) 148.

13

Ibid.

14

Ibid.

15

Australian Taxation Office, Annual Report 1970–71, 6.

16

Australian Taxation Office, Annual Report 1973–74, 10–11.

17

ATO, Working for all Australians 1910–2010 (2010) 42.

18

British Imperial Oil Co Ltd v FC of T (1925) 35 CLR 422, at 432–433.

19

ATO, Working for all Australians 1910–2010 (2010) 42.

20

Ibid, 168.

21

IGT, Review of the Management of Tax Disputes (2015) 6.

22

Jurisdiction of Courts (Miscellaneous Amendments) Act 1987.

23

ATO, Working for all Australians 1910–2010 (2010) 168.

24

Dennis Pearce, Administrative Appeals Tribunal (LexisNexis Butterworths, 4th ed, 2015) 1–2.

25

Ibid.

26

Garry Downes, “Reasonableness, proportionality and merits review” (Speech delivered at the NSW Young Lawyers Seminar Issues of Administrative Law, Sydney, 24 September 2008) .

27

Minister for Immigration and Multicultural Affairs v Eshetu [1999] HCA 21, 49.

28

Re Pescott and Inspector-General in Bankruptcy [2013] AATA 680, 70.

29

Administrative Appeals Tribunal, General Practice Direction, 30 June 2015, 2.5–2.6.

30

Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577, 589.

31

Garry Downes, “Reasonableness, proportionality and merits review” (Speech delivered at the

NSW Young Lawyers Seminar Issues of Administrative Law, Sydney, 24 September 2008) 10–11.

¶1-040 The current taxation disputes process — a brief outline of Pt IVC The three measures of a successful taxation system are fairness, efficiency and simplicity. The same measures stand for taxation disputes and the many and sometimes rapid changes that have occurred (and to some extent still occur) were mostly aimed towards achieving this balance. A slow disputes process is not efficient, a complex one is not simple, and a system that favours one taxpayer over another will never be fair. These principles offer an objective measurement as to whether the current disputes process meets its objectives and whether it is more effective than the previous system. Part IVC of the TAA came into effect on 1 March 1992 and since that time has outlined the objection, review and appeal processes for taxpayers who are unhappy with their tax decision or private ruling (or the failure of the ATO to make a decision). For the purposes of Pt IVC, a “tax decision” includes an assessment, determination, notice or decision.32 Prior to Pt IVC, various different Tax Acts (including ITAA36 and the Fringe Benefits Tax Assessment Act 1986) contained their own independent disputes procedure adding unneeded complexity to the regime. Part IVC is divided into five divisions: (1) Division 1 — Introduction (s 14ZL to 14ZP) (2) Division 2 — Definitions (s 14ZQ to 14ZT) (3) Division 3 — Taxation objections (s 14ZU to 14ZZ) (4) Division 4 — AAT review (s 14ZZA to 14ZZM), and (5) Division 5 — Federal Court appeal of objection decisions (s 14ZZN to 14ZZS). Division 1 — Introduction Section 14ZL specifies that Pt IVC is triggered when: • there is an assessment, determination, decision, notice or a failure to make a private ruling (the event), and • an Act or regulations state that someone who is unhappy with the event may object under Pt IVC. The objection is called a “taxation objection” (outlined in Div 3 — see below). Part IVC will apply in any circumstance where the above criteria are met (including if the provision is applied by another Act). Part IVC will not apply in circumstances where only one of the two criteria is met. For example, if an Act or regulation empowers the Commissioner of Taxation to make an assessment, but does not provide that a person who is unhappy with that assessment can object under Pt IVC, then no objection can be made and alternative remedies must be sought. Sometimes the Act will outline that an aggrieved party can apply directly to the AAT for the review of a decision (eg TAA s 14ZX(4) provides taxpayers the right to apply to the AAT for a review of a decision not to allow them to object out of time), but any such review is only a review of the correctness of that specific decision and falls outside Pt IVC. Alternative rights of review could include whether the decision is reviewable under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA), which provides limited rights of review for Acts listed in that Act and is considered specifically in Chapter 6 at ¶6-040.

Tip Threshold test: Check whether an Act or regulation states that an objection to an event can be made under Pt IVC.

Division 3 — Taxation objections The key elements of this Division include: • The format and process for how taxation objections need to be made (s 14ZU). • Time limits for lodging an objection (s 14ZW). • The Commissioner is required to decide whether to grant an extension of time to lodge an objection and if refused, the decision can be reviewed by the AAT (s 14ZX). • The Commissioner is required to allow (in full or part) or disallow an objection decision (s 14ZY). • An objecting taxpayer can require the Commissioner to make an objection decision or to make a private ruling (usually only used because of delays caused by the Commissioner) (s 14ZYA and 14ZYB). • A taxpayer dissatisfied with an objection decision can apply to the AAT for review, or to the Federal Court (s 14ZZ).

Tip Objections must be lodged in writing, within time and fully outline the grounds relied on. The time for lodging an objection varies from 60 days to four years. In practice, the ATO accepts many late objections without dispute.33

Division 4 — AAT review The AAT review of objection and extension of time refusal decisions is outlined in Div 4. The key elements include: • The AATA applies except as modified by Div 4 (s 14ZZA). See Chapter 6 for a detailed outline of the modifications. • How to apply to the AAT for review of an objection decision (s 14ZZC). • A third party can be made party to proceedings if they consent (s 14ZZD). • Hearings will be held in private at the taxpayer’s request (this is a much lower threshold than the Federal Court) (s 14ZZE). • The Commissioner is required to lodge various documents with the AAT (including a statement of reasons for the objection under review) (s 14ZZF). • When a matter is heard in private, the AAT may still publish its reasons so long as the taxpayer cannot be identified (s 14ZZJ).

• The taxpayer is limited to the grounds stated in their objection (unless the AAT orders otherwise) (s 14ZZK(a)). • The taxpayer has the burden of proof (s 14ZZK(b)). • The Commissioner must give effect to a decision of the AAT within 60 days (s 14ZZL). • The Commissioner may recover the outstanding tax liability as if no review were pending (s 14ZZM). This bias towards the Commissioner is in place to protect the revenue.

Tip The AAT will hold a hearing in private at the taxpayer’s request. This is a much lower threshold than applied by the courts.

Division 5 — Federal Court appeal of objection decisions Federal Court appeals against objection decisions are outlined in Div 5. The key elements include: • An appeal to the Federal Court against an objection must be lodged within 60 days of service (s 14ZZN). • The taxpayer is limited to the grounds stated in their objection (unless the court orders otherwise) (s 14ZZO). • The taxpayer has the burden of proof (s 14ZZO). • The Federal Court can make any order it sees fit (s 14ZZP). • The Commissioner must give effect to any decision within 60 days after the decision becomes final (ie any appeal period has lapsed) (s 14ZZQ). • The Commissioner may recover the outstanding tax liability as if no review were pending (s 14ZZR). This bias towards the Commissioner is in place to protect the revenue. • Proceedings may be transferred to the Family Court (s 14ZZS).

Tip The Federal Court does not conduct a merits review of the objection decision, it only conducts a legal review. Consider whether a merits review or legal review is best before deciding where to lodge (if a choice is available).

Appeals from the AAT to the Federal Court A decision of the AAT can only be appealed to the Federal Court on a “question of law” (s 44(1)). The “error of law” is both the condition precedent for lodging the appeal and the subject matter of the appeal. Appeals from decisions of the Federal Court and Full Federal Court A decision of a single judge of the Federal Court concerning an unfavourable appeal about an objection decision can be appealed to the Full Federal Court:

• by either party subject to an unfavourable (or partly unfavourable) decision • as of right (ie they do not need to seek the leave of the court) • only on questions of law, and • within the required timeframe (currently 21 days from the date of the original judge’s decision).34 A decision of the Full Federal Court can be appealed only if the High Court grants “special leave” to appeal. A special leave application may be lodged: • by either party subject to an unfavourable (or partly unfavourable) decision • as of right • only on questions of law, and • within the required timeframe (currently 28 days from the date of the Full Federal Court’s decision).35 In considering whether to grant special leave to appeal, the High Court is guided by the Judiciary Act 1903 (Cth) s 35A which states: “In considering whether to grant an application for special leave to appeal to the High Court under this Act or under any other Act, the High Court may have regard to any matters that it considers relevant but shall have regard to: (a) whether the proceedings in which the judgment to which the application relates was pronounced involve a question of law: (i) that is of public importance, whether because of its general application or otherwise; or (ii) in respect of which a decision of the High Court, as the final appellate court, is required to resolve differences of opinion between different courts, or within the one court, as to the state of the law; and (b) whether the interests of the administration of justice, either generally or in the particular case, require consideration by the High Court of the judgment to which the application relates.” Accordingly, to obtain special leave to appeal to the High Court of Australia, a party must demonstrate that the dispute involves: • a question of law of public importance where the High Court needs to resolve different opinions between courts, and • whether it is in the interests of justice for the High Court to consider the dispute. Interestingly, given the High Court rarely hears taxation disputes, their expertise (with some very notable exceptions) in this area is possibly less developed when compared to their colleagues in the Federal Court who tend to hear taxation disputes more regularly. As the High Court operates a general jurisdiction, this is entirely appropriate. However, it means the Federal Court plays an increasingly important role in identifying important taxation issues appropriate for the High Court and ensuring that its decisions are framed appropriately for superior judges who may not have an equivalent level of taxation expertise. The process for reviewing, objecting and appealing decisions will be discussed in more detail in Chapters 5 and 6. Footnotes 32

TAA s 14ZQ.

33

IGT, Review into the Australian Taxation Office’s use of early and Alternative Dispute Resolution (2012) 96.

34

Federal Court Rules 2011 (Cth) 2011 reg 36.03.

35

High Court Rules 2004 (Cth) reg 41.02.

¶1-050 Part IVC compared to the previous system The current system of objections, reviews and appeals under TAA Pt IVC commenced on 1 March 1992. Before this time, every Commonwealth Tax Act contained its own set of unique provisions dealing with objections, reviews and appeals in relation to assessments, determinations, notices and decisions. Although each system was legislated to provide an equivalent review system for each Act, the result was inconsistency, complexity and duplication (resulting in many pages of unnecessary legislation). On introducing the new system, the government made it clear that the intention was for there to be few changes of substance.36 However, the current system indeed contains some key differences to the previous one. Simplified legislation The most important difference is that the tax disputes process has now been codified into one part of one Act (Pt IVC), streamlining, simplifying and increasing transparency in the process. A consequence of streamlining the disputes process of various Acts into one Act meant that the wording in Pt IVC often differs (at times substantially) from the original corresponding sections. However, the implemented effect of the new provisions are essentially the same, except in a few specific provisions where new rights have been created or existing rights taken away. There are two specific instances where the new tax disputes system established under Pt IVC creates new rights and two others where rights have been taken away (outlined below). New rights created Previously, when a taxpayer wanted to review or appeal the Commissioner’s decision on an objection, a written request (accompanied by a filing fee) needed to be made to the Commissioner to refer the matter to the appropriate court or tribunal. The current system gives the taxpayer the right to approach the court or tribunal directly for review or appeal of a decision.37 This change represents an appropriate transfer of responsibility, enabling the taxpayer to take control of their own affairs. It also removes unnecessary layers of bureaucracy and makes the review and appeals process more efficient and transparent. Part IVC also enables a person to require the Commissioner to make an objection decision if he has not done so within the required time (generally 60 days either from lodging the objection or providing additional information requested by the Commissioner)38 by serving written notice. The written notice then triggers a mandatory deadline, where the Commissioner has 60 additional days to make a decision or the objection is automatically disallowed.39 This provision was inserted to ensure the Commissioner acts in a timely manner and allows an unsatisfied person direct access to the court or tribunal if the objection process is taking too long. This section creates a completely new right as there was no corresponding section in the previous disputes regime. Previous rights removed Under the former system, the Federal Court could grant an extension of time to an objector to appeal a decision to the court. This right has been removed under Pt IVC by TAA s 14ZZN which provides a strict 60-day time limit for lodging an appeal with the court. In contrast, no such restriction applies to appeals to the AAT, with s 14ZZA specifically conferring jurisdiction on the AAT to determine extension of time decisions. Whether this change was intentional is uncertain given both the explanatory memorandum and second reading speech to the legislation that inserted Pt IVC stated that the amendments were not meant

to “substantially change the law” and also made no reference to this change.40In either event, it appears that the court has no power to extend the time for lodging an objection as the time is fixed by statute41 and even the Federal Court’s general power to make any appropriate order where it has jurisdiction42 would not apply as the court no longer has jurisdiction once the 60-day time period has expired (confirmed by the Federal Court in Bayer v DFC of T 99 ATC 4895). There has also been no legislative attempt to change this provision (although the anomaly is well-known), which raises the prospect that even if the change was unintended, it has now been accepted as appropriate. Alternatively, it is possible that the legislation was drafted deliberately to remove this administrative burden from the Federal Court and to push all applications to appeal outside of time towards the AAT to free up valuable judicial resources. The final right removed was TAA Pt IVAB which contained the provisions relating for requests to be made for reference of objection decisions to the AAT. This section has no equivalent under Pt IVC as it was unnecessary. Any person unsatisfied with an objection decision could now approach the AAT directly for review of that decision under s 14ZZA, instead of making a request to the ATO to refer the decision to the AAT for review (which was the purpose of Pt IVAB). Footnotes 36

Explanatory Memorandum, Taxation Laws Amendment Bill (No 3) 1991 (Act No 216 or 1991) (Cth).

37

TAA s 14ZZ.

38

TAA s 14ZYA.

39

TAA s 14ZYA(3).

40

Explanatory Memorandum, Taxation Laws Amendment Bill (No 3) 1991 (Act No 216 or 1991) (Cth).

41

TAA s 14ZZN.

42

Federal Court of Australia Act 1976 s 23.

¶1-060 Reviewing and improving the disputes system There have been a multitude of reviews into the Australian taxation system (either directly or indirectly) since the ATO was established, and in particular since the introduction of self-assessment in 1986 (when the very nature of tax disputation changed). Most of these reviews are now of only historical reference and do not require further discussion. Inspector-General of Taxation The manner of reviewing the Australian taxation system changed significantly in 2003, when the government established the Inspector-General of Taxation (IGT) as an independent statutory agency. The main function of the IGT was to investigate the systems used by the ATO (or Tax Practitioners Board (TPB)) to administer the tax laws, along with the laws themselves (but limited to administrative matters). Since 1 May 2015, the IGT also helps people address complaints about the ATO or TPB.43 This created a new level of oversight for the ATO with the IGT able to make recommendations for change directly to government. Accordingly, the tax disputation system (as an administrative function) falls within the general purview of the IGT and numerous relevant reviews have been conducted, including the 2012 review into the ATO’s

use of alternative dispute resolution44, the 2015 review into management of tax disputes,45 and the 2016 review into the Taxpayer’s Charter and protections46. Government review The tax disputes system is also able to be reviewed by relevant government committees (such as the Standing Committee on Tax and Revenue) which can undertake reviews referred to it by the House of Representatives or a Minister (Standing Order 215)47 or the Joint Committee of Public Accounts and Audit48 which can conduct inquiries referred by either House of Parliament or via its own initiative.49 Recent reviews include the 2015 report into tax disputes by the Standing Committee on Tax and Revenue.50 Recommendations from each review are generally either made to the ATO to implement as a matter of policy or administrative change, or to government for legislative change. ATO response The ATO will not usually comment publicly on suggested legislative change, preferring to state “This is a matter for Government” and reserving its comments to official liaison channels with Treasury. Government tends to avoid recommendations for legislative change, stating that administrative solutions are preferable to legislative ones as they are quicker, more flexible and avoid increasing the volume and complexity of tax legislation, “which is difficult, time consuming and resource intensive to amend”.51 Accordingly, the ATO is left with the responsibility of implementing agreed recommendations from an administrative perspective. Generally, each review makes numerous recommendations, most of which the ATO agrees to (either in full, part or principle). The ATO is under no obligation to implement recommendations it disagrees with, or to implement a recommendation in a specific way, but doing so leaves it open to criticism (publicly and by the reviewing bodies) and potentially legislative intervention. Footnotes 43

Inspector-General of Taxation Act 2003 s 7.

44

IGT, Review into the Australian Taxation Office’s use of early and Alternative Dispute Resolution (2012) 96.

45

IGT, Review of the Management of Tax Disputes (2015) 6.

46

IGT, Review into the Taxpayers’ Charter and taxpayer protections (2016).

47

Parliament of Australia, Standing Committee on Tax and Revenue .

48

Public Accounts and Audit Committee Act 1951.

49

Parliament of Australia, Joint Committee of Public Accounts and Audit .

50

Standing Committee on Tax and Revenue, Parliament of Australia, Tax Disputes (2015).

51

Standing Committee on Tax and Revenue, Parliament of Australia, Australian Government response to the House of Representatives Standing Committee on Tax and Revenue report: Tax disputes (2015) 4.

¶1-070 Example of a tax dispute Background

Jo is a high wealth individual who has been audited due to significant losses claimed on a hobby farm. Upon completion of an audit, the ATO issued an amended assessment increasing Jo’s income tax liability by $1m (penalties and interest are ignored for the purpose of this example). Lodging an objection Jo’s accountant advises that (in their opinion) the ATO has made an error and that Jo is able to object to the original decision. Unfortunately, Jo is dubious as the accountant advises that the objection will simply be reconsidered by the ATO. If the same person (or their supervisor) is simply going to reconsider the decision, why bother? However, Jo decides to investigate further and discovers that the objection is decided by a different area of the ATO which is completely independent of the original decision maker. Furthermore, to maintain the objection officer’s independence (perceived and actual) the ATO has introduced “communication protocols” which carefully and transparently manage any contact between the original decision maker and the reviewing officer. Feeling optimistic, Jo calls the accountant and gives instructions for an objection to be lodged. Objection allowed in part The objection officer carefully reconsiders the original decision, requesting important additional information as appropriate and having detailed discussions with all parties. Ultimately, the objection officer comes to their own decision that the original decision was partly incorrect and allows the objection in part, reducing Jo’s liability to $750,000. Appealing the objection decision to the AAT Feeling pretty frustrated that the situation has still been misunderstood, Jo speaks to a lawyer who advises that he can appeal the objection decision to the AAT (on the merits of the decision) or directly to the Federal Court (as to the legal correctness of the decision). Jo’s lawyer also advises that the AAT is likely to be quicker, cheaper and less formal than the Federal Court. Jo feels that the ATO has misunderstood the merits, so the AAT is the better option. The AAT schedules numerous conferences between the parties, encouraging the parties to discuss the dispute and resolve it. Unfortunately, Jo and his lawyer cannot persuade the ATO to settle the dispute and it is ultimately set down for hearing. Outcome At the hearing (which was much less formal than what Jo was expecting from seeing courts on TV), the AAT agreed with Jo and set aside the ATO’s decision and substituted its own decision that Jo owed no additional income tax. Jo’s lawyer advises that the ATO could appeal the decision to the Federal Court (on a “question of law”) but the ATO confirms it does not intend to pursue that avenue. Despite the outcome, Jo resents having incurred $10,000 in legal costs simply getting to the right outcome (not to mention the wasted time and stress it has caused). Unfortunately, given the AAT is a “no costs jurisdiction” Jo’s legal costs cannot be recovered from the ATO. Jo feels slightly better when the lawyer advises that going to court would have been much more expensive and the successful party never recovers all of their costs.

¶1-080 Part IVC — Disputing a tax decision — Flowchart A complete framework for disputing taxation decisions made (or the failure to make a decision) under a Commonwealth Tax Act is set out in TAA Pt IVC. Part IVC will apply if an Act allows a person dissatisfied with a “taxation decision”52 to object to the decision.53

Footnotes 52

TAA s 14ZQ.

53

Or the failure to make a private ruling, TAA s 14ZL.

Audits, assessments and amendments Foundation of the tax system — the tax assessment ¶2-010 The assessment

¶2-020

Amending (correcting) assessments

¶2-030

Risk management

¶2-040

Reviews and audits

¶2-050

¶2-010 Foundation of the tax system — the tax assessment “Income tax returns are the most imaginative fiction being written today.”1, Herman Wouk The Australian taxation system is founded upon the tax assessment. Although the types and complexity of taxes administered by the Australian Taxation Office (ATO) have changed since its inception, the tax assessment still exists as the bedrock upon which rights, disputes and expectations between the ATO and taxpayer flow. Originally, a taxpayer would file a return and the ATO would review the return in full, deciding facts, interpreting the law and disallowing deductions before issuing an assessment. This process of full assessment provided certainty at the cost of efficiency. In an ideal world with unlimited resources, the ATO could fully assess all returns. However, given the growth in both population and tax law (in both size and complexity), the system needed to change and it evolved into a system of self-assessment (see Chapter 1 for further discussion). Accordingly, the Commissioner decided that he had to change how the ATO engaged with risk and rather than try to establish the truth upfront, they would largely accept returns as lodged and deal with the false and misleading returns later. The risk of self-assessment The risk in doing this is that the ATO will not know which returns to look at and that taxpayers can file whatever they like without consequence. This in turn would lead to a degradation of the taxation system as others would be less likely to comply voluntarily if they knew their friends and neighbours were getting away with filing false returns. The answer to this conundrum is risk management. The Commissioner’s approach to managing this risk The ATO issues assessments — largely accepting the returns as filed. If a taxpayer makes an error, they are able to request an amendment to the return within certain timeframes. However, the ATO also has the same amount of time to amend assessments and, if the taxpayer has committed fraud or evasion, an unlimited timeframe to amend. Accordingly, taxpayers know that the ATO may look at their affairs in the future. However, it is still a difficult task to expect taxpayers to comply voluntarily when they know the ATO only has finite resources to dedicate to compliance. This is why the Commissioner takes a strategic, differentiated and risk-based approach to compliance whereby he uses a variety of tools to classify taxpayers on a spectrum (from those trying to do the right thing through to those who are deliberately doing the wrong thing or simply don’t care) and directs his resources appropriately. This allows the ATO to focus its reviews and audits on those doing the wrong thing and use the full force of the law to deal with them, while assisting the bulk of taxpayers (who are trying to do the right thing) by making it easier and quicker for them to comply, supporting them with tools (such as the ATO App) and educational materials to make their taxation administration burden as small as possible. Taxpayers who do the right thing are assisted and rewarded and those who do the wrong thing are

subject to the full force of the Commissioner’s powers and the law. This is how the Commissioner manages risk, ensures that people are encouraged to comply, and that being honest with your tax affairs is seen as an important part of Australian society. Footnotes 1

Hernan Wouk, Quotes About Taxes, Goodreads .

¶2-020 The assessment The Australian income taxation system is centred on the concept of taxation assessments. This now largely takes place as self-assessment (as opposed to the prior regime of full assessment as discussed in Chapter 1). Self-assessment essentially allows the ATO to make a calculation of a taxpayer’s tax liability for each tax year based on the information provided. The ATO then undertakes various verification programs to check the accuracy of the information provided by selected taxpayers (usually known as review or audit). The ATO is required to make an original assessment of a taxpayer’s taxable income, tax payable and their right to any offsets (ITAA36 s 166). Serving of an assessment The ATO is required to serve a written assessment on a taxpayer liable to taxation2 and the assessment process is not complete until the notice has been served3 (which is important as both the taxpayer and ATO accrue various rights once the assessment has been issued). An assessment can be served personally on a taxpayer (ie physical delivery), or if they have provided a physical, postal or electronic address for service, by delivering it to that address.4 If the notice is posted, unless there is proof to the contrary, it is generally deemed to be delivered in the “ordinary course of post” (ie the fourth working day after posting). As long as the correct procedure is followed, the assessment is treated as having been served regardless of whether it comes to the attention of the taxpayer.5 It also does not matter if the correct procedures were not followed if there is evidence that the assessment did come to the attention of the relevant person.6 Date of service It is important to know the date of service as it is from this date that the time period for lodging an objection is calculated (along with the due date for any payments). The timeframe for lodging objections is outlined in TAA s 14ZW and can vary between 60 days and four years. Payment of income tax is generally required 21 days after the due date for lodgement of a return or service of an assessment.7 The ATO does not have to issue an original assessment within a specific timeframe. If a taxpayer has lodged a return and not received an assessment within 12 months, they may ask the ATO to make an assessment. If the ATO then fails to issue an assessment within three months, the taxpayer is deemed to be served with an assessment on that date and any subsequent assessment issued by the ATO will be an amended assessment8 and subject to the associated restricted timeframes (see ¶2-030 for discussion of amended assessments). Full self-assessment Some taxpayers are assessed under a system of “full” self-assessment, where the ATO does not actually issue an assessment, rather the assessment is deemed to be made at the time of lodgement.9 A deemed assessment still allows a taxpayer the same rights of objection, review and appeal that is applicable to self-assessment taxpayers. Examples of full assessment taxpayers include companies and superannuation funds. Part-year assessment The ATO is also able to make special assessments for part of an income year.10 This power is generally used when the taxpayer has become bankrupt (ie one assessment up to the point of bankruptcy, as any

liability will be included as part of all bankruptcy liabilities, and a second assessment for the remainder of the income year). Default assessment The final kind of assessment is called a default assessment. Default assessments are used when a taxpayer fails to file a return (whether or not the Commissioner thinks the person has derived taxable income) or he is dissatisfied with the return. In this scenario, the Commissioner is able to make his own assessment as to the income tax that should be levied.11 Default assessments can be issued for many reasons, but a common example is where a taxpayer’s assets do not match their income. In this scenario, the Commissioner might issue a strategic default assessment to force the taxpayer to engage with the ATO in order to show that the assessment is excessive and what the correct amount of tax should have been (showing the amount to be incorrect is not sufficient).12 This type of strategy is essentially a valid method for triggering disputes and forcing taxpayers to engage. The only limitation on the Commissioner is that he must use genuine methodology to calculate the taxable income and not guesswork.13 The trigger for commencing a dispute The relevance of the assessment (regardless of the type of assessment) is that both the Commissioner and taxpayer accrue rights once a valid assessment is issued (ie the right to object or amend the assessment). Timeframes also commence for exercising these rights and for the payment of any outstanding tax liability. Accordingly, the issuing of an assessment is the key trigger for commencing a dispute. Footnotes 2

ITAA36 s 174.

3

Batagol v Commissioner of Taxation (Cth) [1963] HCA 51.

4

TAR reg 12F(1).

5

DFC of T v Taylor 83 ATC 4539.

6

Briggs v DFC of T 86 ATC 4583.

7

This excludes self-assessment entities where income tax is payable under ITAA97 s 5-5(4).

8

ITAA36 s 171(1) and (2).

9

ITAA36 s 166A.

10

ITAA36 s 168.

11

ITAA36 s 167.

12

FC of T v Dalco 90 ATC 4088; FC of T v ANZ Savings Bank Ltd 94 ATC 4844; Mulherin v FC of T 2013 ATC ¶20-423.

13

Briggs v DFC of T (WA) & Ors; Ex parte Briggs 87 ATC 4278.

¶2-030 Amending (correcting) assessments Under the self-assessment regime, the ATO assesses taxpayers based on their returns as filed (ie they

are generally accepted at face value), but they are also able to consider any other information in their possession14 (ie data matching). Once an assessment is issued, it may only be amended by the Commissioner (within certain time periods) or at the request of the taxpayer. The Commissioner’s power to amend (or further amend) assessments is contained in ITAA36 s 170 and 170A. The Commissioner’s power to amend Although a taxpayer may wish to apply to the Commissioner to “correct” a mistake in the information filed with their return (ie they may have included the wrong amount for a deduction), once an assessment has been issued, the Commissioner has no general power of correction, rather he can only change the assessment by amending the return. Accordingly, if a taxpayer identifies after the assessment has been issued that they have made an error, they should apply for an “amendment”. A taxpayer may wish to amend a factual error, an error in a calculation, or a misinterpretation of the law. However, if the ATO has made a mistake in processing the return, the problem may be able to be resolved without a formal amendment request. It is advisable to speak to the ATO before lodging an amendment request to see if the problem can be resolved directly (providing a quicker and cheaper resolution).15 For an amendment to be actioned, a taxpayer’s request must be made within the relevant time period allowed for amendments and include all relevant information (for more detail on the relevant time period, see below). However, as the Commissioner does not need to verify the information supplied and is able to accept any statement made by the taxpayer (or their representative) at face value, taxpayers are essentially able to self-amend (although the Commissioner may subsequently choose to audit the taxpayer’s affairs and is able to make a further subsequent amendment if required).16

Tip Ultimately, however, the Commissioner’s power to amend on the application of a taxpayer is discretionary, so it is important for taxpayers seeking amendment to protect their rights by lodging a parallel objection (as otherwise the objection may be lodged out of time and it will be at the Commissioner’s discretion as to whether to grant the extension of time to lodge).

The difference between amendment and objection The fundamental difference between an objection and a request for an amendment is that an objection is a formal method for disputing certain decisions and an amendment request is aimed at correcting inadvertent errors (by the taxpayer or the ATO).

Tip The easiest way to differentiate a request for amendment to an objection is to use the appropriate wording in the request (ie state that you are requesting an “objection” or “amendment”). However, this won’t guarantee that the Commissioner treats the request accordingly, as he will also look at what is being asked. This is because taxpayers often ask for amendment, when they mean to object and vice versa. To be sure that a request is treated appropriately, it is advisable: • if you are seeking to correct an error or omission, request an “amendment”, or • if you are disputing the facts, issues, law, are unsure if all entitlements or income has been included, request an “objection”.17

Valid requests When requesting an amendment, it is advisable to lodge a separate objection to preserve your rights in the event that the amendment request is invalid. Another option could be to ask that your amendment request be treated as an objection in the alternative (as long as it otherwise complies with the necessary requirements to be a valid objection). Examples of valid amendment requests: • “Please amend my return as I forgot to include X. Please find relevant information attached.” • “I want to object to my assessment. I forgot to include details of my private health insurance and have been charged the Medicare levy (details attached).” Although the second example uses the word “object”, it is clearly asking to correct an omission and would likely be treated as a request for an amendment. However, if the ATO decided not to process the amendment, they may subsequently treat it as an objection. Example of a valid objection request: • “I want you to amend my return. I believe you have applied the decision of Jones incorrectly for the following reasons.” Although the taxpayer has requested an amendment, they are clearly objecting as they are challenging how the ATO has interpreted the law. Accordingly, the ATO will not only consider the words, they will also consider the intention and context of the request.18 The ATO supplies a form on its website for amendment requests. Although it is not mandatory to use the form, it is advisable to use it so that all relevant information is supplied and the intention of the request is clear. If the form is not used, the request must be made in writing and the taxpayer should check that all formal requirements are complied with.19 Amendments generally occur for one of two reasons — at the taxpayer’s request to correct an error or they are instigated by the ATO, for example at the conclusion of an audit. Time limits The time to request an amendment varies according to the taxpayer and the complexity of their affairs. For a normal taxpayer with simple affairs, the period is two years from the day on which the notice of assessment was given. Taxpayers with more complex affairs are subject to a four-year review period.20 Amendments can still be made when the relevant time period has expired when: • the taxpayer applies for an amendment before the period expires • the taxpayer applies for a private ruling before the period expires, or • the Commissioner starts to examine a taxpayer’s affairs before the end of the relevant period, but cannot finish in time. In this circumstance the period can be extended with the consent of the taxpayer or an order of the Federal Court (where the court is satisfied that the delay is the fault of the taxpayer).21 In the case of fraud or evasion There is also no time limit to amend when fraud or evasion is involved. The difference between fraud and evasion is subtle and also distinguishable from mere avoidance. Fraud occurs when a taxpayer has no belief or a reckless indifference to what they have represented.22 Evasion is less than fraud, but must include some wrongdoing on behalf of the taxpayer.23 Anything less will fall into the category of avoidance. For example, simply withholding information would be avoidance rather than evasion and the unlimited period to amend would not apply. These findings are factual in nature and therefore a taxpayer opposing a finding of fraud or evasion will need to prove that it didn’t occur. If this can be done using

independent evidence, the dispute can be avoided in its entirety as any assessment issued on the basis of fraud and evasion to extend the time period will now be out of time and invalid. Nil assessments The Commissioner is also able to issue a nil assessment if no tax is payable for the 2004/05 and later income years. This is important because if a nil notice is not an assessment, the Commissioner has an unlimited time to amend (as the time only runs from when an assessment issues). This had previously been a contentious area of law prior to the 2004/05 income year, so the clarity in this area is beneficial for taxpayers and tax administration generally. Limit on amending assessments for 2004/05 and subsequent income years

Footnotes 14

ITAA36 s 166.

15

ATO, Correct (amend) an income tax return (27 October 2016) .

16

ITAA36 s 170(3).

17

PS LA 2008/19, 1–2.

18

Ibid.

19

Ibid, 3.

20

ITAA36 s 170(1).

21

ITAA36 s 170(5)–(7).

22

Derry v Peek (1889) 14 App Cas 337, at 374.

23

Simms v Registrar of Probate (1900) AC 332, at 334.

¶2-040 Risk management

The concept of risk management changed significantly for the ATO on the introduction of the “selfassessment” system on 1 July 1986. Previously, the ATO assessed each return upon lodgement. Selfassessment changed this such that returns were largely accepted at face value and assessments issued accordingly. In some respects the change to self-assessment increased the ATO’s risk, but was a necessary evolution in order to cope with the growing Australian population and increasing complexity of tax laws. Rather than attempting to eliminate risk (by assessing all returns upon lodgement), the system changed to one of accepting risk as a part of good tax administration and managing it on the basis of education and strategic compliance activity.24 What are the risks? “Compliance risks can generally be categorised into obligations of registration, lodgement, payment and reporting”25. All of these risks need to be managed carefully; registration, lodgement and payment are largely pure questions of fact, while reporting is a question of fact and degree, ie was the relevant information reported and if so, was the law applied correctly? Accordingly, the Commissioner places significant key resources towards managing this risk. Establishing where to direct limited resources is a significant challenge and one that is constantly evolving. The Commissioner requires some methodology to work out where the risks of non-compliance are and what the consequences would be. Taxpayers in high risk categories will require a different approach to those with a lower risk. In that regard the Commissioner may conduct audits on high risk taxpayers, while focussing on assisting those in low risk categories to comply with their obligations (via education and assistance tools such as online calculators). The compliance model

Source: ATO The main tool used for assessing, managing and responding to taxpayer behaviour is the “compliance model”. The ATO describes the compliance model as: “a structured way of understanding and improving taxpayer compliance. It helps us to understand the factors that influence taxpayer behaviour and to apply the most appropriate compliance strategy”. This means the ATO applies a differentiated approach to taxpayers, treating them differently depending on where they sit in the pyramid spectrum. Those at the bottom (most taxpayers) are considered low risk and want to do the right thing. Accordingly the ATO tries to make it as easy as possible for them to comply with their taxation obligations. The spectrum then narrows progressively to the tip of the pyramid, with high risk tax payers who have decided not to comply (a very small number as a proportion of all taxpayers). For these taxpayers, the ATO uses the full force of the law and all appropriate resources to enforce compliance. This in turn creates an incentive for these and other taxpayers to comply voluntarily so that they don’t have to incur the wasted time, expense and stress that arises from legal disputes. The other key aspect of the model is that it recognises the pressures on taxpayers that can influence behaviour, encouraging them either to comply or not. In recognising these factors, it allows the ATO to use various strategies to again influence behaviour and reduce the risk of non-compliance. Strategies

may include education, engagement (speaking to people) or even using technology (ie using voice identification to make it quicker and easier for taxpayers to manage their tax affairs themselves). Analysing taxpayer behaviour The five key factors identified as influencing taxpayer behaviour are: 1. Industry factors — specific industries may conduct their businesses in certain ways that influence compliance generally (ie it is common for tradespeople to quote a lower price for cash). 2. Sociological factors — whether the general attitude towards paying tax in Australian society is positive or negative. Countries where tax evasion is seen as acceptable have low compliance and in turn social problems.26 3. Economic factors — financial pressures facing a taxpayer (or group of taxpayers) may influence their conduct. For example, if their income is impacted by poor economic conditions, they may be more inclined to delay payments to the ATO or not declare all of their income. 4. Psychological factors — as opposed to sociological factors (which help explain how individuals are influenced by surrounding groups), psychology helps to explain individual behaviour. An example is the ATO’s development of new technology (such as the ATO App — which allows taxpayers to take photos of their receipts for deductions and upload the data directly into their tax return), to make it easier for taxpayer’s to do the right thing, meaning that it’s less likely that the wrong thing will be done. 5. Business factors — each individual business has its own unique challenges or practices that influence how that business responds to compliance (even within the same industry). For example, a coffee shop in a holiday destination will implement a very different business model to a similar shop in a major city. In implementing the compliance model, the Commissioner uses a variety of tools to make a measured calculation, determine risk and a possible response. Some of these tools include data matching, industry benchmarking, the income tax refund integrity program and the risk differentiation framework (however, the suite of tools is very wide and continually developing). Data matching Data matching is a fundamental resource used by the ATO to compare information provided by the taxpayer with information provided by third party institutions. It has proven especially useful for individuals where the information supplied in their return can be verified via third party checks. An often cited example is the non-declaration of bank interest, with the ATO comparing tax returns with what is reported by banks. This is a very easy way to discover unreported income. Interestingly, the ATO is now taking this to another level by using the reporting of data from organisations such as banks, to pre-fill information in a taxpayer’s return — avoiding situations where they forget to include it. If the omission was inadvertent, this prompt should avoid that occurring, whereas if the omission was deliberate, it will likely also avoid further problems as the ATO has highlighted that they are aware of the interest income. This shows a dual approach to compliance, assisting those trying to do the right thing and engaging those who aren’t. Further, by front loading this work (ie by using data to help taxpayers do the right thing rather than catching them doing the wrong thing), the Commissioner is transforming the ATO into a serviceoriented organisation focussed on client experience, rather than simply results. With this in mind, it is foreseeable that for many taxpayers with simple affairs, the ATO will be able to use pre-filled data to make lodging a tax return quick, simple and accurate with no more effort than pressing a few buttons. This then allows the ATO to direct its limited resources towards taxpayers at the top of the compliance model (those trying to do the wrong thing and those who just don’t care). Benchmarking Benchmarking is a tool used in the small business compliance area that allows the ATO to compare a

business’s performance against other businesses — identifying outliers that may have potential compliance issues. Businesses can also check whether they sit within the relevant benchmark — assisting them to comply. The ATO sets the benchmarks by applying independent statistical analysis to over 1.3 million returns and activity statements filed by small businesses. Accordingly, the benchmarks are able to provide valid parameters within which most businesses will fall. The parameters are also set within a range to acknowledge that similar businesses will confront different circumstances due to factors such as their location. They also vary due to turnover (up to a maximum of $15m) across over 100 different industries. This provides taxpayers with a robust framework within which the Commissioner publicly states he expects most businesses to operate. To assist small business taxpayers that wish to ensure they are operating within the benchmarks, the ATO provides a “business performance check” which is available on the ATO app and enables taxpayers to check whether they are operating within the relevant benchmarks. This provides a twofold benefit, firstly it encourages voluntary compliance by ensuring taxpayers can check whether they are operating within the expected standard, while also discouraging non-compliance by stating the ATO will likely examine your affairs if you fall outside those standards. Secondly, it also provides businesses with a free viability tool, so that they can see whether their business is operating successfully compared to other similar businesses (providing advance notice that they may need to change their operations if they are going to continue operating long-term).27 Along with encouraging compliance, benchmarking discourages non-compliance as the ATO is providing a public indication of what the benchmarks are and that if small business fall outside them, it is likely that the ATO will have a closer look at their affairs.

Tip Although the benchmarks are not mandatory, a business will need to be able to provide objective evidence that their business properly falls outside the benchmark to satisfy the ATO that the correct information is being reported. If a business is not able to supply that information, they would be encouraged to analyse their affairs, amend their practices and ensure they are correctly managing their records so that they can either fall within the relevant benchmark for their industry or explain why they don’t.

Income Tax Refund Integrity Program The Income Tax Refund Integrity Program (ITRIP) commenced operation on 1 July 2009 as a system of data analytics, designed to detect errors and fraud in tax returns.28 Originally designed to detect identity crime, it has since been expanded more broadly to examine specific business risks and patterns. The ITRIP system is dynamic and able to adapt quickly to emerging risks and change (in as short a period as 48 hours). The ITRIP process sees all income tax returns for individuals analysed over a 48-hour period following lodgment. If a risk is triggered, the system stops the return being processed any further until a manual review has occurred. Accordingly, many incorrect or fraudulent returns and refunds are stopped from issuing upfront, which prevents the need to amend returns and avoids having to claw back incorrectly paid refunds. This system of risk identification and dispute avoidance encourages voluntary compliance, as those who are doing the wrong thing know that the ATO is undertaking complex analysis to identify fraud (or similar) and they may be subject to fines and prosecution, while those trying to do the right thing get their returns processed more quickly and with a level of assurance about the integrity of the system. Risk differentiation framework The “risk differentiation framework” is a tool developed for large business taxpayers that complements the compliance model by applying a differentiated engagement approach for taxpayers based on risk. Each large business taxpayer is placed in one of four broad risk categories for each tax type (income tax, GST

and excise).29 Risk differentiation framework

Higher risk taxpayers In situations where the risk and potential consequences are considered high, taxpayers are placed in the higher risk category. The ATO continually reviews these taxpayers (which may include audit or intensive risk analysis), ensuring both the ATO and the large business understand the risks, allowing both to take an informed approach regarding potential disputation and (for the large business) make more informed decisions about their activities with a full understanding of the position the ATO will likely take.30 Key taxpayers The ATO takes a close interest in the risk and governance frameworks of key taxpayers who are assessed as low risk but high consequence (ie there are not likely to be any problems, but if there were, the results would be significant). The ATO currently has an engagement focus for key taxpayers, focussing on understanding their business and resolving contentious issues collaboratively.31 Medium risk taxpayers Medium risk taxpayers are assessed as having a higher risk, but the risk resulting in lower consequences. The ATO will undertake targeted and strategic assurance activity (more likely to be reviews and audits than engagement and education).32 Low risk taxpayers Most large businesses are considered low risk. In this category the ATO has a service focus, in particular education and advice (although the ATO will monitor the situation via third party information and consultation to ensure the lower risk status remains appropriate).33 Although this tool is specifically designed for and targeted at large business taxpayers, the principles seem to flow through to other taxpayers. This framework may be seen as providing guidance in how the ATO assesses and addresses risk at all levels. However, with that in mind, the Commissioner has stated publicly that he is currently reviewing this framework (in consultation with taxpayers) to change the risk differentiation framework from a compliance to a service focus. This aligns with the Commissioner’s programme of reinvention, with the goal of becoming a “contemporary, service-oriented organisation”34 and will likely see a change in focus with service and assurance becoming the key tool used for most taxpayers. Footnotes

24

IGT, Review into the Taxpayers’ Charter and Taxpayers Protections (2016) 282.

25

Ibid.

26

Michael Kirby, Down with Hubris! A Message on Tax Reform for Australian Tax Specialists (Paper presented at The Institute of Chartered Accountants in Australia National Tax Conference, Melbourne, 7 April 2011) 24.

27

ATO, Small business benchmarks (9 November 2016) .

28

IGT, Review into the Australian Taxation Office’s compliance approach to individual taxpayers — income tax refund integrity program (2013) 5.

29

Ibid.

30

Ibid.

31

Ibid.

32

Ibid.

33

Ibid.

34

ATO, Reinventing the ATO (16 September 2016) .

¶2-050 Reviews and audits The ATO presumes most taxpayers try to do the right thing. However, the system relies on taxpayers complying voluntarily, which only occurs if the community believes in doing the right thing, that others are doing the right thing and that the ATO is ensuring that occurs. Accordingly, the ATO selects some returns, statements or other relevant information for checking via review or audit.35 Selections are made based on risk assessment (discussed at ¶2-040) providing taxpayers a differentiated experience.36 Difference between a review and an audit A review differs from an audit as it focusses on checking whether a taxpayer is complying with their obligations, if any errors have been made and if so, assisting the taxpayer to correct them. This is an extension of the risk identification framework (discussed at ¶2-040), allowing the ATO to verify the risk and either conduct a full audit or, if there is no risk, finalise the review.37 An audit is a systematic examination of a taxpayer’s affairs to establish whether the tax laws have been complied with. An audit is generally conducted if the ATO is of the view that a taxpayer may not be meeting their obligations or if a review will be insufficient. The audit may cover numerous years, issues and taxes. If the key issue is income tax, the ATO will look at whether all assessable income has been disclosed, and that all deductions and tax offsets claimed are correct. Interestingly, the scope of an audit is identified as part of the risk assessment process, which means the audit can only be expanded if approved by a team leader and the taxpayer informed.38 The Commissioner’s power of review and audit It is often assumed that there is a complex set of laws governing reviews and audits, but there is no specific law that gives the Commissioner the power to conduct an audit, rather he relies on his general power of administration of the tax laws39 and his powers to gather and access information (discussed in Chapter 3).

Interestingly, although many of the ATO’s decisions are reviewable under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA), decisions made during an audit are only reviewable if they are made under a specific provision of an Act, not if they are made using the Commissioner’s general power of administration under ITAA36 s 8.40 This means that most decisions made during an audit are not judicially reviewable.

Tip The ATO has established internal guidelines for its auditors to follow, but has not made that information available to the general public. Different areas within the ATO have unique guidelines regarding how their audits will operate which represents the differentiated approach the Commissioner applies to varying types of taxpayer. Information is power, so the sensible question for any taxpayer (or their representative) to ask at the commencement of an audit is for an outline of the process. Even if they have previously been through an audit, the process may have changed (or differ). The Taxpayers’ Charter also gives guidance as to how a taxpayer can expect to be treated throughout the audit process.

The ATO’s approach Regular audits are conducted with the concepts of proportionality, double jeopardy, natural justice and the right to silence in mind. Proportionality refers to the Commissioner’s risk-based approach to compliance (which has been discussed in detail at ¶2-040). Double jeopardy usually means that a person cannot be pursued for the same issue twice. However, the ATO may conduct subsequent audits for the same period for different issues (or even, in rare cases, the same issue if new compelling evidence arises). The ATO does not strictly adhere to the principle of double jeopardy, although the situation would likely be different if the parties had resolved the audit via a settlement. The ATO generally applies the principle of natural justice to audits, allowing taxpayers to be heard and express their views “as a matter of good and fair decision making”. The exception to this rule is when the Commissioner conducts a covert audit (ie the taxpayer is not informed that an audit is occurring or involved in the audit) which usually only occurs when the taxpayer is considered to be involved in organised crime or serious non-compliance. Finally taxpayers are able to remain silent during audit activity to avoid incriminating themselves (although this is not a stated right).

Tip The difficulty with this approach is that the ATO has strong (although not unfettered) informationgathering powers and may continue the audit and make adjustments whether the taxpayer engages or not. Accordingly, taxpayers must take a considered and strategic approach as to whether they choose to remain silent as it may not be in their best interests. They should also be aware that where the Commissioner is using his formal information-gathering powers, a taxpayer may be subject to criminal prosecution if they don’t comply41 (discussed in detail in Chapter 3).

Timeframes Audit timeframes vary with the complexity of the issues at hand and the ATO accordingly takes a differentiated approach. When the audit is commenced the ATO generally advises an outline of the audit, including expected (but not binding) timeframes. Audit timeframes can vary from a number of weeks for a small taxpayer with simple affairs to many years for a taxpayer with complicated affairs.

Taxpayers’ Charter In the Taxpayers’ Charter, the Commissioner outlines how audits will be conducted, including the expectations he has of his staff and taxpayers. In particular, the Commissioner undertakes to conduct audits in an “impartial, fair, reasonable and professional manner”, to complete audits as quickly and cheaply as possible, listen and treat taxpayers in accordance with the law, policy and the Charter. The Commissioner acknowledges the impost (financially and personally) that an audit can have (in particular for those trying to do the right thing). For those who cooperate, he will try to conduct the audit with the smallest cost and delay possible. In turn, the Commissioner states his expectations of taxpayers and specifically notes that failure to cooperate may result in increased costs, wasted time and potentially unnecessary disputation. He goes on to specify that he expects taxpayers under audit to be honest, open, responsive (especially regarding possible delays) and provide reasonable assistance (ie access to appropriate documents, buildings and facilities). However, this does not mean that a taxpayer needs to supply documents that are confidential as between the taxpayer and their lawyer(s) or accountant (discussed further in more detail in Chapter 3). Following an audit At the conclusion of an audit the Commissioner will advise the outcome, including whether the taxpayer owes more money or otherwise. If he is making an adjustment, he will provide written reasons (including for the imposition of any penalty) and advise how the taxpayer can dispute the decision if they choose (ie generally by lodging an objection). Penalties and interest may also be applied if the audit finds that a taxpayer has understated their tax liability (discussed further in Chapter 4). If the taxpayer isn’t happy with their treatment by the ATO at any stage (during or after the audit), they should raise the issue at first instance with the case officer in charge of the audit. If that does not resolve the issue, they may escalate to the case officer’s manager (whose details are provided at the beginning of the audit). If the taxpayer is still unhappy, they may lodge a formal complaint (discussed further in Chapter 9 at ¶9-160). Footnotes 35

ATO, Taxpayers’ Charter — if you’re subject to review or audit (5 January 2016) .

36

IGT, Review into the Taxpayers’ Charter and Taxpayers Protections (2016) 282.

37

ATO, Taxpayers’ Charter — if you’re subject to review or audit (5 January 2016) .

38

IGT, Review into the Taxpayers’ Charter and Taxpayers Protections (2016) 282.

39

ITAA36 s 8.

40

Robinswood Pty Ltd v FC of T & Anor 98 ATC 4442; (1998) 39 ATR 305.

41

TAA s 8C.

Disputes over access to information Tapping in to the “neighbour effect”

¶3-010

Commissioner’s right of access to premises

¶3-020

Commissioner’s power to obtain information and evidence ¶3-030 Limits to the Commissioner’s formal powers

¶3-040

Legal professional privilege

¶3-050

Public interest immunity

¶3-060

Accountants’ concession

¶3-070

Corporate board advice concession

¶3-080

¶3-010 Tapping in to the “neighbour effect” “Unlike commercial litigants, the ATO is not a direct contracting party to the underlying transaction which may give rise to tax consequences and is sometimes required to investigate many years after the fact. As a result, the ATO relies on information obtained from taxpayers or third parties in its audit and review processes to assist it in arriving at a decision, assessment or determination.”1 The Commissioner’s powers to access information are necessarily broad and largely unfettered. This allows the ATO (in a self-assessment environment) to conduct verification and compliance activities well after transactions have occurred and as a non-party to those transactions. This builds confidence in the taxation system, as taxpayers are aware that the ATO can undertake review work in the future (at any point if fraud or evasion is involved) and has the power to collect information to support that work. To that end, people know that there is a good chance that they will ultimately be caught if they do the wrong thing and (in some respects more importantly) their neighbours will be as well. This can be coined as the “neighbour effect” — taxpayers are more likely to do the right thing if they think that either their neighbours are also doing the right thing or, if they aren’t, they are going to get into trouble. Justifying the infringement of personal liberty It is on this basis that the Commissioner has been given extensive powers to both request access to information and conduct access visits to taxpayers’ premises (with or without notice). This clearly infringes on personal liberties and in many respects breaches privacy in a way that people will rarely tolerate from government. The policy reason that government allows this invasion (even with the risk that any overreach could see the current government being voted out of office) is that in spite of this infringement of personal liberty, income tax is the government’s principle source or revenue and the Commissioner needs wide-ranging powers to ensure the populace either complies voluntarily or are made to comply via compliance action.2 This then triggers the neighbour effect whereby people will tolerate certain impositions as long as their neighbours are also affected and it means that they aren’t going to be able to get away without paying their fair share of tax either. Powers are not unfettered With that in mind, it is not appropriate for the Commissioner to have completely unfettered power. It is important to note that his decisions to access premises and request information are subject to judicial review under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA), as well as to legal (legal professional privilege and public interest immunity) and self-imposed administrative restrictions (accountants’ and corporate board concessions). Although the legal restrictions create strict oversight for the ATO in relevant instances, the administrative restrictions can be lifted in “exceptional circumstances” as defined by the Commissioner. However, as the Commissioner has created a legitimate expectation that he will apply the administrative concessions, if he decides to lift them in a manner not defined in his

policy or without notice, the decision will likely be invalid as a breach of procedural fairness.3 The earlier the ATO is able to access quality information about transactions, the better their decisions which in turn leads to less disputation, and earlier resolution at the least cost to all parties. Footnotes 1

IGT, Review into the Australian Taxation Office’s use of early and Alternative Dispute Resolution (2012) 29.

2

Grant & Ors v DFC of T 2000 ATC 4649.

3

Stewart v The Deputy Commissioner of Taxation [2010] FCA 402.

¶3-020 Commissioner’s right of access to premises Under Taxation Administration Act 1953 (TAA) s 353-15(1) Sch 1 the Commissioner, or an authorised officer: (a) may at all reasonable times enter and remain on any land, premises or place (b) is entitled to full and free access at all reasonable times to any documents, goods or other property (c) may inspect, examine, make copies of, or take extracts from, any documents (d) may inspect, examine, count, measure, weigh, gauge, test or analyse any goods or other property and, to that end, take samples. Although these are very strong coercive powers, the Commissioner states that he only uses them if the relevant information has not been obtained cooperatively. The Commissioner will try to avoid using a strong-armed approach unless absolutely necessary. This would generally involve negotiating access to documents at first instance and using formal powers only if the negotiation failed. However, this may not be the case if the Commissioner believes the documents are at risk of being destroyed and in that situation, he may use his power without prior discussion or notice.4 At its simplest, this access power allows the ATO to enter and remain on any property and have full access to all records and goods. Copies can be made but nothing can be taken without consent. It is a very broad power that allows the ATO to obtain tax-related information from various parties if it is believed they hold probative information about the tax affairs of a particular taxpayer. For example, the access power can be used to obtain information from a solicitor’s office. It has also been used to obtain documents from banks5 and the Family Court6 (although the court’s permission is required to use the information for an audit). Giving notice The Commissioner’s policy is generally to give notice before using this access power, unless he believes that the documents may be destroyed. Access powers are very rarely used without notice, for example, in the 2014/15 year the ATO only initiated four access visits without notice out of a total of 36 (ie only 11% of visits occurred without notice).7 It seems anomalous that when the ATO decides to use this access power, in approximately 90% of cases they inform the taxpayer (or their representative beforehand). Presumably where information cannot be obtained by negotiation or a less intrusive method, there would be some concern about document destruction. This would seem to be at odds with the ATO’s approach to provide advanced notice of access visits. In either event it would appear that the ATO almost always provides notice of access visits. In addition to situations where there is a risk of records being destroyed, the following are other examples of when access visits have occurred without notice:

• significant offshore funds are not accounted for in Australia • offshore promotion of tax evasion for Australian residents • phoenix activity • tax evasion • lodgment of false business activity statements, and • significant risk to the revenue.8 With this list in mind it appears that the ATO will undertake access without notice very rarely, ie where there is a view that serious fraud or evasion is occurring and there is a real risk that the records will be destroyed if notice is provided. The ATO can also conduct access visits without notice on law and accounting firms.9 However, before doing so the ATO will conduct a thorough risk assessment (to be approved by a senior officer) to decide whether to give the firm notice (only of the visit, not of the taxpayer of interest). The purpose and use of access powers is unrestricted, as long as it is for the purpose of administering a taxation law.10 This means that it can be used to gather information about current, past and future income years.11 Furthermore, the power can be used to obtain any documents the ATO thinks will assist in an audit, including documents held at the premises of the taxpayer’s advisor or representative.12 As long as the ATO is attempting to establish the taxpayer’s assessable income, the visit can be random, wideranging and even amount to a “fishing expedition” and still be appropriate. However, the power does not permit the ATO officers to take control of premises, or deny staff access to their place of work or computer records. It also doesn’t allow the ATO officers to copy everything without considering whether the information is required for the purposes of a taxation law.13 Showing authority to enter premises However, there are some limits on the Commissioner’s power. For example, if the ATO officers are asked to show their authority to exercise powers under TAA s 353-15 Sch 1, if they are unable to produce written authority, they must leave the relevant property (or not enter it). Oddly though, the authority only has to be produced on request. This means that the ATO officers are not acting improperly if they conduct the visit without written authority, as long as they leave if unable to produce it.14 The solution to this problem is that the officers should ensure that they always carry written authority when they conduct access visits, and taxpayers (or their representatives) should always request to see the written authority as soon as the visit commences. If authorisation cannot be produced, the ATO officers should be refused entry or asked to leave the premises. As long as the ATO officers are properly authorised and can produce that authority on request, it is an offence for anyone to hinder or obstruct them from conducting their work, indeed the legislation states that an offence is committed if “you do not provide the individual with all reasonable facilities and assistance”. The offence is one of strict liability and carries a penalty of 30 penalty units15 (currently $5,400) for each offence. What does it mean to provide reasonable facilities and assistance? This would generally include the use of basic business amenities (photocopiers and lighting) as well as basic assistance to locate documents (ie answer questions about where certain things might be), unlocking doors, removing obstructions and providing passwords. Each instance where reasonable facilities and assistance are not provided is an offence and the Commissioner states that where his officers are hindered or obstructed he may prosecute for each offence. An example of not providing reasonable facilities would be turning the power or telephones off, whereas an example of not providing reasonable assistance would be refusing to provide a computer password when known.16 What will the Commissioner do if his access is restricted? The Commissioner states on the ATO website that “[o]ur right of full and free access allows us to take

whatever steps are appropriate to remove a physical obstruction to our access, provided that those steps are not excessive”. If obstructed, ATO officers may move the obstruction, seek an injunction from a court or prosecute. The ATO will generally provide time for people to take advice, but may seek to stay on the premises to ensure nothing is moved or destroyed. In exceptional circumstances the Commissioner may seek to force access to premises, but in reality this would be very rare. A more common occurrence would be when ATO officers require access to a locked storage facility (like a safe). In these circumstances the officers will try non-invasive means to open it first (such as looking for the key or engaging a locksmith), but if necessary will break it open. If criminal activity is suspected, the Commissioner will request the Australian Federal Police to seize and remove items using a search warrant. In this instance, it is worth noting that only items specifically listed in the warrant can be taken.17 The Commissioner’s powers of access are significant and only subject to judicial review under the ADJRA s 5 (discussed further in Chapter 6). Although the Commissioner’s rights of access are very powerful and largely unfettered, they are subject to limitations such as public interest immunity and legal professional privilege (along with the accountants and board concessions) which are discussed later in this chapter at ¶3-040. Footnotes 4

ATO, Our formal access powers (26 July 2016) .

5

Simionato Holdings Pty Ltd v FC of T (No 2) 95 ATC 4720.

6

Commissioner of Taxation & Darling and Anor (2014) FLC ¶93-583.

7

ATO, Our formal access powers (26 July 2016) .

8

ATO, National Tax Liaison Group minutes of 31 March 2010 (7 June 2010) .

9

ATO, Access without notice — law and accounting firms (26 July 2016) .

10

TAA s 353-15 Sch 1.

11

ATO, ATO, Our formal access powers (26 July 2016) .

12

Industrial Equity Ltd & Anor v DFC of T & Ors 90 ATC 5008.

13

JMA Accounting Pty Ltd & Anor v Carmody & Ors 2004 ATC 4916.

14

FC of T & Ors v Citibank Ltd 89 ATC 4268.

15

TAA s 353-15(3) Sch 1.

16

ATO, Providing reasonable facilities and assistance (26 July 2016) .

17

ATO, Obstructing our access (26 July 2016) .

¶3-030 Commissioner’s power to obtain information and evidence The Commissioner is empowered by TAA s 353-10(1) Sch 1 to give written notice requiring any person: (a) to give the Commissioner any information that the Commissioner requires for the purpose of the

administration or operation of a taxation law (b) to attend and give evidence before the Commissioner, or an individual authorised by the Commissioner, for the purpose of the administration or operation of a taxation law (c) to produce to the Commissioner any documents in your custody or under your control for the purpose of the administration or operation of a taxation law.18 These powers are very wide with limited restrictions, but are again subject to public interest immunity and legal professional privilege (discussed later in this chapter at ¶3-040). The underlying reasoning for this power is that the information required is usually held by other parties. The ATO’s preferred approach is to obtain the information by direct request and negotiation, however where this is not possible, the option of formal powers is needed to ensure the relevant information can be obtained in order to fulfil the statutory obligation to administer the taxation and superannuation systems.19 Types of notice As stated above, there are three key types of notice that may be sent (however, they are not mutually exclusive and may be exercised jointly and severally). Broadly, a notice may require any person (not necessarily a taxpayer or the person whose affairs are being reviewed) to: • provide information • give evidence in person • produce documents. The Commissioner also has the power to issue an “offshore information notice”, where information is located outside Australia.20 To provide context, most of the notices issued by the ATO are to provide information or documents. In the 2014/15 year, 97% of notices were to produce information or evidence, whereas only 2.5% were to attend and give evidence (with only a nominal number of offshore notices issued). This demonstrates that the ATO takes a very targeted and differentiated approach to issuing notices, limiting the burden on most people so that they only need to collate the information and send it in. Whereas those in which the ATO is taking a special interest (likely due to poor compliance, fraud or evasion) are requested to provide formal evidence under oath.21

Reasons for issuing a notice

The reasons for issuing a notice are varied and they will mostly be issued only where negotiations to obtain the information from the person directly have broken down. However, there may be occasions where a notice is issued before negotiations, including where the person has requested a notice be issued, the information could be lost or destroyed, there is a history of poor compliance behaviour, or it is a more efficient use of resources for all involved. Similar to the access powers, notice powers may be used to gather information about past, present or future income years and enquiries may be for a variety of purposes, including reviews, audits and gathering of intelligence. Notices can quite properly be issued as a “fishing expedition”, so long as the information requested is required for the “administration or operation of a taxation law”.22 Complying with a notice Failure to comply with a notice can be an offence under TAA s 8C or s 8D. These are criminal offences that carry penalties that increase significantly for second, third and subsequent offences.23 The ATO provides the following guidance on the “cycle of a notice”.24

People are generally allowed 28 days to respond to a notice, however this is not a firm rule and a lesser period of time will not invalidate the notice as long as the time period is reasonable.25 A person can ask for an extension of time to comply. If the reasons are clearly explained, fair and reasonable, there is a high probability that an extension will be granted (although the ATO is under no obligation to do so). A refusal to grant an extension of time is subject to judicial review (discussed later in this section and in more detail in Chapter 6). The Federal Court can also grant an interim injunction extending the time for compliance with a notice.26 Scope of the powers Although the notice powers are very strong, they are not unfettered and must be issued in good faith, in compliance with and for the proper purposes of the law. If a person who is the subject of a notice thinks it is incorrect or unclear, they still need to respond by contacting the ATO case officer to discuss (otherwise they could still be subject to an offence). The powers are very wide and extend beyond general expectations. For example, a person cannot refuse to comply with a notice by citing self-incrimination27 or spousal privilege. In relation to self-incrimination, this is because the specific statutory obligation to provide information overrides any common law privilege. In relation to spousal privilege, the High Court has ruled that spousal privilege is not recognised under the common law.28 The power to issue notices is also restricted when disputes are in litigation. For example, when a dispute

is before a court the Commissioner can be in contempt by issuing his own notice in relation to the same dispute (as it is essentially usurping the power of the court which has its own information-gathering processes, such as subpoenas, affidavits, testimony and cross-examination). Accordingly, if a person receives a notice when the same taxation dispute is before the court, they should immediately advise the Commissioner, request that it be withdrawn and advise that if it isn’t they will be approaching the court for an injunction restraining the Commissioner from acting on the notice and seeking the Commissioner to pay their costs of the injunction. An example of where the court issued an interim injunction was in Watson29 (a criminal proceeding) as the notice would have usurped the court’s powers. Issuing a notice won’t be contempt of court if the dispute is before the Administrative Appeals Tribunal (as it is not a court), the Commissioner is not a party to the proceedings, or the issue in litigation is different to the subject in the notice. Notices (given their statutory authority) also override any confidentiality conferred by contract or similar. For example, if you keep relevant information in the cloud via a company such as Apple or Google, the Commissioner’s notice would override their contract with you to keep that information secure and they would be obliged to supply it to the Commissioner.30 Why a notice to give information? The Commissioner is able to make wide-ranging enquiries using his notice powers, as long as it amounts to a good faith performance of his functions. This means that he can issue notices where he doesn’t specifically know exactly what he is looking for, otherwise known as a “fishing expedition” or “roving enquiry” — a very unique power that would never be allowed to occur in a court. The legislature has empowered the Commissioner in this way to ensure the proper conduct of investigations and compliance activity and ensure the integrity of the taxation system. It also allows evidence to be gathered at the earliest possible time to reduce the prospect of later disputation, as ideally all evidence relevant to the review or audit should be acquired at the earliest possible stage. A notice may be issued to provide information for a variety of reasons, usually because information is required in relation to a particular transaction in order to establish the taxation consequences. Alternatively, the ATO may simply be trying to establish whether the information in question exists. Pertinently, one reason a notice to produce information is issued (rather than a notice to produce documents) is that there is a belief that the information is not contained in a document, or it is more efficient to get a description of the document31 (for the sake of efficiency and so save the subject of the notice time and money). In this regard the power has been validly used in the following cases: • to obtain a list of a lawyer’s clients who had entered into certain transactions32 • the advice provided by a large accountancy firm with respect to certain non-complying super funds, along with a list of the clients advised33, and • a bank, to establish which customers held accounts in a suspected foreign tax haven34. The powers can be used at any time after an assessment has been made, so long as it doesn’t amount to contempt of court.35 Why a notice to attend an interview? Notices to attend and give evidence in person are usually issued when the relevant documents do not exist, are unavailable or it is more efficient to seek answers and explanations directly. The notice will advise who will be present, including whether the Commissioner intends to have a lawyer represent him.36 This is important to know as the person who is being interviewed is entitled to have a lawyer present to advise on legal issues37 and it is probably critical to have your own lawyer involved if the Commissioner intends to have his, in particular as the Commissioner’s lawyer is entitled to ask questions38 and this may expose the person being interviewed if they don’t have their own lawyer to argue for their legal rights. Why a notice to produce documents? The production of documents will generally be required when the ATO has become aware that a person

or organisation holds or has control over particular documents in Australia or overseas. The documents required will be identified as specifically as possible and the ATO will only hold onto the documents for a reasonable period (say enough time to make copies).39 Documents are required to be produced if they are in the “custody or control” of the person who receives the notice. This would include the person that can physically produce the documents, such as a bank that holds the documents in a safe deposit box40 (the bank has custody and control), or a person who has access to that deposit box (as they have control, although lacking custody). The notice must nominate the particular taxpayer whose information is being sought41 as notices requesting all of a law firm’s trust accounts (not limited to particular taxpayers) have been deemed to be too wide.42 A notice to produce documents is generally used when the ATO has a reasonably clear idea of what they require and the taxpayer it is required from. While still a wide and robust power, it is used in more strategic instances than the more general powers to request information or attend an interview (which are able to be used to “fish” for information). What limits are there on these powers and can I ask for a review? The powers have some legal and administrative protections, including legal professional privilege and public interest immunity (legal) and the accountants and corporate board concessions (discussed later in this chapter at ¶3-040). Decisions to issue notices and not to extend the time for compliance are subject to judicial review pursuant to the grounds set out in ADJRA s 5 (discussed in more detail in Chapter 6 at ¶6-040). Can I challenge a notice? A notice can be challenged in the following circumstances: • it was invalidly drafted, ie it doesn’t provide enough time to comply or doesn’t specifically state what items are required • it was issued by someone who did not have the power to issue it, or was issued for an improper purpose, or • there was a failure to comply with the strict requirements for service of the notice. Footnotes 18

TAA s 353-10(1) Sch 1.

19

ATO, Our formal notice powers (26 July 2016) .

20

ITAA36 s 264A.

21

TAA s 353-10 Sch 1; ATO, Our formal notice powers (26 July 2016) .

22

Ibid.

23

TAA s 8E.

24

ATO, Our formal notice powers (26 July 2016) .

25

Holmes & Ors v DFC of T 88 ATC 4906.

26

Binetter v DFC of T 2012 ATC ¶20-331.

27

Donovan v DFC of T 92 ATC 4114; De Vonk v DFC of T 95 ATC 4538; Binetter v DFC of T 2012 ATC ¶20-331.

28

Australian Crime Commission v Stoddart [2011] HCA 47.

29

Watson v FC of T 99 ATC 5313.

30

ATO, Our formal notice powers — Scope of our powers (26 July 2016) .

31

Ibid.

32

FC of T v Coombes (No 2) 99 ATC 4634; Hart v DFC of T 2005 ATC 5022.

33

Deloitte Touche Tohmatsu & Ors v DFC of T 98 ATC 5192.

34

ANZ Banking Group Ltd v Konza & Anor (No 2) 2012 ATC ¶20-347.

35

Industrial Equity Ltd & Anor v DFC of T & Ors 90 ATC 5008.

36

ATO, Our formal notice powers — Notices to attend an interview and give evidence (26 July 2016) .

37

Dunkel v DFC of T 91 ATC 4142.

38

Grant & Ors v DFC of T 2000 ATC 4649.

39

ATO, Our formal notice powers — Notice to produce documents (26 July 2016) .

40

FC of T & Ors v ANZ Banking Group Ltd 79 ATC 4039.

41

Ibid.

42

Clarke v DFC of T 89 ATC 4521.

¶3-040 Limits to the Commissioner’s formal powers There are four specific situations where the Commissioner’s powers to access information is limited — two legal and two administrative. The legal exceptions are legal professional privilege and public interest immunity. The doctrine of legal professional privilege protects communications between a lawyer and their client in relation to giving or receiving legal advice or anticipated litigation.43 The Commissioner’s powers to obtain information by access or notice are subject to and limited by this doctrine.44 However, public interest immunity (also known as “Crown privilege”) can apply where disclosing the material is not in the public interest.45 The administrative exceptions are the accountants’ concession and the corporate board advice concession. The accountants’ concession is applied voluntarily by the Commissioner in respect of certain aspects of advice provided by accountants. The corporate board advice concession is also applied voluntarily with respect to certain types of advice prepared for a corporate board to assist in managing their tax compliance risk.46 Footnotes

43

Esso Australia Resources Ltd v FC of T 2000 ATC 4042.

44

FC of T & Ors v Citibank Ltd 89 ATC 4268.

45

Middendorp Electric Co Pty Ltd v Law Institute of Victoria 93 ATC 5041.

46

ATO, Limits to our formal powers — Corporate board advice concession (26 July 2016) .

¶3-050 Legal professional privilege The doctrine of legal professional privilege protects communications between a lawyer and their client for the dominant purpose of giving or receiving legal advice.47 It also applies to communications between a client, their lawyer and third parties for the dominant purpose of existing or anticipated litigation.48 The dominant purpose test places the onus on the person claiming the privilege to establish their claim.49 However, this statement is a bit misleading as the claimant of the privilege simply has to assert their claim. If the Commissioner wants to challenge that assertion, he needs to commence legal proceedings in order to test the claim. Although the onus may be on the claimant, the obligation to challenge the claim and commence legal proceedings is on the Commissioner. The rationale for privilege is that it aids in the administration of justice by encouraging people to engage lawyers to represent them and fully disclose their situation,50 ensuring that disputes progress with fully informed lawyers and can be resolved (either by negotiation or litigation) in the most efficient manner. The Commissioner’s access powers are restricted by the legal doctrine of privilege51 which means that if documents are privileged, the Commissioner has no power to access them without the consent of the client involved (the privilege belongs to the client, not the lawyer). Accordingly, the Commissioner is only able to access the information if the privilege is waived either expressly by the client or via implied waiver. If a lawyer is uncertain as to whether a document is privileged, to discharge their duty properly they should withhold the document and allow the Commissioner to test the claim in court if he wishes to press his claim for access to that document. It is important that the Commissioner allows sufficient time for claims of privilege to be made. If this is not done the Commissioner can be found to have acted outside his power and will be unable to use the documents.52 However, privilege is not infringed by simply taking a copy of or looking at a document, as long as the document is only looked at very briefly to ascertain whether it may be privileged.53 Privilege applies Documents that are generally privileged include: • advice from a lawyer, barrister • letters between a solicitor and their client • a solicitor’s conference notes, and • a detailed bill of costs if it discloses the nature of the advice. Privilege DOES NOT apply Privilege does not extend to communications that are not confidential or are lodged with a lawyer purely to claim privilege.54 Documents that are generally NOT privileged include: • documents created to progress a criminal, illegal or improper purpose55

• a solicitor’s client list56 • a trust account57 • a bill of costs that does not disclose the advice given58 • advice prepared but never given to the client59 • communications that evidence transactions (such as contracts or receipts)60 • accounting, financial and banking records (such as ledgers and journals)61, and • communications between a lawyer and their client when not made in that capacity.62 The key issue in determining if privilege applies is whether the information was created for the dominant purpose of giving or receiving legal advice, or in the anticipation of or during litigation. This is obviously a very fine line and an area ripe for disputation as what constitutes advice is arguable and, outside of the parties negotiating an agreement, can only be resolved by litigation. Exceptions Various exceptions apply to privilege including express and implied waiver, stated facts and fraud, crime or improper purpose (discussed above). Express (intentional) waiver occurs when the client (or lawyer following instructions) agrees to release privileged information or documents. Implied (unintentional) waiver occurs when a client’s conduct does not align with that which is expected of someone wishing to maintain privilege.63 An example of an implied waiver of privilege is where a witness uses a privileged document to refresh their memory while giving evidence, and in doing so they waive privilege over that portion of the document.64 Another example is if someone other than your lawyer has custody of the documents (such as your bank) that would likely amount to an implied waiver of privilege.65 Observed facts also do not attract privilege. For example, facts about transactions that do not relate to legal advice (such as contracts, conveyances, declarations of trust and receipt) will not attract privilege.66 Disputes about privilege Clearly, disputes will occur over privileged material and the Commissioner has issued comprehensive guidance on how disputes will be managed. Generally, the Commissioner will accept, reject, negotiate or ask for more information about claims for privilege. In general, the Commissioner will attempt to negotiate an agreement directly and put that agreement in writing so that both parties are clear as to what has been agreed. Where the Commissioner is unable to get sufficient information, he may seek court orders or some form of alternative dispute resolution (ADR) such as mediation, discussed further in Chapter 9, to resolve the dispute, but will try to work with the client to agree on the best method.67 In practice it is difficult to force an entity into inspection agreements or ADR if that is not their preference, so the Commissioner’s main option is to go to court. This is an expensive and time-consuming exercise and the Commissioner will consider whether it is an efficient use of his resources. Any entity in dispute with the Commissioner needs to think carefully about their approach, realising that litigation is expensive and slow (for both parties) and that either directly negotiating an outcome (or using an alternative method of resolution such as mediation or an inspection agreement) may be a more efficient use of resources. In deciding whether to test a claim for privilege in court, the Commissioner will also consider whether it is an efficient, economical and ethical use of his limited resources under the Public Governance Performance and Accountability Act 2013. Footnotes 47

ATO, Limits to our formal powers — Legal professional privilege (26 July 2016) .

48

Esso Australia Resources Ltd v FC of T 2000 ATC 4042.

49

ATO, Limits to our formal powers — Corporate board advice concession (26 July 2016) .

50

Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501.

51

FC of T & Ors v Citibank Ltd 89 ATC 4268.

52

Ibid.

53

JMA Accounting Pty Ltd & Anor v Carmody & Ors 2004 ATC 4916.

54

ATO, Limits to our formal powers — Corporate board advice concession (26 July 2016) .

55

ATO, Ibid; Clements, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police 2002 ATC 4072.

56

FC of T v Coombes (No 2) 99 ATC 4634.

57

Allen, Allen & Hemsley v DFC of T & Ors 88 ATC 4734; 89 ATC 4294; Clarke v DFC of T 89 ATC 4521.

58

Packer & Ors v DFC of T 84 ATC 4666.

59

May v DFC of T 99 ATC 4587.

60

ATO, Limits to our formal powers — Legal professional privilege (26 July 2016) .

61

Ibid.

62

Ibid.

63

Ibid.

64

Case 29/97 97 ATC 327.

65

ATO, Limits to our formal powers — Legal professional privilege (26 July 2016) .

66

Ibid.

67

Ibid.

¶3-060 Public interest immunity This would only occur rarely in circumstances where the release of the information to the Commissioner would be against the public interest. Public interest immunity can be claimed by application to a court to

stop the Commissioner obtaining information using his access or information-gathering powers. In order to make this decision, the court needs to balance the benefit of releasing the information to the Commissioner against the damage it would do to the public interest. For example, this may occur when a statutory entity undertaking an investigation is provided with information relevant to a person’s tax affairs. If the Commissioner seeks access to this information, that access can be denied if the release of the information would be against the public interest of disclosure (ie the importance of maintaining the confidentiality of the information is greater than any benefit that would be gained by its disclosure).

¶3-070 Accountants’ concession The accountants’ concession is an administrative concession voluntarily granted by the Commissioner and applies to clients of accountants. Although the Commissioner has the legal right to access documents prepared by professional accountants, under the concession the Commissioner will generally not seek access to specific types of advisory documents.68 The concession is similar to legal professional privilege, except it is not as wide and the Commissioner applies it voluntarily (ie he is not bound by the law to do so). The policy intention behind applying the concession is that taxpayers who seek the advice of professional accountants should be able to communicate with them fully and frankly when discussing their tax affairs.69 Although there have been recommendations that this administrative concession be made a statutory one,70 there has been no legislative attempt to make this change. Accordingly, the concession remains administrative. While recognising that the Commissioner has the legal power to access these documents, the concession allows certain documents to remain confidential between taxpayers and their professional accounting advisors in all but exceptional circumstances.71 The accountants’ concession classifies documents into three categories — source, restricted source and non-source documents.72 Source documents The Commissioner’s fundamental duty is to administer the tax laws and to do that he needs to understand the arrangements and transactions that taxpayers enter into. Documents that evidence these elements, known as source documents, are not covered by the concession and the Commissioner will seek full and unfettered access to these documents. Source documents are documents which: “include papers prepared in connection with the conception, implementation, and formal recording of a transaction or arrangement and which explain the setting, context and purpose of the transaction or arrangement”. Examples of source documents include “traditional accounting records” such as balance sheets, ledgers, profit and loss accounts and tax working papers. Outside of source documents, the Commissioner identifies two further categories of document (restricted source and non-source) which will only be accessed in “exceptional circumstances”.73 Restricted source documents Restricted source documents are advice documents prepared by a professional accountant advising on tax matters before, or at the same time as, the relevant transaction or activity occurred. Although it is likely that they will record what actually occurred, they will probably have done so in circumstances where candour is important. Accordingly, the Commissioner will only seek to access such documents in “exceptional circumstances”.74 Non-source documents Non-source documents refers to other types of advice or papers, such as advice prepared after the relevant transaction and papers prepared for transactions that did not and will not eventuate. Again, the Commissioner will only seek access to these papers in “exceptional circumstances”.75 What are exceptional circumstances? The Commissioner will only seek access to restricted-source and non-source documents in limited

circumstances and with the “personal” approval of a senior ATO officer (usually a Deputy Commissioner but in certain circumstances an Assistant Commissioner). The Commissioner will ordinarily try to obtain the required information by negotiation and collaboration with the taxpayer. Sometimes the information will have been obtained by another government agency such as the Australian Crime Commission and supplied to the Commissioner indirectly (in which case the concession will not apply).76 If sufficient information cannot be obtained in this way, the Commissioner will first try to obtain the requisite information from restricted-source documents and if that doesn’t work, only then from non-source documents. Exceptional circumstances include: (1) where the Commissioner has unsuccessfully requested source documents and cannot obtain the material from another source (2) the Commissioner suspects fraud, evasion, illegal activity or that an offence has been committed under the Taxation Administration Act (3) where the source documents cannot be located due to being misplaced or destroyed (4) where the taxpayer cannot be located, and (5) where records are overseas and the taxpayer either cannot or will not assist in locating them, and the taxpayer cannot provide a statement sufficiently explaining the transaction. However, the Commissioner won’t seek access to papers prepared by accountants for the purpose of representing a taxpayer in a dispute. This includes disputes or appeals before courts or the Administrative Appeals Tribunal as well as reviews and objections. Disputes about access Where the Commissioner and accountant or taxpayer disagree about whether access can be sought to a particular document, the Commissioner has outlined his policy for resolving such disputes. Given the Commissioner does have the legal power to access all of these type of documents, he is essentially mandating the process he will follow before exercising his power. Accordingly, the Commissioner states that the documents should be placed in a sealed container by the accountant and held for 30 days while the relevant Deputy Commissioner decides whether to seek access to some or all of the secured documents. Given the Commissioner has bound himself from an administrative and policy basis to the accountants’ concession, it is arguable that this on its own creates some legitimate expectation that it will always be followed.77 However, it has been clearly stated by the court that the accountants’ concession is not law78 and accordingly the Commissioner is not bound by it, as long as he does not breach the rules of procedural fairness and gives notice that he is not going to apply his policy, or that he does not make a decision that is so unreasonable that a reasonable decision maker could not have made it (which amounts to an error of law). Clearly, disputes in this space can be quite arduous and time-consuming, especially when the Commissioner has the legal right to obtain the necessary information if required. It would generally be preferable for the parties to work together and agree on the appropriate information to be provided to avoid any ongoing disputation. Footnotes 68

ATO, Limits to our formal powers — Accountants’ concession (26 July 2016) .

69

IGT, Protection of taxpayer rights in Australia (2015) 213.

70

Australian Law Reform Commission, A Review of Legal Professional Privilege and Federal Investigatory Bodies (2008) 6.203.

71

ATO, Limits to our formal powers — Corporate board advice concession (26 July 2016) .

72

ATO, Guidelines to accessing professional accounting advisors’ papers (30 June 2010) .

73

Ibid.

74

Ibid.

75

Ibid.

76

Stewart v DFC of T [2011] FCA 336.

77

White Industries Australia v FC of T 2007 ATC 4441.

78

Stewart v DFC of T [2010] FCA 402.

¶3-080 Corporate board advice concession The Commissioner also grants an administrative concession for advice prepared for corporate boards on tax compliance risk.79 The policy intention for this concession is based on a recognition that “the integral role of good corporate governance systems in ensuring companies can properly identify and manage tax compliance risks, the ATO understands that corporate boards need informed, independent advice to fully understand the implications of escalated risks”80. Documents may be protected from access by the ATO if they are created by advisors (in-house or external, as long as they are appropriately qualified) for the sole purpose of: • providing advice to the board on a major transaction, system, arrangement or process, or • assessing the likelihood, impact of, or managing the tax compliance risk, or the likely view of the Commissioner.81 The concession should be claimed at the earliest possible occasion and the ATO provides a form for this purpose on its website (to simplify and streamline the decision-making process when claims are made). The Commissioner is able to lift the concession in similar situations as apply to the accountants’ concession. Footnotes 79

ATO, Limits to our formal powers — Corporate board advice concessions (26 July 2016) .

80

PS LA 2004/14 ATO access to advice for a corporate board on tax compliance risk.

81

Ibid.

Penalties and interest Making the system fair

¶4-010

The role of interest and penalties

¶4-020

Interest charges — their purpose

¶4-030

General interest charge (GIC)

¶4-040

Shortfall interest charge (SIC)

¶4-050

Disputing GIC

¶4-060

Disputing SIC

¶4-070

Penalties — their purpose

¶4-080

Penalties relating to taxpayer statements ¶4-090 Penalties relating to schemes

¶4-100

Penalties for failing to lodge on time

¶4-110

Miscellaneous penalties

¶4-120

Resolving disputes over penalties

¶4-130

Objections and appeals

¶4-140

¶4-010 Making the system fair “A fine is a tax for doing something wrong. A tax is a fine for doing something right.” Anonymous1 The two underlying principles of the revenue system in Australia are that it relies on people to supply the correct information in order to work out their tax, and then paying that amount on time. In order to ensure that taxpayers do this, they need to believe that the system is fair and that there are appropriate disincentives in place for those who don’t do the right thing.2 The principles underpinning fairness have been described as: • horizontal equity — treating similar taxpayers in a like manner • proportionality — ensuring the repercussions match the offence, and • procedural fairness — giving taxpayers the right to be heard before action is taken.3 If the system isn’t fair (or seen to be fair), taxpayers will be less likely to do the right thing due to the “neighbour effect” (discussed in Chapter 3 at ¶3-010), ie taxpayers are more likely to do the right thing if they think that either their neighbours are also doing the right thing and if they aren’t, they are going to get into trouble. Interest and penalties play a critical role in ensuring that taxpayers know that poor behaviour is punished and that even if their neighbours are doing the wrong thing, they will get caught and be subject to punitive action for their behaviour. Footnotes 1

Geoffrey James, 130 Inspirational Quotes About Taxes (13 April 2015) Inc.com .

2

ATO, Interest and penalties (10 February 2016) .

3

IGT, Review into the ATO’s administration of penalties (2014), 1.16.

¶4-020 The role of interest and penalties The relevant punitive action in Australian tax law is the imposition of interest and penalties (outlined in Taxation Administration Act 1953 (TAA) Pt 4-25 Sch 1). In general terms, penalties are intended to be punitive and are imposed based on a taxpayer’s conduct (for example, making a false or misleading statement). Penalties are also intended to encourage taxpayers to take appropriate care of their tax obligations. On the other hand, interest is imposed to ensure that the people who do not pay on time do not receive an unfair advantage over those that do and are not allowed to treat the ATO like a fee and interest-free bank. Accordingly, interest is charged both in the pursuit of fairness and as a commercial charge on funds that have essentially been borrowed from government consolidated revenue. Interest falls into two categories, the general interest charge (GIC — discussed in detail at ¶4-040) and the shortfall interest charge (SIC — discussed in detail at ¶4-050). GIC is similar to the normal interest paid on a credit card, in that it is applied from the date the tax liability was due to be paid until it (and all accrued interest) is actually paid off. SIC on the other hand only applies in limited circumstances. For example, if a taxpayer is audited and the audit results in an increased tax liability (also known as a tax shortfall), SIC applies from the date the liability would originally have been due until the adjustment is made. The reason for two different charges is relatively straightforward. SIC only applies in circumstances that the taxpayer would (usually) not have been aware of the debt (as opposed to GIC where the taxpayer is aware). Therefore SIC is charged at a 4% lower rate than GIC.4 The concept of deterrence On the other hand the design of penalty regimes largely centers around two concepts — deterrence and norms. Deterrence focusses on high penalties to encourage compliance on the basis that it is cheaper than not complying.5 The concept of norms Norms acknowledges that many people want to do the right thing as a part of being “a taxpayer who values integrity, honesty and the benefits of citizenship”. The Commissioner uses both of these principles, by acknowledging that most taxpayers are trying to do the right thing and making it as easy as possible for them to do that. In support of these people (so that they know that the tax regime is robust) and to influence those that fall outside the “norm” category, deterrence is used in the form of penalties to influence their behaviour.6 Penalties before self-assessment In the context of the Australian taxation system, administrative, criminal and civil penalties are used in varying ways to influence and punish different types of behaviour. Prior to the 1986 introduction of the self-assessment regime, the Commissioner bore the risk of applying the law to the facts as disclosed by the taxpayer. In order to do the right thing, taxpayers simply had to provide all necessary supporting documents when filing their tax return. This meant that the most important thing was to ensure taxpayers were encouraged to provide all relevant information and this encouragement occurred in the form of a 200% penalty (remitted downwards as appropriate to the case) when an inadequate disclosure of facts led to an understatement of income.7 This punitive approach meant that most taxpayers were too fearful of the consequences of non-disclosure, ensuring that most complied automatically and upfront. Moving to a “unified administrative penalty regime” The self-assessment system changed this and the obligations of taxpayers expanded to include applying the law to the facts, meaning the old penalty regime was no longer fit for purpose. The penalty regime was amended in 1992 to align with self-assessment. Taxpayers were expected to act with “reasonable care” or face increasing levels of penalty depending on the type of behaviour. The penalty regime was further refined and unified in 2000 to become a “unified administrative penalty regime” — removing duplication and standardising penalties (including the rates) for all tax laws.8

The uniform penalty regime now accounts for four different types of penalty, those relating to: • taxpayer statements9 (see ¶4-090) • schemes10 (see ¶4-100) • failure to lodge11 (see ¶4-110), and • miscellaneous12 penalties (see ¶4-120). Penalties can be disputed in the manner set out in TAA Pt IVC (see ¶4-130). Taxpayers can object to the imposition of a penalty and if the objection is unfavourable (partly or fully) they may appeal to the Administrative Appeals Tribunal (AAT) or Federal Court for a review of the penalty decision. This may be done in conjunction with, or independently of, appealing a corresponding decision regarding a tax liability. On appeal, the taxpayer bears the responsibility of showing that the penalty is excessive, should not have been made or made differently13. GIC is imposed automatically under the operation of tax legislation and accordingly is not a “reviewable objection decision” so cannot be reviewed by the AAT. However, the decision not to remit is reviewable by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA). On the other hand, a taxpayer can object to the Commissioner’s decision not to remit SIC, as long as the amount that wasn’t remitted is more than 20% of the additional amount of tax. Otherwise, there will be no right of objection, but a taxpayer will still be able to seek review of the decision under the ADJRA. Footnotes 4

ATO, Interest and penalties (10 February 2016) .

5

IGT, Review into the ATO’s administration of penalties (2014) 1.22–1.27.

6

Ibid, 1.24–1.25.

7

Ibid, 1.33–1.35.

8

Ibid, 1.36–1.38.

9

TAA Subdiv 284-B Sch 1.

10

TAA Subdiv 284-C Sch 1.

11

TAA Div 286 Sch 1.

12

TAA Div 288 Sch 1.

13

TAA s 14ZZK and 14ZZO.

¶4-030 Interest charges — their purpose “The interest charges are intended to ensure that taxpayers who underpay their tax for a period don’t receive an advantage over those who have paid their tax on time, and to compensate the community for the impact of late payments.”14 The purpose of the interest charges can be extrapolated to say that the ATO should not and will not

provide interest-free loans. It is not in the business of banking, so it will apply a punitive rate of interest to those taxpayers which use it as a lending facility. This: • discourages unwanted behaviour • ensures taxpayers who do the right thing are not disadvantaged, and • compensates the government for the time cost of funds not being paid as and when they are due. Two different types of interest apply to tax liabilities arising under a taxation law15, the shortfall interest charge (SIC — see ¶4-050) and the general interest charge (GIC — see ¶4-040). Footnotes 14

ATO, Interest and penalties (10 February 2016) .

15

As defined in ITAA97 s 995-1 and includes all Acts for which the Commissioner has general administration.

¶4-040 General interest charge (GIC) The Commissioner’s power to impose the GIC arises from TAA Pt IIA. Public guidance is provided in PS LA 2011/12 on how GIC is administered. The GIC is applied to unpaid taxation liabilities, such as when a tax or penalty amount is paid late or not paid16 (a comprehensive outline of when the GIC applies is provided in TAA s 8AAB). The GIC applies from the date a liability is due, payable and unpaid. The key principle underpinning GIC is that: “[f]ully complying with taxation obligations is an important community responsibility. Taxpayers are expected to pay their tax debts as and when they fall due”. “GIC is intended to: encourage the timely payment of tax; deny late payers an unfair financial advantage over those who pay on time; and compensate the Australian Government for the impact of late payments.”17 GIC is both a punitive mechanism used to influence taxpayer behaviour as well as a measure to ensure there is fairness in the taxation system for all taxpayers (regarding the impact on consolidated revenue). Given taxpayers are usually aware that they have a liability that is due and payable, all taxpayers are charged a punitive GIC rate of interest that is 7% above the 90-day bank accepted bill rate (which is published by the Reserve Bank quarterly). GIC applies on each day that the tax was due, payable and remained unpaid. GIC itself is due and payable at the end of the same day that it accrues and it compounds daily. The GIC daily compounding rate applies to most taxes, including income tax, GST, FBT and also running balance accounts18. Footnotes 16

ATO, General interest charge (10 February 2016) .

17

PS LA 2011/12 Administration of general interest charge (GIC) imposed for late payment or under estimation of liability, 1.

18

TAA s 8AAE, 8AAC and 8AAZF.

¶4-050 Shortfall interest charge (SIC) The Commissioner’s power to impose the SIC arises from TAA Div 280 Sch 1. SIC applies if a tax return is amended and the tax liability is increased. This creates a taxation shortfall which has not been paid and has been outstanding since the original was due for payment.19 SIC is payable on the shortfall amount for the period between when the amount was originally due and the date the assessment is corrected. The purpose of SIC: “is to neutralise benefits that taxpayers could otherwise receive from shortfalls of income tax20 … so they do not receive an advantage in the form of a free loan over those who assess correctly.”21 Given taxpayers are generally unaware that they have a shortfall amount, all taxpayers are given the benefit of the doubt and the SIC rate of interest is 4% lower than GIC (where taxpayers are usually aware of the liability). Previously, taxpayers with a shortfall amount were liable to pay GIC. SIC applies to amended assessments for the 2004/05 and future income years as well as the petroleum resource rent tax for the 2006/07 and later income years. SIC compounds daily and is calculated under the formula outlined in TAA s 280-105 Sch 1. In simple terms the SIC rate22 equates to the 90-day bank accepted bill rate (which is published by the Reserve Bank quarterly) plus an additional 3%. SIC is due for payment 21 days after the amended assessment is issued. GIC will accrue on the outstanding amount if not paid within this time. Footnotes 19

ATO, Shortfall interest charge (10 February 2016) .

20

Also includes petroleum resource rent tax, excess non-concessional contributions tax and Div 293 tax.

21

TAA s 280-50 Sch 1.

22

TAA s 8AAD.

¶4-060 Disputing GIC There are limited options to dispute or seek a review of the imposition of either SIC or GIC. The Commissioner has the general power of remission, however, given he aims to treat taxpayers equally and fairly, he generally exercises this power in accordance with published guidelines, policy and interpretation of the law. With that in mind, the best approach is often to negotiate with the ATO throughout the course of an audit, ensuring that they are across all the material facts and circumstances (in particular, if they align with circumstances outlined in published policy) which can often avoid interest charges being imposed in the first place. This is the preferable and most efficient way of disputing interest charges, by avoiding the dispute altogether. However, if that does not work, or has not been possible, the next step is to seek remission of the interest charge. The Commissioner has a general discretion to remit GIC in full or in part23. However, the discretion is much easier to exercise if the GIC has accrued before an amount was due to be paid, eg GIC that accrues after an adjustment is made to an assessment, but before the amount needs to be paid24. If GIC is payable because a tax liability has not been paid by the due date, GIC can only be remitted (under the law) in three circumstances: (1) Where the circumstances were not due to the person.25 In this situation, the Commissioner is able to remit the GIC if the taxpayer has not contributed to the delay in payment (either directly or

indirectly) and the taxpayer has taken all reasonable steps to mitigate the circumstances that led to the delay. An example of this would be where a person scheduled an electronic payment and a bank systems failure caused the payment to fail. Another example would be where a natural disaster has caused the delay. (2) Where it is “fair and reasonable” to remit.26 Where the taxpayer has contributed to the delay in payment (directly or indirectly), but has taken reasonable action to mitigate the circumstances, and it would be fair and reasonable to remit the GIC. The test of “fair and reasonable” refers to “whether ordinary and reasonable members of the community who pay their taxes on time would see the circumstances as fair and reasonable”27. “Fair and reasonable” would not likely include adverse economic conditions (as all businesses are facing the same challenges). However, it might include circumstances where the taxpayer has tried to do the right thing, but made a mistake that resulted in severe unforeseen consequences.28 An example of this would be where the taxpayer has scheduled an electronic payment, but accidentally used the wrong payment details so the payment did not process successfully. However, once they realised their mistake, they rectified the error with the bank and made the payment immediately. (3) Where “special circumstances” exist or it is “otherwise appropriate” to remit.29 This criteria provides the Commissioner a broad discretion to remit where there are special circumstances that make it fair and reasonable to remit the GIC or it is otherwise appropriate to do so. This essentially gives the Commissioner the power to remit in any situation (as far as the law dictates), so long as he is able to form the view that the broad criteria are satisfied. The Commissioner outlines his policy regarding GIC remission in PS LA 2011/12. “Otherwise appropriate” is a broad discretion limited to senior tax officers. There is no exhaustive list of what may constitute appropriate circumstances, but it gives the Commissioner flexibility to consider the particular circumstances of each taxpayer.30 In practice, this allows disputes to be resolved based on a risk assessment of the dispute (see discussion in ¶4-130). It is always advisable for a taxpayer to seek remission of GIC under this criteria as part of an overarching resolution or settlement. The Commissioner’s decision on the remission of GIC cannot be objected under TAA Pt IVC31, but may be judicially reviewed under the ADJRA (see ¶4-130). Footnotes 23

TAA s 8AAG(1).

24

TAA s 8AAG(2).

25

TAA s 8AAG(3).

26

TAA s 8AAG(4).

27

PS LA 2011/12 Remission of General Interest Charge, 4.

28

Ibid.

29

TAA s 8AAG(5).

30

PS LA 2011/12 Remission of General Interest Charge, 4.

31

Sharp v FC of T [2010] AATA 1023.

¶4-070 Disputing SIC Where an assessment is amended to increase the tax payable, a taxpayer is liable to pay SIC on the increased amount payable (for income years 2004/05 and later). Because taxpayers would generally not be aware that they have a tax shortfall, SIC is 4% lower than GIC. The ATO is required to give a taxpayer a notice specifying the amount of SIC due, which is due for payment 21 days after the notice is given. If the SIC is not paid by the due date, GIC will accrue to the unpaid SIC. The Commissioner has the discretion to remit SIC under TAA s 280-160 Sch 1 and outlines his policy considerations for doing so in PS LA 2006/8. In deciding whether to remit SIC, the overarching consideration is whether “it is fair and reasonable to do so”.32 The principle of what the Commissioner considers to be “fair and reasonable” is discussed earlier in this chapter (¶4-060) and is what an ordinary taxpayer who complies with their obligations would consider to be “fair and reasonable”. However, in addition to this, the Commissioner “must” also have regard to: (1) the principle that remission should not occur simply because the benefit gained is less than the SIC (ie just because the taxpayer didn’t gain an equivalent benefit from having temporary use of extra funds does not mean remission is justified), and (2) the principle that the circumstances justify the Commonwealth bearing part or all of the delayed payment (ie where the Commissioner caused the delay). Informal approach SIC has a different nature to GIC (as usually it is a liability of which taxpayers will be unaware). However, if a taxpayer is subject to an audit and they are aware of reasons that SIC should not be imposed (or would be appropriate for subsequent remission under the criteria discussed above (¶4-060)), they should discuss with the tax officer handling their matter at the earliest possible opportunity as it is often easier to avoid the imposition of a liability than having to go through the time, expense and turmoil to have the liability overturned at a subsequent date. Formal request for remission However, if that does not work, a formal request for remission (aligned to the factors above) should be made. The Commissioner is obliged to provide a taxpayer with written reasons for his decision if he decides not to remit part or all of the SIC.33 At this point, SIC differs to GIC in a very important way as taxpayers can object to SIC under TAA Pt IVC in certain circumstances (GIC can never be objected to under Pt IVC).34 Accordingly, a taxpayer can object to the imposition of SIC (plus then appeal to the AAT if they are unsatisfied with the objection decision) if the amount that was not remitted exceeds 20% of the tax shortfall. Example A taxpayer has a tax shortfall of $10,000 and SIC of $2,500 is imposed. If the Commissioner declines to remit any SIC, the taxpayer can object as the amount of SIC not remitted exceeds 20% of the shortfall (ie $2,500/$10,000 × 100 = 25%). However, if the Commissioner had remitted $600, the taxpayer would not be able to object as the shortfall would not exceed 20% ($1,900/$10,000 × 100 = 19%).

Although taxpayers have the right to object to SIC in certain circumstances, these rights are in addition to and do not replace the existing rights to seek judicial review under the ADJRA35 (¶4-130). Footnotes 32

TAA s 280-160(1) Sch 1.

33

TAA s 280-165 Sch 1.

34

TAA s 280-170 Sch 1.

35

PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods, 34P.

¶4-080 Penalties — their purpose The uniform administrative penalty regime applies to all tax laws,36 which means that a consistent regime of penalties operates regardless of the type of tax imposed as long as it was imposed under a relevant tax law. This regime, among other things, introduced a consolidated penalty system for all taxes and standard rates for breaching similar obligations. The uniform penalty regime is consolidated in TAA Pt 4-25 Sch 1 and broadly includes four types of penalties: (1) taxpayer statements (2) schemes (3) failing to lodge on time, and (4) miscellaneous. The law empowers the Commissioner to impose these administrative penalties to encourage taxpayers to take reasonable care in relation to their tax affairs. The Commissioner applies a differentiated approach to imposing penalties, which means that he takes into account each taxpayer’s individual circumstances (including their taxation history) when deciding the amount of penalty to impose (if any). Penalties are calculated in one of two ways, either as outlined in the law or as multiples of a penalty unit.37 When infringement occurred

Penalty unit amount

Up to 27 December 2012

$110

28 December 2012 — 30 July 2015

$170

On or after 31 July 2015

$180

Example A taxpayer is liable to a penalty of 20 penalty units for failing to keep records as required by the law.38 An offence committed on 1 August 2015 would give rise to a penalty of $180 × 20 = $3,600.

Penalties that relate to taxpayer statements are calculated differently depending on whether they result in a tax shortfall amount (see below at ¶4-090). Footnotes 36

Includes all Acts and legislative instruments for which the Commissioner has general administration, but excludes certain excise laws.

37

ATO, Penalties (10 February 2016) .

38

TAA s 288-25 Sch 1.

¶4-090 Penalties relating to taxpayer statements In general terms, a taxpayer is liable for a penalty if: (1) the taxpayer or their agent makes a statement to the Commissioner, and (2) the statement is false or misleading in a material particular (by act or omission).39 The Commissioner takes a broad interpretation of “statement” to include “anything disclosed for a purpose connected with a taxation law” and may be made in writing, orally, in correspondence, objections, amendment requests, activity statements, tax returns or by omission (the list is not intended to be exhaustive). A statement is false or misleading in relation to a material particular if it is “contrary to fact or wrong” or “creates a false impression, even if … true”. A particular is considered to be “material” if it “is likely to affect a decision regarding the calculation of an entity’s tax-related liability or entitlement to a credit or payment”40. Penalties are calculated according to the requisite behaviour that has given rise to the penalty. To that end there are three core levels of penalty for false or misleading statements. Three core levels of penalty (1) Failure to take reasonable care Where there is a shortfall amount caused by a failure by a taxpayer (or their agent) to take reasonable care, the taxpayer is liable for a penalty of 25% of the tax shortfall. If there is no shortfall, the penalty is 20 penalty units. No penalty will apply if the taxpayer or agent has taken reasonable care or if “safe harbour” applies (safe harbour is discussed in more detail at ¶4-130). “The standard required to demonstrate reasonable care is that which would be taken by a reasonable person with the entity’s relevant personal characteristics, such as age, health, background, knowledge, education, experience, skill, and understanding of the tax laws. The class of entity concerned is also a factor. For example, more stringent record keeping and other procedures would be required of a business entity with complex transactions than an employee earning salary and wages.”41 For example, a tax professional will be expected to exercise a higher standard of care than an ordinary taxpayer. (2) Recklessness Where there is a shortfall caused by the “recklessness” of the taxpayer (or their agent), the taxpayer is liable for a 50% penalty of the shortfall amount. If there is no shortfall, they are liable for a penalty of 40 penalty units.42 The Commissioner advises that a taxpayer is “reckless if a reasonable person in your circumstances would have been aware that there was a real risk of a shortfall amount arising and you disregarded, or showed indifference to, that risk”43 and it “goes beyond mere carelessness or inadvertence by displaying a high degree of carelessness”. Essentially, the test is an objective one (actual intention is not relevant) and similar to reasonable care, turning on what a reasonable person in that situation would do. It is a question of degree and if the actions fall below what is required of a reasonable person, the conduct will likely amount to recklessness.44 (3) Intentional disregard of a taxation law Where there is a shortfall amount that is caused by the intentional disregard of a tax law by a taxpayer or their agent, the taxpayer is liable to a penalty of 75% of the shortfall amount. If there is no shortfall, the

penalty will be 60 penalty units.45 Intentional disregard amounts to conduct that is more than reckless action or indifference to the law. The test differs to the objective tests used for recklessness and lack of reasonable care. The test for intentional disregard is subjective, that is the actual intention of the taxpayer is relevant rather than what a reasonable person would think. The test requires that the taxpayer has actual knowledge that they are making a false statement, understand the law and deliberately choose to ignore it and act dishonestly. Evidence of the taxpayer’s intention must be found directly or inferred by the relevant facts.46 Further penalties In addition to the three core (or base) penalties relating to statements, there are three further penalties in relation to statements. (1) Penalty for taking a position that is not reasonably arguable47 A penalty of 25% of the tax shortfall applies where a taxpayer (or their agent) interprets the tax law48 as applying in a certain way, but the position taken is not “reasonably arguable” and the shortfall exceeds a certain threshold.49 “The test for a reasonably arguable position focuses on an objective analysis of the merits of the position taken and its application to the facts at the time of the statement. A position is reasonable arguable if it is at least ‘about as likely as not’ to be correct. It must be arguable on rational grounds; there must be scope for a difference of opinion as to the law, or of the application of the law to the particular facts of the case. An error of fact, which the entity did not know and could not reasonably be expected to have known was wrong, is not adoption of a position in relation to a tax law.”50 The test is an analysis of what a reasonable person would think of the argument taken and whether (on the facts) there is a 50/50 chance of success or what is sometimes referred to as “reasonable prospects”. Although legal advice in this regard is not definitive, if the advice supports the proposition that a reasonable person would form a view that the taxpayer could win in court, this will constitute reasonable prospects. (2) Penalty for failing to make a statement51 If a taxpayer fails to lodge a document by the day it is due, and that document is required by the Commissioner to determine the tax liability and the Commissioner ultimately determines the liability without that document, a taxpayer is liable to a penalty of 75% of the entire tax liability (not just any shortfall).52 (3) Increases and reductions53 The base penalty for statements can be increased or reduced based on whether there are aggravating or mitigating circumstances. The base penalty will normally be decreased if a taxpayer makes a “voluntary disclosure” and informs the ATO of information that they were not previously aware. The penalty reduction can be as much as 80%. The maximum may apply if the disclosure is made before the commencement of a review or audit. If the disclosure is made after a review or audit has begun, only a 20% reduction will apply. The base penalty is increased by 20% if a taxpayer: • tries to obstruct the ATO from discovering a shortfall, or makes a false or misleading statement • became aware of a shortfall or misleading statement and did not inform the Commissioner in a reasonable time, or • was previously liable for a false or misleading statement penalty or for taking a position that was not reasonably arguable.54 Footnotes 39

TAA s 284-75 Sch 1.

40

PS LA 2012/5 Administration of penalties for making false or misleading statements that result in shortfall amounts, 16–23.

41

MT 2008/1 Penalty relating to statements: reasonable care, recklessness and intentional disregard.

42

TAA s 284-90(1) Item 3B Sch 1.

43

ATO, Statements and unarguable positions (10 February 2016) .

44

MT 2008/1 Penalty relating to statements: reasonable care, recklessness and intentional disregard, 99–101.

45

TAA s 284-90(1) Items 1 and 3A Sch 1.

46

MT 2008/1 Penalty relating to statements: reasonable care, recklessness and intentional disregard, 110–114.

47

TAA s 284-90(1) Item 4 Sch 1.

48

Also applies to the petroleum resource rent tax.

49

TAA s 284-90(3) Sch 1.

50

MT 2008/2 Administrative penalty for taking a position that is not reasonably arguable.

51

TAA s 284-75(3) Sch 1.

52

TAA s 284-90(1) Item 7 Sch 1.

53

TAA s 284-220 Sch 1.

54

TAA s 284-220 Sch 1.

¶4-100 Penalties relating to schemes Scheme participants Different base penalty amounts apply to the benefits that arise where a taxpayer has entered into a tax avoidance scheme. These penalties are known as “scheme shortfall amounts”55 and are imposed at higher rates in order to act as a deterrent. These penalties can also be adjusted (up or down) as outlined above (¶4-090). Scheme penalties are also subject to remission which will be discussed later in this chapter (¶4-130). It is beyond the scope of this text to consider schemes and scheme penalties in any detail, however, they are subject to the same disputation process including remission, objections and appeals — discussed at the conclusion of this chapter (¶4-140). Scheme promoters A civil penalty regime also applies to promoters of tax avoidance and evasion schemes56 with the Federal Court able to impose penalties of 5,000 penalty units (25,000 for a body corporate) plus twice the payment received from the scheme. In order to impose such a penalty, the Commissioner will need to apply to the Federal Court and prove (on the balance of probabilities — given that it is a civil penalty) that

the person or entity: • is a promoter of a tax exploitation scheme, or • implemented a scheme that was promoted on the basis of a product ruling in a materially different way to what is described in the ruling. Given that disputes around these penalties occur in the Federal Court, the normal court processes (including subsequent appeals) will apply. Any entity that becomes aware that the Commissioner is considering applying to the Federal Court for this penalty should engage with the Commissioner at the earliest opportunity and see if litigation can be avoided (either as unnecessary or in order to avoid the wasted time, cost and publicity that comes with litigation). The best way to engage is to discuss the evidentiary requirements related to the imposition of the penalty and whether the evidence will be sufficient for the court to impose the penalty. If not, the Commissioner will be unlikely to commence litigation. If evidence exists, discussions should focus on the admissibility and probity of that evidence and each parties’ prospects of succeeding in the litigation. The Commissioner may choose to pursue the penalty as a compliance measure in order to send a message to the community that this behaviour is unacceptable. In this situation, an entity that wishes to dispute the penalty will need to test the evidence in the Federal Court. Footnotes 55

TAA s 284-145 to 284-160 Sch 1.

56

TAA Subdiv 290-B Sch 1.

¶4-110 Penalties for failing to lodge on time In order to properly administer the Australian taxation system in a self-assessment regime, the ATO relies on the prompt and regular provision of relevant information from taxpayers as most of the time the ATO is not a party to relevant transactions and does not have the requisite information to undertake its duties. With that in mind, it is very important for the ATO that all taxpayers lodge their documents on time. In order to encourage this, an administrative penalty applies to taxpayers who either fail to lodge or lodge late (TAA Div 286 Sch 1). In broad terms, a taxpayer is liable to an administrative penalty if required to give a “document”57 by a particular time but fails to do so. A taxpayer can also be subject to criminal prosecution for refusing or failing to lodge, but if they are prosecuted the penalty is not payable (prosecution is discussed further in Chapter 6). The Commissioner advises that he understands that taxpayers sometimes make mistakes and forget to meet their obligations even when they are trying to do the correct thing, accordingly if the incident is isolated he won’t apply a penalty. He will also have one of his officers contact a taxpayer before the penalty is imposed. If a penalty is applied, the Commissioner will send a penalty notice stating the amount of the penalty and providing a due date for payment. Penalties are issued in penalty units (one for each 28 days a document is overdue, up to a maximum of five). Medium and large entities are subject to higher penalties.58 Footnotes 57

This includes a return, statement or notice.

58

ATO, Failure to lodge on time penalty (10 February 2016) .

¶4-120 Miscellaneous penalties Various other administrative penalties may be applied by the Commissioner, including penalties for failing to withhold PAYG obligations. These are commonly referred to as “director penalties” and are discussed further in Chapter 7. Other types of penalty exist for taxpayers who fail to comply with other obligations as outlined in the tax laws (such as keeping records as required) and are applied in penalty units per offence.

¶4-130 Resolving disputes over penalties There are a variety of options open to taxpayers to resolve penalty disputes, both informal and formal. In the interests of saving time and costs for both the ATO and taxpayers (plus relationship building), the Commissioner generally prefers to resolve disputes about penalties upfront and informally.59 Informal resolution would generally involve direct discussions with the ATO regarding the appropriateness for the penalty and, failing that, requests for remission or safe harbour. These strategies can generally be implemented for all administrative penalties discussed in this chapter. Direct discussion Direct discussion about the penalty the Commissioner intends to impose is the most efficient and effective means of resolution if done well. This involves establishing the penalty that the Commissioner is contemplating, the evidentiary requirements of that penalty and the relevant facts. Taxpayers and their agents often wait until a penalty decision is made before disputing the penalty, usually in the mistaken belief that no penalty will be imposed, or that once they can review the penalty decision it will be easier to argue against. Unfortunately, the opposite can often be true and it can be more difficult to reverse a penalty decision as the onus is on the taxpayer to demonstrate that the penalty was excessive, should not have been made or should have been made differently.60 It is advisable to engage with the ATO upfront and throughout the review or audit to argue that either no penalty applies, or that a lesser penalty is appropriate (based on an objective view of the facts). If a taxpayer is unable to persuade the Commissioner that the penalty should have been imposed differently (or not at all) based on negotiations over the objective facts, it is still worthwhile negotiating further to avoid a protracted dispute. Failing a negotiated outcome, the remaining strategies to use (other than formal disputation or Alternative Dispute Resolution (ADR) discussed in Chapter 9) are requesting remission and safe harbour. Requesting safe harbour Safe harbour applies to an administrative penalty imposed for false or misleading statements made by a taxpayer’s registered tax agent for not taking reasonable care and for failing to lodge. However, it only applies if the agent is a registered agent, the taxpayer provided the agent with all relevant information, the agent made the statement (not the taxpayer) and the statement was only due to “lack of reasonable care”, not recklessness or intentional disregard.61 If the penalty fits within these parameters (or should fit within these parameters), a taxpayer should approach the ATO and request “safe harbour” protection which will result in the administrative penalty not applying. The difficulty with this is that the taxpayer will be unlikely to be aware that their agent made the misleading statement and agents will often be reluctant to admit their error, so the ATO will often apply “safe harbour” on its own initiative. In either event, it is advisable that the application of “safe harbour” always be considered by the ATO, taxpayers and their representatives in every relevant case (as it may reduce the penalty to nil). It could also be professionally negligent of registered agents to disadvantage their clients by hiding their error. Requesting remission The Commissioner has an unfettered discretion to remit some or all of any administrative penalty (TAA s 298-20 Sch 1). This may be done on the Commissioner’s own initiative or at the request of the taxpayer (or their agent). This applies to all administrative penalties. If negotiations have not worked and safe

harbour does not apply, then the next avenue is to ask the Commissioner to remit the penalty under this section. If the Commissioner chooses not to remit in full, he must provide the taxpayer with written reasons. The Commissioner outlines his approach to remission of different penalties in various practice statements. For example, for penalties relating to false or misleading statements that result in shortfall amounts, PS LA 2012/5 says the Commissioner will ensure “the question of remission in each case [is] based on all of the relevant facts and circumstances and having regard to the purpose of the provision”. ATO officers are instructed to consider that the law provides its own exceptions to the penalty regime, given that if taxpayers have taken reasonable care or “safe harbour” applies, then there will be no penalty anyway. With that in mind, officers are instructed to act fairly and reasonably, considering that the penalty regime is intended to ensure taxpayers are treated consistently and that arbitrary penalty remission compromises that objective. The key reason for remission appears to be that the penalty regime is not achieving its objective and causing “unintended or unjust results”62. The test for remission of penalties for false or misleading statements that do not result in a shortfall amount is similar.63 Given the discretion is so wide, the best approach is to discuss the penalty decision with the ATO officer who made the decision to ensure a thorough understanding of the reasoning behind it, and then to use that reasoning to launch a persuasive argument as to why the penalty should be reduced to a lower level or remitted altogether. Remission of penalties for failure to lodge The Commissioner also has an unfettered discretion to remit penalties for failure to lodge, however, given the different nature of the penalty some additional considerations are taken into account. For example, the Commissioner states that remission will occur if the taxpayer can show that the failure to lodge was due to unpredictable circumstances beyond their control and they were not in a position to request an extension of time. Remission can also be granted if it is “fair and reasonable” to do so or if the penalty results in an unjust outcome. If any of these criteria can be demonstrated, remission should be automatic. Successful examples of this type of remission request would be natural disasters or significant illness. Unsuccessful examples would include being on holiday or too busy.64 The key to requesting remission is to make a persuasive argument using the Commissioner’s policy to describe why the circumstances were beyond the taxpayer’s control, that it is “fair and reasonable” to do so, or the penalty gives an unjust result. Formal and alternative dispute resolution If none of these approaches have worked to the taxpayer’s satisfaction (either full or partial remission), the only option remaining is either formal disputation under the objections and appeals process in TAA Pt IVC (see Chapter 5), or requesting ADR (see Chapter 9). Footnotes 59

IGT, Review into the ATO’s administration of penalties (2014), 1.84–1.85.

60

TAA s 14ZZK.

61

TAA s 284-75(1A) and (6) Sch 1.

62

PS LA 2012/5 Administration of penalties for making false or misleading statements that result in shortfall amounts, 155–158.

63

PS LA 2012/4 Administration of penalties for making false or misleading statements that do not result in shortfall amounts, 132.

64

PS LA 2011/19 Administration of the penalty for failure to lodge, 9–11.

¶4-140 Objections and appeals The objections and appeals process under TAA Pt IVC is described in Chapters 5 and 6. Broadly, taxpayers dissatisfied with the Commissioner’s penalty decision may object (obtain an independent internal review) and then appeal (to the AAT or Federal Court) for an external review of the decision. An external review places the onus on the taxpayer to show that the penalty was excessive or the decision should have been made differently.65 Taxpayers can object to all penalties other than in limited circumstances (such as where there are less than two penalty units remaining after a remission decision).66 Where there are no objection rights, taxpayers can still seek a review under the ADJRA (discussed at ¶6-040). Footnotes 65

TAA s 14ZZK and 14ZZO.

66

TAA s 298-20(3) Sch 1.

Challenging an assessment A multi-layer process

¶5-010

A taxpayer’s right to obtain information

¶5-020

What can be accessed and how?

¶5-030

Making an FOI request

¶5-040

Refusal of an FOI request for access

¶5-050

Internal review of FOI decisions

¶5-060

Independent review by the OAIC

¶5-070

Being strategic in resolving disputes about access to information ¶5-080 The legislative review process

¶5-090

The administrative review process — purpose

¶5-100

Internal review under the Taxpayers’ Charter

¶5-110

Independent review for large taxpayers

¶5-120

¶5-010 A multi-layer process “Dear IRS, I am writing to you to cancel my subscription. Please remove my name from your mailing list.” Charles M Schulz (Snoopy)1 The assessment and amendment processes may be simple on their face, but their implementation is padded with complexity. For the processes and procedures that sit behind challenging an assessment, the complexity appears in the detail and in the variety of mechanisms (both legal and administrative) that are implemented to try and assist taxpayers to comply, while balancing the revenue collection priorities of the Australian Government. This creates an intricate system that most will spend their lifetime trying to avoid, manage, navigate and at the very worst, survive. It is important to consider the methods for challenging an assessment and the collateral disputes that can arise. This includes the convoluted processes for gathering information, legislative review and administrative mechanisms created by the Commissioner under his powers of general administration to resolve and avoid disputes at the earliest possible time. Gathering information — the issues The process of gathering the relevant information to challenge an assessment is tricky, as it sits at the intersection of administrative decision-making and legal disputation (see ¶5-020 below for further detail). Once a dispute is in court, a party has the right to access relevant information so they can understand and meet the case against them (Futuris Corporation Ltd v FC of T 2009 ATC ¶20-115, at 9791). Unfortunately, before a matter is in the court or tribunal, those in dispute with the Commissioner are at the mercy of the Commissioner’s discretion as to what (if any) information he wishes to disclose to a taxpayer (as there was originally no obligation to share information). However, to address this gap, the legislature has stepped in to provide taxpayers with a mechanism to access information relevant to their own affairs and has also created a pro-disclosure onus on the Commissioner to release information where possible under the Freedom of Information Act 1982 (FOIA). However, even with these changes, collateral disputes in relation to the release of information also arise and a legislated system for resolution is in place to manage these issues. It is therefore important to understand and analyse how the disputation and resolution processes work in relation to information disputes, while realising that these disputes fall within a larger context and must be managed strategically

and cautiously. Avoiding court There are two key mechanisms in place to challenge taxation assessments, the objection and appeals process outlined in TAA Pt IVC, which provides a prescriptive mechanism for resolving disputes between the Commissioner and taxpayers either on their merits (via the Administrative Appeals Tribunal) or at law (in the Federal Court). However, these processes have become cumbersome, slow and expensive. Accordingly, the government and Commissioner have sought additional avenues to ensure that most disputes are resolved more quickly and cost effectively than going through the tribunals and courts. The Commissioner’s solution has been to create a process of earlier internal review that occurs during an audit (much earlier than would occur via the legislated objection process), with the goal of resolving disputes at the earliest possible stage, providing cost-effective solutions and certainty for taxpayers. These processes include “independent review” for large business and “review” for all other taxpayers, which the Commissioner is empowered to implement as an administrative process of resolution pursuant to his general powers of administering the tax laws. It is also important to understand and analyse how these processes are implemented and contribute to the anatomy of tax disputation. Footnotes 1

Charles M Schulz, Quotations about Taxes (9 April 2016) Quotegarden .

¶5-020 A taxpayer’s right to obtain information Challenging taxation assessments is a complex and time-consuming process, particularly when engaging with the formal objection and appeals procedure under TAA Pt IVC. In order to have the best chance of success in challenging an assessment, taxpayers (including their advisers or representatives) need as much information about the assessment decision as possible. The better the information available to a taxpayer, the greater the understanding of the decision and how best to challenge it. To that end it is important to identify and understand where those sources of information are, how to access them and what to do in the event of a dispute about access to information. Under common law There are two key ways for a taxpayer to obtain information — via either the common law or statute. Before a dispute is in court, there is no obligation on the Commissioner to disclose his reasons for making a particular decision2 (although he will usually do so voluntarily, but won’t necessarily provide all the information relied upon). This can leave taxpayers at a significant disadvantage throughout the review and objection (pre-litigation) phases. In contrast, once a dispute is in court (or the Administrative Appeals Tribunal (AAT))3 the Commissioner is obliged to provide the taxpayer with relevant information so that a taxpayer can understand and dispute the case against them.4 As the law left taxpayers somewhat exposed to the discretion of the Commissioner prior to litigation, the legislature has stepped in to provide taxpayers with additional rights. Freedom of Information Act 1982 The key legislation enabling access to information is the Freedom of Information Act 1982 (FOIA). Although the FOIA has whole of government application, the focus of discussion will be predominantly on its application in the taxation system. The fundamental purpose of the FOIA is “to give the Australian community access to information held by the Government of the Commonwealth”, in particular for present purposes, by providing taxpayers with a “right of access to documents”.5 While certainly not unfettered, the FOIA empowers taxpayers to request information relevant to their tax affairs and any associated dispute at any appropriate time (including pre-litigation). It is also important to note that powers exercised under the FOIA are specifically intended to be used “to facilitate and promote

public access to information promptly and at the lowest possible cost”,6 which creates a pro-disclosure environment (subject to any specific restrictions outlined in the Act), while also assisting taxpayers by providing prompt assistance at the lowest cost. Administrative Decisions (Judicial Review) Act 1977 The other key pillar that supports disclosure and the FOIA is the Administrative Decisions (Judicial Review) Act 1977 (ADJRA). While disputes under the ADJRA will be discussed in more detail in Chapter 6, for present purposes it is appropriate to note that the ADJRA provides taxpayers with the ability to obtain reasons for many ATO decisions, specifically a statement outlining the “material questions of fact”, with reference to the underlying evidence and the associated reasons for making the decision.7 This ability to request information as well as (in many instances) a statement of reasons for the decision provides taxpayers with the opportunity to understand the case against them and decide whether or not they wish to dispute the decision at the pre-litigation stage. This also ensures that many disputes do not progress to litigation as they are able to be resolved (one way or the other) at the earliest opportunity, thereby saving all parties valuable time and money. Limitations under the FOIA As noted previously, the fundamental principle of the FOIA is to provide taxpayers with a legal right to access many documents held by the Commissioner and there is even a pro-disclosure bias, encouraging this to be done as quickly and cheaply as possible. However, the power is obviously not unfettered, and it is appropriate to outline what documents can be accessed, how they are accessed, exclusions to access and what occurs if the Commissioner and taxpayer disagree on whether a document should be released under the FOIA. Footnotes 2

Wingfoot Australia Partners Pty Ltd v Eyup Kocak [2013] HCA 43, at 43.

3

AATA s 37, 38 and 40.

4

Futuris Corporation Ltd v FC of T 2009 ATC ¶20-115, at 9791.

5

FOIA s 3(1).

6

FOIA s 4.

7

ADJRA s 13(1).

¶5-030 What can be accessed and how? Information and documents available on the ATO website The ATO provides comprehensive guidance in the Taxpayers’ Charter in relation to freedom of information (FOI) requests, including an FOI request form. The ATO advises that it provides access to certain documents without requiring an FOI request, in particular policy documents the Commissioner uses to make decisions (such as public rulings and determinations)8 with most of these documents available on the ATO website (to ensure access is quick, cheap and efficient). Documents already released under the FOIA In further compliance with its obligations under the FOIA and to promote quick and easy access to appropriate information, the ATO also publishes an “FOI disclosure log” which lists publicly available documents which have already been released under the FOIA.9 Anyone who wants access to these documents can order them via the ATO’s “Freedom of information ordering service”, which provides

immediate electronic access to most documents in the log.10 All of this information can be accessed directly, at no cost and without lodging an FOI request. Given the FOIA requires the ATO to publish policies and other documents that it uses for making decisions, there is a large amount of information available on the ATO website.11 This is published to provide guidance to taxpayers and their agents, plus it also avoids unnecessary FOI requests. Copies of your own tax returns, assessments or payment summaries In addition to this, taxpayers do not have to lodge an FOI request to access copies of their own tax returns, assessments or payment summaries. Taxpayers can request these directly from the ATO using the “Copies of returns request” form (at no cost). For information that falls outside these categories, taxpayers have the right to access their own records (subject to any legislative exemptions).12 Footnotes 8

ATO, Taxpayers’ Charter — accessing information under the Freedom of Information Act — You may not need to make an FOI request (5 January 2016) .

9

ATO, Access to information (8 March 2016) .

10

ATO, Freedom of information disclosure log (22 February 2017) .

11

ATO, Taxpayers’ Charter — accessing information under the Freedom of Information Act (5 January 2016) .

12

FOIA s 11.

¶5-040 Making an FOI request To ensure their request is processed in the quickest possible timeframe, taxpayers should use the “Freedom of Information (FOI) request — individuals and businesses” form to make requests (available on the ATO website). However, it is not mandatory to use this form, as long as the request is in writing, provides a return address, clearly states that it is a request under the FOIA and provides sufficient detail so that the documents can be identified.13 Timeframe After a request has been lodged, the ATO must acknowledge the request within 14 days and provide a decision (with reasons) within 30 days.14 Sometimes the ATO will ask for more time to comply with the request and will approach the applicant requestor directly to negotiate more time to comply. Although it may be tempting for the applicant to refuse to grant more time to the ATO, if the request is refused the ATO can apply to the Australian Information Commissioner (AIC) for more time, who will make a binding decision.15 Such an application will probably only slow the request down, therefore it will likely be in the applicant’s interest to negotiate an agreed timeframe with the ATO directly. If, however the ATO refuses to comply within a reasonable time, it might be appropriate to refuse more time and ask them to make their application to the AIC to minimise unnecessary delays. Alternatively, if the ATO has to consult a third party about the request (because it contains information about them), they are allowed an additional 30 days to determine the request but must advise the requestor.16 If the ATO fails to meet its obligations, the request is deemed to be refused and can be reviewed by the Office of the Australian Information Commissioner (OAIC — see ¶5-070)17.

Charges Generally, there is no cost for an FOI request if the request only relates to the requestor’s personal information. Charges do apply for accessing other types of documents (for example, if a media outlet makes a request). The amount of these charges is set by law.18 The applicant is entitled to be given an estimate of the likely charge before any fee is imposed and is also able to request that the fee be reduced or waived (usually because the fee will cause financial hardship or that the disclosure is in the public interest). However, the ATO is under no obligation to reduce or waive the fee even if it agrees with the reasoning put forward.19 Correcting information After accessing the documents, applicants can request that their information be corrected if they are of the view that the information is incorrect, out of date or incomplete and is used for an administrative purpose. The request can either be to amend the information or for the agency to make an annotation. Requests need to be made in writing with a return address and specify the document at issue, plus what needs to be done and why.20 There is no cost for making a request. The ATO is required to give its decision within 30 days, however it can ask the OAIC for more time. If the ATO does not meet these timeframes, the request is deemed to be refused and the applicant can ask the OAIC to review the decision.21 Where the threshold requirements are satisfied, the ATO “may” amend the record.22 The legislation uses the term “may” because although the ATO may be satisfied that the record is incorrect, they may not be satisfied that the suggested change is accurate. Accordingly, it is open to the ATO to amend a record differently to what has been requested by the applicant, if it is more likely to be correct than any other option.23 However, the ATO should make the amendment where it is satisfied that the information is incorrect and the proposed change is more likely to be correct than any other possible amendment.24 If an applicant is unsatisfied with how the ATO has handled the request, they are able to apply for an internal review by the ATO or an external review by the OAIC (discussed at ¶5-060 and ¶5-070 below). Taxpayers also have the right under the Privacy Act 1988 to ask the ATO to correct personal information held about them. It also requires the ATO to take “reasonable steps” to ensure that personal information is correct in the absence of a particular request. Anyone who is unhappy with the way the ATO has managed such a request can complain to the OAIC under the Privacy Act. Footnotes 13

FOIA s 15(2).

14

FOIA s 15(5).

15

FOIA s 15AC.

16

FOIA s 15(6).

17

FOIA s 54L.

18

Freedom of Information (Charges) Regulations 1982.

19

OAIC, FOI fact sheet 7: Freedom of information — Charges .

20

FOIA s 48 and 49.

21

FOIA s 51DA.

22

FOIA s 50.

23

OAIC, Part 7 — Amendment and annotation of personal records (October 2014) .

24

“K” and Department of Immigration and Citizenship [2012] AICmr 20 [39].

¶5-050 Refusal of an FOI request for access Access may be refused by the ATO if the requested information is considered an exempt document (FOIA Pt IV). “Exempt documents” include: • documents affecting enforcement of law and protection of public safety — eg could disclosure reasonably be expected to prejudice an investigation or proper administration of the law?25 • documents to which secrecy provisions of enactments apply — eg does a tax law enactment specifically prohibit disclosure?26 • documents subject to legal professional privilege — any document that would be subject to legal professional privilege is exempt27 (see ¶3-050) • documents containing material obtained in confidence — eg would disclosure found an action by a person for breach of confidence?28 • documents affecting national security, defence or international relations29 • Cabinet documents — eg would disclosure reveal Cabinet deliberative processes that have not been officially disclosed?30 • documents disclosing trade secrets or commercially valuable information31, and • documents where disclosure would be contrary to the public interest.32 It is beyond the scope of this book to go into further detail about the FOI exemptions, but broadly if the ATO decided to refuse access on the grounds that the document was exempt they would usually advise the applicant of the decision and the reason for the refusal (except where there is a deemed refusal as discussed earlier). This would include advising which exemption or exemptions were relied upon. Clearly, it can be difficult to dispute the decision when the applicant is unlikely to be aware of what the information entails. Accordingly, the ATO’s decisions are able to be reviewed internally and externally. Footnotes 25

FOIA s 37.

26

FOIA s 38.

27

FOIA s 42.

28

FOIA s 45.

29

FOIA s 33.

30

FOIA s 34.

31

FOIA s 47.

32

FOIA s 47B to 47J.

¶5-060 Internal review of FOI decisions FOIA Pt IV empowers the ATO to conduct internal reviews of its FOI decisions in two situations — where there has been an “access refusal” or “access grant” decision33. The internal review is wide-ranging and allows the reviewing officer to review both the original request and decision, exercising all the powers of the original decision maker, while not being bound by any aspect of the decision. In addition, the reviewing officer can consider new information or circumstances that were not available or known to the original decision maker.34 This ensures that the reviewing officer is able to conduct a thorough enquiry and make an independent and robust decision. The reviewing officer is also required to provide reasons for the decision.35 An applicant will first need to choose whether to apply for an internal review or a review via the OAIC. There is no restriction and an applicant can apply for an internal review, then seek a further review by the OAIC, or they can approach the OAIC at first instance. The OAIC advises that it is preferable to start with an internal review as it gives the ATO an opportunity to take a fresh look at its decision and is generally quicker than going directly to the OAIC. The one exception is that internal review is not available if the decision was made by the Commissioner of Taxation personally36 (which would be very rare). However, in those circumstances the applicant can still have the decision reviewed by the OAIC. Footnotes 33

FOIA s 53A and 53B.

34

OAIC, Part 9 — Internal agency review of decisions (October 2014) .

35

FOIA s 26 and 54C.

36

FOIA s 52.

¶5-070 Independent review by the OAIC “The Information Commissioner is an independent office holder who can review the decisions of agencies and ministers under the FOIA”.37 Relevantly for this discussion, the Australian Information Commissioner (AIC) can only review FOI requests made on or after 1 November 2010. If the request was made prior to this date, a different procedure applies (which is not discussed here). Applicants can have an ATO FOI decision reviewed by the AIC. They can also approach the AIC directly for review if that is their preference (although the AIC generally advises that applicants first ask the ATO to conduct an internal review as it will be quicker and also allows the ATO the opportunity to review its initial decision). There is no cost for applying for a review, the only requirement is that the applicant apply in writing (although it would be preferable to use the form available via the OAIC website). Applications should be lodged via one of the methods outlined on the OAIC website and include a copy of the decision to be

reviewed, the applicant’s contact details and the reasons for the review.38 Timeframes Applications need to be made in the timeframe specified in the FOIA and depend on the type of review being sought: • If the applicant is objecting to a decision to an “access grant decision” (a decision to grant access to documents to a third party), they have 30 days to object.39 • If the applicant is objecting to an “access refusal decision” (a decision to refuse access to part or all of one or multiple documents), the applicant has 60 days to lodge their objection (running from the day they were given notice of the original decision). The AIC can extend these timeframes if it is reasonable in the circumstances.40 Process Generally, OAIC staff will conduct the review with the AIC making the final decision (as only the AIC has the power to make a decision). The AIC has the power to affirm, vary or set aside the original decision and make a new decision. The AIC does not have to conduct a review if the application is frivolous, vexatious, lacking in substance, not made in good faith, or if the applicant unreasonably fails to cooperate with the process. In these circumstances, the AIC can elect not to review the decision and the applicant will have no further option for review open to them. The AIC can also decide that it would be more appropriate for the review to be undertaken by the AAT and advise the applicant of the procedure for referring the matter to the AAT, however the AIC states that would be a rare occurrence.41 Keeping it informal The review process itself is intended to be as informal and cost-effective as possible. Generally, this means the following: • No formal hearing. The AIC will attempt to make a decision without the need of a formal hearing and may even discourage legal representation (although parties always have the right to be represented by a lawyer). Parties have the right to request a hearing (which could be in person, or by phone) and the AIC is obliged to consider relevant submissions from each party and to make a determination as to whether a hearing will be held.42 • Gathering information. The AIC may approach the parties for more information, to clarify issues or ask the ATO to give written reasons for the decision if the reasons given do not suffice.43 • Broad powers. In managing the review process the AIC has broad powers, including the ability to compel parties (including the ATO) to produce documents, undertake further searches or attend and give evidence on oath. The AIC can also join affected third parties to the proceeding.44 • Examine all documents. The AIC will examine all documents relevant to the dispute (including those the ATO has declined to release). However, the AIC does not have the power to release documents determined to be exempt. Parties may also provide submissions arguing their case and the AIC will generally make a decision based on the submissions and papers provided45. • Make a decision. At the conclusion of the process the AIC will provide a decision either affirming, varying or setting aside the original decision, as well as providing reasons for the decision.46 • Appeals. Decisions of the AIC can be appealed to the Federal Court on a question of law or seek a further “merits review” by the AAT if the decision is a “reviewable decision”.47 Footnotes

37

OAIC, FOI fact sheet 12: Your review rights (July 2012) .

38

Ibid.

39

FOIA s 54S(2).

40

FOIA s 54T.

41

OAIC, FOI fact sheet 12: Your review rights (July 2012) ; FOIA s 54W, 55K and 57A.

42

Ibid; FOIA s 55B and 55C.

43

FOIA s 55E.

44

FOIA s 53C and 55A and Div 8.

45

FOIA s 55K and 55L.

46

FOIA s 55K.

47

FOIA s 56, 57 and 57A.

¶5-080 Being strategic in resolving disputes about access to information In the context of taxation disputes, it is important to ensure that the focus remains on the key issue in dispute and the access request does not become an additional dispute in its own right. This will only increase the time and cost involved in resolving the original dispute and ultimately may not be relevant if the information can be accessed by subpoena or summons in either the Federal Court or AAT. The objects of the FOIA are clearly stated; to provide the Australian community with access to government information. It requires agencies (such as the ATO) to publish information and it provides the community with “a right of access to documents”. In recognising that government information is a national resource, the Act states that it is intended to be used to “promote public access to information, promptly and at the lowest possible cost”.48 This essentially provides for an overriding purpose of quick and cheap pro-disclosure (not necessarily attributes regularly prescribed to either the government or government agencies). Clearly, the intention is to encourage agencies like the ATO to avoid disputes over information by providing the information up front, as quickly and cheaply as possible. With this in mind, it is important to “be strategic” with information requests to the ATO, thinking about why the request is being made and for what purpose. Presuming the information is required, it is important to analyse what the information is going to be used for. If it is going to be used in a tax dispute and the dispute is already (or nearly) in the AAT or court, it may be more efficient to use the relevant subpoena or summons processes to obtain the information. If you are not yet at the litigation stage and require it for a tax dispute, and cannot obtain it directly from the ATO (as it is not information that will be provided without an FOI request), it will be necessary to lodge an FOI request and negotiate with the ATO at all stages to obtain the information. Saving time The best approach depends on whether time or cost is more important to you. If the information is required quickly, the request should be meticulous and thorough, while explaining exactly what information is required, accompanied by a statement outlining why you believe the information can be

released under the FOIA. It may be appropriate to obtain professional assistance (from a lawyer) to help with this process. This will cost more money upfront, but will likely result in an expedited decision with the maximum amount of documents released. If any documents are not released, the applicant can then make an informed decision as to the next steps as the ATO will have supplied reasons with either a full or partial refusal. Saving money Alternatively, if cost is more important than time, it would be advisable for the applicant to submit a simple application clearly stating what is required and why. The ATO will be obliged to make a decision on the merits of what has been supplied at its own cost. If the request is granted, the applicant has been successful at minimal cost. If refused wholly or partially, the applicant will be supplied reasons which can be specifically addressed via a “free” internal or external review. Ultimately, every situation will differ and should be considered strategically on the merits, with a clear understanding of what the information is required for in the context of the disputation and pro-disclosure process outlined by the FOIA. Footnotes 48

FOIA s 3(1), (3) and (4).

¶5-090 The legislative review process The legislative process for challenging the Commissioner’s assessments was introduced in Chapter 1 and will be elaborated here. The process for correcting or amending assessments is discussed at length in Chapter 2. The objection, review and appeal processes for taxpayers who are either unhappy with their tax decision or private ruling (or the failure of the ATO to make a decision) are outlined in TAA Pt IVC. For the purposes of Pt IVC, a “tax decision” includes an assessment, determination, notice or decision.49 The process is illustrated in the following flowchart that explains the disputation process for reviewable objection decisions.50

The process has also been described by the Inspector-General of Taxation as: “[a] uniform code of procedures [that] applies in relation to all objections, reviews and appeals under Commonwealth tax statutes, including the Income Tax Assessment Act 1997 (ITAA 1997), Income Tax Assessment Act 1936 (ITAA 1936), Taxation Administration Act 1953 (TAA), Fringe Benefits Tax Assessment Act 1986 (FBTAA), A New Tax System (Goods and Services Tax) Act 1999 and Superannuation Guarantee (Administration) Act 1992. This uniform code is contained in Part IVC of the Taxation Administration Act 1953 (TAA)”.51 What is meant by a “uniform code”? The expression “uniform code” means that Pt IVC outlines the complete process for disputing “taxation decisions”52. This was designed to ensure that a single disputation system was in place for all taxpayers, to ensure the system is robust and equitable for all. Essentially, it outlines that: • a taxation decision will first be reviewed by the ATO through the objection process53 • the objection decision can then be appealed to the AAT as to its merit, or to the Federal Court54 as to its legal correctness, and • after a decision has been made by the Federal Court, the normal avenues of appeal lie to the Full

Federal Court by right, and the High Court by special leave on errors of law only. This design was deliberate and replaced the prior Federal jurisdiction vested in state courts. The benefits of doing this is threefold; it promotes quicker, cheaper and fairer decision-making for taxpayers, remembering that the less it costs the Commonwealth to administer the taxation system, the less money it costs all taxpayers (not just those in dispute with the ATO). An AAT merits review — the benefits One of the key elements contributing to a cheaper, quicker and fairer system is that all taxpayers with a reviewable objection decision, can elect to have a “merits review” conducted by the AAT — a no cost jurisdiction (which means that a taxpayer cannot be liable to pay the costs of the ATO if unsuccessful, as would happen in the Federal Court). In addition, the AAT is not constrained by the “rules of evidence”, which means it can consider any evidence it likes (unlike a court). These elements alone make it cheaper and quicker. The AAT is also a single national Tribunal with members that are appointed for their tax expertise, which creates a more sophisticated and consistent level of decision-making than would otherwise be the case (the Federal Court operates likewise). This contrasts with the previous situation where review was undertaken by taxation review boards (which essentially ran on a state basis), with appeals going to the state courts (which could create state based anomalies and increase the need to engage the High Court to resolve the law). The current system operates on a federal level using a federal tribunal and court allowing for efficiencies (both cost and time), along with a more consistent and sophisticated level of decision-making ensuring fairer decisions as between taxpayers. Decisions that cannot be disputed Although most of the Commissioner’s decisions can be objected to and then appealed to the AAT or Federal Court, these rights are not guaranteed. Rather they are provided for in the legislation, but are capable of being removed by government. Accordingly, the government can decide that some decisions cannot be disputed, or may only be disputed in a limited way. This occurs for various policy reasons, but mostly for straight-forward strict liability offences (for example a taxpayer is subject to GIC for not paying their tax liability by the due date). The charge is payable based on the facts — was the debt paid on time? If the answer is no, interest is payable and it would not be appropriate to allow the taxpayer to dispute this further as they are essentially treating the ATO like a bank and obtaining an unfair advantage over other citizens by having the use of that money for free. The GIC is applied in the interests of fairness and to compensate the government. Although the decision to apply GIC is not discretionary as it operates directly from the law, the Commissioner is still able to remit the charge (in part or full) in appropriate circumstances. There are a variety of additional decisions that cannot be disputed via TAA Pt IVC including (but not limited to): • a decision not to remit GIC • imposition of SIC (but you can seek remission) • a decision not to remit SIC (unless the amount of interest to be paid after the decision has been made is more than 20% of the shortfall amount) • a late payment penalty (but you can seek remission) • a decision not to remit some penalties (unless what you owe after the decision has been made is $340 or more) • a private ruling if an assessment has issued covering the period (you may object to the assessment instead), and • administratively binding advice or advice about proposed changes to tax laws55. Footnotes

Footnotes 49

TAA s 14ZQ.

50

An objection decision that is not an ineligible income tax remission decision, TAA s 14ZQ.

51

IGT, Review into the underlying cause and the management of objections Tax Office decisions (15 April 2009) .

52

TAA s 14ZQ.

53

TAA Pt IVC Div 3.

54

TAA Pt IVC Div 4 and 5.

55

ATO, Decisions you can’t dispute via an objection (1 June 2015) .

¶5-100 The administrative review process — purpose In order to minimise the wide disruption caused by disputes, in addition to the legal disputation processes for tax disputes, the Commissioner has also created two distinct administrative review processes in a further attempt to prevent, avoid and resolve disputes early. He is empowered to do this via his general power of administration of the tax laws.56 Although the tax law provides a robust process for resolving disputes via the objection process along with merits and judicial review, all of these processes come at a late stage (generally after the conclusion of an audit), after the Commissioner (and often the taxpayer) has already invested significant resources in the dispute. Accordingly, the Commissioner has created two additional types of review: • independent review for large business (see ¶5-060), and • internal review under the Taxpayers’ Charter (see ¶5-050).57 These processes are unique, would generally be mutually exclusive, and are to be used prior to the finalisation of an audit. Footnotes 56

ITAA36 s 8.

57

IGT, The management of tax disputes — Appendix 2: ATO Dispute Resolution Processes (January 2015) .

¶5-110 Internal review under the Taxpayers’ Charter Under the Taxpayers’ Charter the Commissioner states that he respects the rights of all taxpayers to have their decisions reviewed. Reviews are clearly intended to encapsulate both “internal” and “external” review, or to say it another way, using the formal objection process (to have the ATO conduct a merits review by another officer of its own decision) and the formal appeals process (having a merits review conducted by the AAT or a legal review conducted by the Federal Court). However, what is interesting is that the word used by the ATO is “review”, not “objection” or “appeal”. Indeed the ATO differentiates its

“Dispute (object to) an ATO decision” by referring to it as a “disputation” process rather than a “review” process. This poses the idea that an additional type of review is available. The Taxpayers’ Charter goes on to state that “If you want us to review a decision, use the contact details we provide to contact the person or area of the ATO handling your case. Reviews are conducted by a tax officer who did not make the original decision.” So what does this mean if the term “review” does not mean the formal “objection” or “appeals” process? Given the ATO doesn’t provide further illumination via its website or other publications, guidance can be taken from the Inspector-General of Taxation: ATO Dispute Resolution Process58

This document (supplied to the IGT by the ATO) shows that either “internal review (as per Taxpayers’ Charter)” or “Independent Review — for large business” is offered in every dispute, before the final position paper is issued or audit decision is made. However, it is likely that the Commissioner will not feel compelled to offer these types of “administrative” review in every dispute. The ATO website states that “[a]n independent review is offered at the ATO’s discretion, and in exceptional cases the ATO may choose not to offer an independent review.”59 This means that the review processes are offered at the Commissioner’s discretion, ie they are not available as a right. Having said that, providing taxpayer’s under audit with the possibility of having their issue reviewed once it has become clear that the two parties are going to disagree, provides an incredible opportunity for the parties to avoid unnecessary disputes by having a quasi-independent person (quasi-independent as they still work for the ATO) to decide whether the ATO’s position is appropriate, defensible and sustainable. This increases the quality of decision-making as poor decisions will be overturned at this stage, while good decisions will be strengthened. It also allows the parties another opportunity to consider the dispute before positions become entrenched and the dispute progresses to the formal stages of disputation via objection and appeal. But what happens to those matters in the middle, where the decision could go either way? As can be seen on the diagram above, after the ATO makes a decision (but at a stage before an amended assessment is issued), the ATO actively considers settlement of the dispute (settlement is discussed in detail in Chapter 8) along with alternative dispute resolution (discussed in detail in Chapter 9) as additional mechanisms to avoid, prevent, limit or resolve disputes before entering the formal stages. This can also benefit disputes where the ATO has a strong position, as it provides them with an additional opportunity to discuss resolution with the taxpayer and attempt to reach a mutually agreeable resolution. Footnotes

Footnotes 58

Ibid.

59

ATO, Independent review of the Statement of Audit Position for groups with a turnover greater than $250m (23 January 2017) .

¶5-120 Independent review for large taxpayers The ATO offers an “independent review” (IR) process for taxpayer groups with a turnover greater than $250m. This is a different process to the “review” process discussed previously and is targeted exclusively at large business taxpayers, to prevent disputes to the greatest extent possible. Accordingly, IR is a much more formalised administrative process than the “review” process and the ATO provides significant detail of the process on its website.60 The ATO provides the following context for its IR process: “Tax law administration and large business are both challenging environments. As we apply tax law to complex facts, some areas of disagreement may be inevitable. We want to resolve areas of disagreement with you as early and cooperatively as possible. To support this, we have established an independent review service, where an independent technical officer outside the audit area reviews the technical merits of your case prior to finalisation of the ATO audit position”. In addition, the IR is conducted by an officer from a different “quasi-independent” area of the ATO, who has not been involved in the dispute previously. It can become quite difficult to remain impartial in lengthy and complex disputes, which is why it is important that the reviewing officer is from a different area of the ATO (so that they are not subject to any undue influence) and that they have not had prior involvement in the dispute. They can bring “a fresh set of eyes” to the dispute, which will hopefully provide some impartial objective analysis that the parties can use to resolve or progress the dispute.61 The process An IR occurs at a point after the ATO has issued its “Audit Position Paper”, which is a draft view to which a taxpayer can respond and comment. Any comments and discussion at this point are then taken into account by the ATO before reaching their final “Statement of Audit Position” (SOAP). If the taxpayer disagrees with any part of the SOAP, they can request an IR as long as the request is made within 10 days of receiving the SOAP (unless a longer time has been agreed). There is no specific form for the request, however it must outline each area of disagreement with the SOAP and be emailed to the ATO at the address specified. Reviews will normally be finalised within 60 days of the request.62 Subject to the ATO’s discretion Given the IR process is an administrative review (ie the taxpayer has no legal right to it), it will always be available at the ATO’s discretion (although decisions to refuse an IR will be rare). Instances where an IR may be refused include: • where the decision has already been independently scrutinised by a senior ATO officer • where the issue in dispute is of the highest priority for the ATO • when the taxpayer has not cooperated with the audit • when the request is receive late (more than 10 business days after receiving the SOAP) • the taxpayer has had the same issues considered previously • another evaluative process has occurred (such as early neutral evaluation) • anti-avoidance provisions are involved, or

• the audit timeframe is set to expire and the taxpayer won’t consent to it being extended.63 It should also be noted that the IR process won’t consider new evidence or arguments and if these things are introduced the IR will likely be disbanded and the matter returned to the audit team to consider the new information as a part of the audit. It also won’t consider conflicting expert opinions, shortfall penalties (as these are not generally in the SOAP) or complaints. Essentially, IR is aimed at establishing who has the better view of the core tax issue in dispute, so anything that falls outside this process will not be considered. The IR process is established around providing the reviewer the appropriate information to make recommendations about the better view of the facts and how the law applies to those facts. The audit team will finalise the audit in accordance with the recommendations of the reviewer, which means that if the reviewer finds that the audit team’s position is untenable, they will finalise the matter without making any adjustments to the taxpayer’s existing tax position. The reviewer will always be a senior officer from the Review and Dispute Resolution area of the ATO and will focus the review on the areas of disagreement outlined in the request for review. They will also bring the parties together for a “case conference”, which allows them to establish which facts are agreed, where the areas of disagreement are, and ask questions to clarify the issues.64 IR is an administrative review process established by the Commissioner to attempt to resolve disputes at the earliest possible stage (during audit). It is an advisory process (at least for the taxpayer) used for the parties to be able to consider and establish who has the better case, whether the dispute should be progressed and whether the parties should subsequently enter into settlement discussions to avoid ongoing disputation once they are aware of the challenges to their own and the other sides position (although the ATO will amend their position based on the recommendations regardless). This makes post independent review matters perfectly placed for additional alternative dispute resolution processes or settlement negotiations, as each party has had an initial technical view supplied by an independent expert allowing them to assess the positive and negative aspects of their position before electing to take the dispute further. Footnotes 60

Ibid.

61

Ibid.

62

Ibid.

63

Ibid.

64

Ibid.

External review — appeals and litigation To appeal or not to appeal?

¶6-010

Taxpayer’s decision to appeal — tribunal or court?

¶6-020

Commissioner’s decision to litigate — obligations and considerations ¶6-030 Additional litigation options

¶6-040

Tax crime disputes

¶6-050

¶6-010 To appeal or not to appeal? “All the Congress, all the accountants and tax lawyers, all the Judges, and a convention of wizards cannot tell for sure what the income tax law says.” Walter B Wriston1 The complexity of not just the tax system but also the tax disputes system is not lost on many. Even ordinary citizens know that they don’t want to end up in a dispute with the ATO, although most would not enunciate the exact reasons apart from the fact that it would be costly and stressful. Rather, they take it as a fundamental truth that very little good can come from that situation. This is probably correct in a very general sense for ordinary wage earning citizens. However, for large corporate and sophisticated taxpayers, the prospect of disputation is not something to be as concerned about. In some respects and by some taxpayers, it is seen as a cost of doing business (especially if millions of dollars are at stake depending on how a particular law is interpreted). It is important to understand why taxpayers and the ATO may elect to litigate and the types of litigation available. In order to do this it is essential to look at the disputes system from both a taxpayer and ATO perspective, in order to appreciate the sophisticated nature of decision-making involved. The decision for taxpayers From the taxpayer’s perspective, they can seek review of an objection decision either in the Administrative Appeals Tribunal (AAT) or the Federal Court. Clearly, the two jurisdictions will have similarities and differences and that should make the decision easy. However, what really goes into this decision is much more complex and must be analysed to understand the true cost of disputation. Anyone making a big decision will undertake a risk assessment to decide if the risk outweighs the possible benefit; but is the decision purely a financial one for most taxpayers (at least those that aren’t large corporates or sophisticated litigants)? The reality is that most disputes involve ordinary people who have to decide whether to accept the Commissioner’s decision or to dispute it and this necessarily involves more than a financial cost benefit analysis. For example, what is the cost of their time, potential effects on their health and family life, and impact on their reputation? How can this be quantified and can they really be objective when making such a decision? The decision for the ATO Similarly, the Commissioner also needs to decide which matters to litigate and which to settle. In analysing this a much more sophisticated understanding of the Commissioner’s decision-making process can be obtained, including the laws and policies that guide his decision-making and the sort of disputes he litigates no matter what. Will he litigate everything or does he have some guidelines to streamline his decision-making across his vast workforce? There are also some more unique avenues of disputation outside the ordinary review and appeals process. These include options to seek review under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA), the Judiciary Act 1903, the Australian Constitution, and defences available to criminal prosecution. Footnotes

Footnotes 1

The Quote Garden, Quotations about Taxes (9 April 2016) .

¶6-020 Taxpayer’s decision to appeal — tribunal or court? The ATO is required to consider a taxpayer’s objection (as long as it is valid — see Chapter 5 for more information on internal reviews and objections) and provide them with written notice as to whether the objection has been allowed in full or part.2 This is the formal objection process prescribed by the legislation which provides for the ATO to conduct a merits-based reconsideration of their original decision by an independent officer who works in a different area to the original decision maker and who had nothing to do with the original decision. If the objection has been disallowed in full or part, the taxpayer can choose to apply to the Administrative Appeals Tribunal (AAT) for a merits-based review of the decision, or appeal against the decision in the Federal Court. TAA Pt IVC specifically allows taxpayers to do this in order to obtain an external review of many of the Commissioner’s decisions (although some decisions cannot be reviewed in this way). Mostly, a taxpayer will be required to lodge an objection and be unhappy with the result before seeking external review.3 Weighing up all the factors Once a taxpayer reaches this stage, they must decide whether they wish to incur the inconvenience (time and cost, both personally and financially) of disputing the decision further by seeking an external review. This decision should not be taken lightly as it will often have far reaching consequences, especially for small businesses and individuals who are inexperienced with litigation. They must also realise that it is not enough for them to show that the ATO’s decision is wrong, they must also show what the right decision should have been (with probative evidence).4 Deciding whether to seek external review, and whether to go to the AAT or the Federal Court is one of the most difficult decisions for a taxpayer. A taxpayer must conduct their own analysis of whether they should consider (not necessarily undertake) external review. This should commence as a cost benefit analysis and then go beyond that to look at the personal cost of the dispute. Further, it is wise to look at what the dispute has cost to date and then make an estimate of what the dispute will cost if it continues. This then needs to be weighed against the possible benefit if the taxpayer was to win. This analysis should weigh the costs versus the possible benefits of the dispute and be conducted for both the past (so they realise what the dispute has already cost them) and for the future (to understand what the dispute could ultimately cost). This should be done for both direct and indirect costs. A direct cost is something that you are aware of, eg my lawyer charges me $500 an hour and I have to pay the balance monthly. An indirect cost is something you may either not be consciously aware of or may not have understood to be a cost, eg my partner has been really cross with me lately, I wonder if it has something to do with the tax dispute — will they leave me if this stress continues for another year or two? It is only once this entire analysis is done, that a proper decision can be made as to whether the dispute should be litigated. Making an effective decision — recognising and overcoming your bias This analysis can be difficult to undertake effectively as all people make mistakes in their decision-making due to what psychologists refer to as “heuristics”5, which are “decision making shortcuts” that generally only focus on certain elements of a problem while completely overlooking others. The processes of thinking and decision-making can be further refined into “two systems: • System 1 — operates automatically and quickly, with little or no effort and no sense of voluntary control. • System 2 — allocates attention to the effortful mental activities that demand it, including complex

computations. The operations of System 2 are often associated with the subjective experience of agency, choice and control.”6 System 1 represents the quick judgments and decisions made by the human mind using “heuristics”. System 2 is the more sophisticated thinking that people assume they would use to make important decisions (such as the decision about whether to dispute their taxation liability). The difficulty is that people often use System 1 thinking without realising they are doing it. It is important to be aware of the biases that lead to System 1 thinking, so they can be countered when it comes to important and complex decisions. Some of these biases include “overconfidence”, “confirmation bias”, “anchoring” and “generalising”.7 Overconfidence bias The overconfidence bias comes into play where people “tend to overestimate their decision-making capabilities, which often results in their making risky choices”; choices which go against the mathematics of probability and common sense.8 What this tells us is that people (including taxpayers in dispute with the ATO) will generally overestimate their prospects of success, thinking that they will be the exception and win. This can place taxpayers in a very precarious position with unrealistic expectations. Confirmation bias Confirmation bias comes into play where “[p]eople overweight evidence that supports their views and underweight evidence that runs contrary to their views — all without objectively assessing the evidence.”9 People tend to think that their facts, opinions, evidence, and reasoning is much stronger and better than their opponents. This probably explains why so much litigation still occurs. The problem is with objectivity — people find it very difficult to be objective about their own problems and only seek out information that confirms their world view. For example, reading news sites that agree with your ideology (while avoiding those that don’t) or seeking out friends who will tell you what you want to hear (while avoiding those who might challenge your views). This makes confirmation bias very difficult to bring to someone’s awareness and stop, as it is a comfortable and safe place to operate — where people think they are better informed than others and will ultimately succeed. Unfortunately, when it comes to legal or taxation disputes, this cannot be the case as there is almost always one winner and one loser, so someone is always wrong and proceeding according to their confirmation bias. Anchoring bias The anchoring bias comes into play when “[p]eople tend to anchor their choices to reference points that aren’t objectively relevant to the decision at hand. The reference point may be a piece of information that is suggested to them or something they’re already familiar with.”10 The anchoring effect is widely known and has been demonstrated in experimental research.11 For example, if someone is informed that a painting is worth around $1,000 and then asked to value it, their answer will invariably be around the $1,000 mark. This will be true regardless of whether the painting is worth $1 or $1m in reality. This anchoring effect is a tremendously difficult bias to counter, especially if a person has been primed for it, ie their anchor has been repeatedly affirmed. This can be especially challenging in the context of tax disputes as disputants can become anchored to both positions and numbers. To put it another way, if they have been repeatedly told by their representatives or friends that they should win, they will come to expect that they will indeed win and will anchor on that position. From a numerical perspective, people will tend to anchor on round numbers (eg I won’t settle for more than $100) when that figure may have no correspondence to reality. Accordingly, it can be very difficult to counter the effect of anchoring, especially when unaware of it. Generalising bias “People often generalize from facts derived from a small sample to the entire universe. In the same light, they often treat facts from a small sample with the same level of trust as they do facts from a larger sample”.12 This is known as the generalising bias and runs contrary to what is generally accepted in relation to statistical analysis — that the bigger the sample, the more likely it is to be correct.13 This can be

problematic in a tax dispute; if a taxpayer (or their representative) knows someone that has won a case against the ATO, they are much more likely to think that they will be successful, even if all the available evidence points to the contrary. Countering your bias So what can be done to counter these heuristics and biases and make good decisions? The key is to be aware that heuristics exist and that people often rely on system 1 thinking to make complex decisions (as it is quick, convenient and always provides an answer). The problem is that often system 2 thinking is required when there are serious consequences.

Tip To engage system 2 thinking, it is important to ensure your mind is using higher level functions. One way to do that is to write down your cost benefit analysis (along with your reasons) and check it to see if it makes sense. After doing that it is important to check what assumptions you have made and ask yourself: What evidence underpins or supports them? Finally, get a second opinion from someone who isn’t vested in the decision (perhaps a dispassionate friend or even obtain some professional advice from someone who hasn’t been involved in the dispute previously).

What needs to be remembered is that the other party is usually also of the view that they have a good case and will win (the exception sometimes being “test-cases” which are discussed at ¶6-030). Both parties can’t be right so it is critical to have a thorough understanding of the other party’s arguments and why they think they will win. Risk versus reward After countering the many biases that can come into play, there is a decision to be made that needs to be based on risk versus reward. For individual taxpayers and small businesses, unfortunately there are often a lot of indirect risks (such as the effect it will have on a person’s health, marriage, family and business) and not a lot of indirect rewards. For corporate taxpayers, the occasional tax dispute may be considered a cost of doing business. The differences between the AAT and Federal Court Once a taxpayer has made their decision to seek external review, the question is whether to litigate in the AAT or the Federal Court. There are key differences between the two including cost, nature of proceedings, the powers of each jurisdiction and the potential for publicity. What can be considered? One of the key differences between the AAT and Federal Court is what each jurisdiction can consider. Generally, the AAT is called a jurisdiction of “merits review”, while the Federal Court considers the legality of the decision: Was the decision correct at law? It is commonly said that the AAT is best for disputes about fact and the Federal Court is best for disputes regarding questions of law. However, this in many respects is a simplistic interpretation. Unlike the Federal Court, the AAT “stands in the shoes of the Commissioner” and is able to reconsider the facts and come to the correct or preferable decision. It also applies the law to the facts and, given the AAT is obliged to follow precedent, its decision makers are comprised of senior members of the legal tax profession as well as serving Federal Court judges, its legal decisions are of a high standard (although they don’t hold the same precedential value as a decision of the Federal Court). The AAT is also able to decide disputes about how the Commissioner’s discretion should be exercised (which the Federal Court cannot), thus standing in the Commissioner’s shoes, the AAT can look at the

facts, evidence, arguments and law and decide whether the Commissioner’s discretion was exercised properly — a powerful tool. Creating a legal precedent There is generally only one reason a taxpayer would commence proceedings in the Federal Court over the AAT and that would be if they wanted to create a legal precedent. Aside from large or highly sophisticated taxpayers, this would be a rare occurrence unless the Commissioner wanted to run a “test case” and was willing to fund the taxpayer’s costs of the litigation (test cases are discussed at ¶6-030). While the Federal Court is clearly a more sophisticated jurisdiction, it would rarely be in a taxpayer’s interests to appeal there directly as the AAT has a broader jurisdiction, broader powers and in particular is able to conduct a merits-based review and come to a different interpretation of the facts. Nature of proceedings The nature of the proceedings can also determine whether the AAT or the Federal Court is the appropriate jurisdiction. For instance, the AAT is much less formal than the Federal Court, meaning a taxpayer can be self-represented (or represented by their tax agent). Although representation in the Federal Court is not mandatory, it is necessary in order to have any prospect of properly presenting a case, let alone winning.14 The AAT will also provide more assistance to unrepresented taxpayers, to ensure their argument is properly ventilated and they are not disadvantaged. In addition, the AAT is not restricted by the rules of evidence (a complex area of law which guides whether facts and evidence can be taken into account by a court in making a decision). The AAT is able to conduct its enquiry in a much more flexible, intuitive, costeffective, timely and individual manner, making it a cheaper jurisdiction within which to run a tax dispute. Publicity One key difference between the jurisdictions is that in the interest of open justice, court decisions are generally open to the public and reported (including the name of the taxpayer).15 This can be quite a difficult scenario if a taxpayer does not wish their family, colleagues or clients to know about their dispute with the ATO. This can be particularly challenging for lawyers with personal taxation disputes or corporates sensitive to media coverage. The AAT, however, is required to hold tax hearings in private if requested by the taxpayer,16 which means all a taxpayer has to do is to ask for the hearing to be in private (their name will also be suppressed). This is a major departure from how the Federal Court (or even the AAT)17 operates in the ordinary course and can be a significant advantage for taxpayers wishing to keep their affairs private or their names out of the media. Costs The costs of disputation vary widely between the two jurisdictions. This is in addition to the fact that legal representation is a necessity in the Federal Court (a costly endeavour). In broad terms, the AAT is known as a “no costs jurisdiction” which means that each party running a matter bears their own costs. This is in contrast with the Federal Court which is a “costs jurisdiction”, with the ordinary rule being that costs are in the cause (which means that costs are generally awarded to the winner). So if a taxpayer takes a matter to the Federal Court and wins, do they get their money back? Unfortunately, the answer is that they will only get part of their money back due to the complex process of how the Federal Court calculates what costs are recoverable (known in the Federal Court as taxation of costs). In addition to this, the Federal Court has higher fees for running litigation, including a filing fee, a fee for getting a hearing date and a daily hearing fee. The AAT only has one filing fee which can be reduced to as little as $87 for individuals suffering financial hardship (as opposed to the Federal Court where the fees run into many thousands of dollars, even for individuals suffering hardship). The AAT will also generally refund fees when a taxpayer is successful in their dispute. The cost of running a dispute in each jurisdiction varies dramatically and will likely be a determining factor in deciding where the dispute should be run.

In a nutshell The decision of whether to file a dispute for external review is a complex one before even considering the appropriate jurisdiction within which to proceed. As has been discussed, taxpayers must be strategic and deliberate in their decision-making, taking into account their inherent biases arising from heuristic assumption and system 1 thinking. If they are able to do this effectively, they can undertake a true cost benefit analysis of both direct and indirect costs before deciding whether to take the dispute forward. Once they have done this, there is the question of where to litigate the dispute. As has been discussed above, unless the taxpayer is a large company or highly sophisticated litigant, it would be rare for it to be advisable to progress the dispute outside the AAT at first instance. This situation may differ if the ATO is willing to provide “test case funding” which will cover the taxpayer’s costs, but this is rare (especially if the taxpayer is commencing the dispute). Test case funding is discussed at ¶6-030. Footnotes 2

TAA s 14ZY.

3

ATO, Dispute or object to an ATO decision — Seek an external review of our decisions (1 June 2015) .

4

TAA s 14ZZK.

5

Morris Altman, Behavioural Economics for Dummies (Wiley, 2012) 259.

6

Daniel Kahneman, Thinking Fast and Slow (Penguin Books, 2011) 20.

7

Altman, Behavioural Economics for Dummies (Wiley, 2012) 125–127.

8

Ibid.

9

Ibid.

10

Ibid, 126–127.

11

Khaneman, Thinking Fast and Slow (Penguin Books, 2011) 119.

12

Ibid, 127.

13

Ibid.

14

Tanner v FC of T 90 ATC 4809.

15

Herald & Weekly Times Ltd v Williams (formerly identified as Vai) & Ors 2003 ATC 4868.

16

TAA s 14ZZE.

17

AATA s 35.

¶6-030 Commissioner’s decision to litigate — obligations and considerations The ATO does not litigate every possible case, for a variety of reasons, not the least that they are

accountable to government for spending public money. Under the Public Governance, Performance and Accountability Act 2013 (Cth) (PGPA), all Commonwealth entities are required “to use and manage public resources properly”, with “properly” defined to mean “efficient, effective, economical and ethical”18. This means that the ATO must consider whether each dollar they spend (generally, not just on litigation) satisfies these rules. There will be times when throwing “good money after bad” is simply not justified and the ATO will need to decide to either not pursue a dispute or to settle it (this is discussed in more detail in Chapter 8). In the broader context, this means that the ATO does not operate in a “taxation vacuum”, is subject to government oversight and is constrained by budget and even (at times) commercial realities. When it comes to litigation, the Commissioner has parallel constraints. On the one hand, the government has put in place legislation and rules to modify the behaviour of Commonwealth and ordinary litigants (such as the “Model Litigant Rules” and the Civil Disputes Resolution Act 2011). In contrast, the Commissioner places self-imposed policy constraints upon himself in relation to the types of matters he will litigate, as well as the reporting mechanism to government to account for his decisions under the PGPA. The Commissioner outlines the matters he will litigate in his “litigation policy” on the ATO website. Specifically, they are: • where there is a contentious point of law and it is in the public interest to litigate • when the behaviour requires a strong message to be sent to the community • the dispute is intractable, and • there is a long standing unresolvable debt.19 Civil Disputes Resolution Act 2011 The Civil Disputes Resolution Act 2011 (CDRA) was legislated “to ensure that, as far as possible, people take genuine steps to resolve disputes before certain civil proceedings are instituted”. The CDRA applies to all litigants (not just the ATO) and mandates that parties have an obligation to take “genuine steps” to resolve a dispute before instituting proceedings in an “eligible court” (eligible court means the Federal Court or Federal Circuit Court)20. Filing a “genuine steps statement” Applicant’s to the Federal Court must file a “genuine steps statement” outlining the genuine steps that were taken to resolve the dispute and if none were taken, explain why that was the case. A respondent who receives such a statement must file their own stating whether they agree and if not, the reasons why. This applies to all proceedings in the Federal Court unless they are specifically excluded. For present purposes, tax disputes are not generally excluded at first instance, but are excluded if the dispute is an appeal on a point of law from a matter that has already been decided by the AAT.21 The consequences of not filing a statement that is satisfactory to the court is that the faulty party may be subject to an adverse costs order. There is also a duty on the lawyers of parties to assist them to comply.22 Commissioner’s obligations Although the obligations and consequences of the CDRA do not sound particularly onerous, it must be contextualised for the Commissioner of Taxation. The Commissioner is obliged to comply with the rules of the court, the PGPA and to act as a “model litigant” (discussed further below). He must, in complying with the law, take genuine steps in all relevant matters to resolve disputes so that he can file a “genuine steps” statement if the matter goes to the Federal Court. One might ask: how can this be onerous when so few matters are litigated in the AAT, even less in the Federal Court and, regardless, the Commissioner is never the one filing the appeal? Even if he doesn’t file the appeal, he needs to file a response that demonstrates he took genuine steps to resolve the dispute, or be subject to an adverse costs order.23 The Commissioner is unable to do this if he doesn’t take genuine steps to resolve a dispute before it is filed in the Federal Court.

However, does it really matter when so few matters are filed in the Federal Court? The short answer is that it does. The reason for this is that out of the thousands of appealable objections the Commissioner completes each year, without a crystal ball, he has no idea which disputes will be appealed and then, which jurisdiction they will be appealed in. Accordingly, the Commissioner must treat every dispute as one that will possibly be litigated in the Federal Court and take “genuine steps” in accordance with the CDRA to resolve it before it gets there. This is a big task for the Commissioner, but as a large public litigant, one that he is well resourced to complete. Notification of issues in dispute What are the “genuine steps” that the Commissioner needs to take? Although the CDRA provides examples, it is not prescriptive. However, it does say that “a person takes genuine steps to resolve a dispute if the steps taken by the person in relation to the dispute constitute a sincere and genuine attempt to resolve the dispute”, and goes on to give examples including “notifying the other person of the issues that are, or may be, in dispute, and offering to discuss them, with a view to resolving the dispute”.24 Given the ATO’s robust formal objection process, a taxpayer will always be notified of what the issues in dispute are (at a minimum as part of the audit and objection processes). The Commissioner can also satisfy the requirement to offer to discuss the matter by inviting the taxpayer to speak with him to try to resolve the dispute when issuing the audit reasons for decision or objection decision. The more difficult part is for the Commissioner to demonstrate that the attempt to resolve was sincere and not simply paying lip service to the CDRA. This would probably need to be established by the Commissioner demonstrating how he was willing to resolve the dispute (ie that he was willing to negotiate within appropriate parameters — while not necessarily revealing them). This could be done by consulting an internal record or obtaining a statement from the ATO officer dealing with the matter at the time. The test for the Commissioner is to ensure that he has these processes in place in order to satisfy this requirement. From the taxpayer’s perspective, it is important to be aware that the Commissioner is subject to the CDRA and the overarching imperative. It is also important to be aware of the potential adverse consequences for the taxpayer if they don’t attempt to resolve the dispute prior to filing proceedings. It would be advisable for taxpayers to ask for a meeting with the ATO before filing to satisfy the requirements of the CDRA. This will mean the Commissioner must make a sincere attempt to resolve the dispute or be able to explain why he hasn’t. Taxpayers can do this with the intention of filing in the Federal Court, but still file in the AAT. Model litigant obligation (MLO) The obligation to act as a model litigant arises (for all Commonwealth litigants) from the Legal Services Directions 2005 Appendix B (LSD). What does the MLO mean? The Commissioner summarises the obligation to mean that he “is required to act with complete propriety, fairly and in accordance with the highest professional standards in handling claims and litigation. This also requires that the ATO not start legal proceedings unless it is satisfied that litigation is the most suitable method to resolve a dispute”.25 Interestingly, the MLO picks up on some recurring themes in relation to dispute minimisation, including dealing with disputes quickly and at minimal cost. In addition, the ATO must only commence “court proceedings if it has considered other methods of dispute resolution (eg alternative dispute resolution or settlement negotiations)” or pursue appeals without reasonable prospects of success or it otherwise being in the public interest 26. The MLO has been described by the Full Federal Court as an obligation that “require[s] more than acting honestly and in accordance with the law and court rules. It also goes beyond the requirement for lawyers to act in accordance with their ethical obligations”.27 This means that the MLO is a higher obligation than what lawyers normally owe to the court and what has been described “as the old-fashioned traditional, and almost instinctive, standard of fair play to be observed by the Crown in dealing with subjects”28. The MLO means the Commissioner has to conduct legal disputes (including merits review)29 with the highest degree of fairness and integrity, going above and beyond what is even required by legal professionals. In the context of the Commissioner’s decision to commence and continue litigation, the MLO has an important role to play as it guides what the Commissioner can do before and during proceedings. There are also consequences for the Commissioner if he does not comply (either from the Attorney-General or

the courts under common law). However, the MLO is not predicated on consequences, rather it is a common law principle codified by the Attorney-General about how all Commonwealth litigants will behave. The expectation is that breaches will be the exception rather than the norm and government agencies will actively educate, monitor and investigate to ensure these high standards continue to be met. Breaches of the MLO It is in this context that a taxpayer can expect the Commissioner to select and manage cases for litigation. If it appears that the MLO has been breached, the alleged breach should be raised with the Office of Legal Services Coordination (part of the Attorney-General’s Department) which will refer the matter to the relevant agency for investigation and appropriate action. This should generally remedy the situation. Alternatively, if the breach has occurred during litigation, it should be raised with the court or on appeal (as often the breach won’t become apparent until the end of or even after litigation has concluded).30 If prejudice has been caused due to some breach of natural justice, an appeal could succeed.31 Types of dispute the Commissioner will litigate The following outlines the Commissioner’s approach to the types of disputes he will pursue (regardless of cost): “Litigation is appropriate where: • there is a contentious or uncertain point of law that requires clarification and it is in the public interest to seek law clarification through litigation • the behavior is such that we need to send a strong message to the community • there is a longstanding unresolvable debt • the dispute is intractable, alternative means of resolving the dispute have been attempted but have not produced an acceptable outcome.32 The four types of cases that the Commissioner will litigate can be summarised as test, egregious behaviour, intractable and longstanding debt. Test cases “The test case litigation program (program) funds cases that have broader implications beyond the individual dispute with the ATO. The program provides financial assistance to taxpayers to help them meet some or all of their reasonable litigation costs and — in limited circumstances — pre-litigation costs, associated with clarifying tax, superannuation and in some instances debt-related issues”.33 The criterion used for selecting test cases is that they need “to involve issues where there is uncertainty or contention about how the law operates and must be in the public interest to be litigated”. This would generally only include disputes involving issues of law (not disputes over facts). This also brings in the public interest element, which is to say that the public needs to be affected by the litigation for it to be a test case. It is beyond the scope of this text to provide a detailed analysis of how the test case program operates, rather the discussion is limited to how the program illustrates the types of dispute the Commissioner will litigate. In line with policy, the Commissioner will litigate matters where there is a contentious point of law which requires clarification and it is in the public interest to litigate. If a taxpayer believes they have a case which fits these criteria, they should consider applying for test case funding. Examples of matters that have been approved and declined for funding are available to review on the ATO website via the Test Case Litigation Register. Egregious behaviour The Commissioner may also run cases where the behaviour is considered so bad that a message needs to be sent to the community. These types of matters can be referred to as disputes involving “egregious behaviour”. This is behaviour of the worst kind where the public would expect the Commissioner to take action. An example of this type of behaviour is promoters of illegal tax schemes who have conspired to induce other taxpayers to participate in arrangements that constitute tax fraud or evasion. In these

instances, the Commissioner elects to litigate the matter, not because it is cost-effective, rather he does it to send a message to the wider community that he will not tolerate this sort of behaviour and will take action if required. Although it is impossible to know if the Commissioner has litigated a matter specifically for this reason, it would appear that the cases of Bywater Investments Ltd & Ors v FC of T; Hua Wang Bank Berhad v FC of T 2016 ATC ¶20-589; [2016] HCA 45 would fall into this category. “Intractable” disputes The Commissioner will also litigate disputes that are considered to be “intractable”. Intractable means situations where the Commissioner has tried everything to resolve the dispute but the taxpayer won’t give any ground. In this instance, the Commissioner has to decide whether to continue or give up and it would be rare for the Commissioner to give up if he has a strong case as this would send a message to taxpayers that the Commissioner won’t litigate if they just dig their heals in. Longstanding unresolvable debt Another type of “intractable” dispute is where the Commissioner has tried everything to recover an outstanding liability (outside of going to court) and simply cannot obtain payment. In these situations the Commissioner clearly states that he will undertake litigation to recover these amounts. However, in some circumstances the Commissioner may elect not to pursue such amounts if it were to be uneconomical to do so (discussed further in Chapter 7). Footnotes 18

Public Governance Performance and Accountability Act 2013 s 5(c)(iii) and 8.

19

ATO, Options for resolving disputes, including Alternative Dispute Resolution (ADR), litigation and settlement (6 October 2016) .

20

CDRA s 3, 5 and 6.

21

CDRA s 6, 7 and 15–17.

22

CDRA s 9 and 12.

23

CDRA s 7, 12(1)(b).

24

CDRA s 4(1)(a) and (1A).

25

ATO, Litigation — our policies (2 June 2017) .

26

Ibid; Legal Services Directions 2005 Appendix B, 2 and 5.1.

27

LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 at 42.

28

Melbourne Steamship Co Ltd v Moorehead [1912] HCA 69; (1912) 15 CLR 333, at 342.

29

Legal Services Directions 2005 Appendix B, 3–4.

30

Comaz (Aust) Pty Ltd v Commissioner of State Revenue [2015] VSC 294; LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90, at 42.

31

IGT, The Management of Tax Disputes (January 2015) .

32

ATO, Options for resolving disputes, including Alternative Dispute Resolution (ADR), litigation and settlement (6 October 2016) .

33

ATO, Test case litigation program (21 February 2017) .

¶6-040 Additional litigation options In addition to the rights taxpayers have to litigate in the AAT or Federal Court under TAA Pt IVC, rights also exist to litigate tax disputes under the Constitution, Judiciary Act 1903 and the ADJRA. Alternatively, where the taxpayer does not have a right to dispute a decision under Pt IVC (such as matters that don’t actually relate to the assessment or calculation of tax, for example, the exercise of some of the Commissioner’s many discretions), they may be able to access alternative litigation. Administrative Decisions (Judicial Review) Act 1977 The ADJRA codified the complexity of hundreds of years of common law judicial review, to provide a more straightforward form of review limited to the Federal Court. The intention was to simplify an overly complicated and somewhat archaic system. As noted above, these rights accrue in addition to those already available.34 However, the Federal Court may refuse to grant an application if adequate provision exists for the applicant to seek review under another Act.35 Accordingly, if the applicant is able to appeal under Pt IVC TAA, the Federal Court can (and will likely) refuse to grant the application for judicial review under the ADJRA. Any applicant considering litigation under the ADJRA, should first consider whether they have an alternative right of review and pursue that avenue if they do. Once they have exhausted that right, they can then seek judicial review in the Federal Court as long as the prior avenue for review was not before a court.36 If the prior review was to the AAT, judicial review could then be sought in the Federal Court under the ADJRA. However, if the prior review was conducted in the Federal Court or another court, the Federal Court may refuse to consider the application. The intent behind this discretion is to ensure litigants are unable to seek endless reviews of the same decision. One of the benefits of seeking judicial review in the Federal Court is that the court has the power to suspend a decision or stay proceedings,37 which is a powerful remedy against the Commissioner (even if it is just a short-term stay for the application to be heard). Criteria for consideration For a tax decision to come within scope for judicial review, there are various criteria which need to be considered if the application is to succeed. (1) Firstly, the applicant must establish they are an “aggrieved person” for the purposes of the ADJRA.38 An “aggrieved person” can be summarised as a person whose interests are (or would be) adversely affected by the decision. The term “aggrieved person” has been interpreted broadly by the Federal Court, and this should not be difficult for a taxpayer to satisfy. (2) Unless the Federal Court grants further time, the application must be made within 28 days of the applicant being notified of the decision.39 (3) The decision must be of an “administrative character”,40 which in a tax context has been determined to mean that the decision must not simply be a step in the process, rather it needs to be substantive in nature.41 (4) The decision must also be made under an “enactment”, which includes an Act and an instrument made under an Act (including rules, regulations and by-laws),42 which must be required or authorised by the enactment and affect legal rights or obligations.43 (5) The applicant must also ensure that the decision is not an “excluded” decision under ADJRA Sch 1.

Only certain decisions are excluded and the schedule will need to be checked on a case-by-case basis. One example of an excluded decision is decisions under TAA s 14ZY disallowing objections (ie if an objection is disallowed by the Commissioner, no judicial review is available). (6) Finally, the applicant has to satisfy one of the grounds for relief outlined in the ADJRA, such as a breach of natural justice, there was an improper exercise of power, an error of law, or was affected by fraud.44 If an applicant can satisfy these criteria and does not have another form of relief available, the court has a wide discretion (although relief will generally be declaratory or injunctive, not damages)45. Eligible applicants can also use the ADJRA to obtain reasons for a decision so that they can understand why the Commissioner made the decision and whether they should challenge it.46 Constitutional challenges Under the Australian Constitution, taxpayers can also challenge the validity of tax laws as enacted by Parliament and also seek relief via constitutional writs under the Constitution s 75. The Parliament has power to make laws with respect to taxation (as long as they don’t discriminate between the states or parts of the states) under the Constitution s 51(ii). Applicants can challenge whether the tax law is valid in accordance with the Constitution in the High Court. If it isn’t, the entire dispute falls away. It is clearly beyond the scope of this text to conduct a thorough analysis of constitutional challenges to tax laws. Suffice to say that although they rarely succeed, some have been upheld.47 Section 75 of the Constitution gives the High Court original jurisdiction to hear matters where the Commonwealth is a party to the proceedings or when a constitutional writ is sought48. Historically, the High Court was only considered when all other avenues of dispute had been tried (ie it was an option of last resort). Challenges of this kind were more common historically in tax disputes, however the High Court considered these issues at length in FC of T v Futuris Corporation Ltd 2008 ATC ¶20-039; [2008] HCA 32, and found that challenges to a tax assessment could only be made pursuant to the Constitution s 75 (or Judiciary Act 1903 s 39B discussed below) if “there is corrupt conduct or a deliberate failure to comply with the provisions of the income tax law by the Commissioner”.49 This is a very high bar to satisfy and requires the Commissioner (or one of his officers) to commit an act of “actual bad faith”, an allegation “not lightly to be made or upheld”50. This dramatically limited the scope of such challenges under the Constitution s 75, making it almost impossible for a taxpayer to succeed. Section 39B of the Judiciary Act 1903 Section 39B gave the High Court’s power of judicial review under s 75 of the Constitution to the Federal Court to minimise proceedings going to the High Court at first instance (ie the High Court could refer proceedings to the Federal Court as s 39B gave it parallel jurisdiction to the High Court’s original jurisdiction under s 75 of the Constitution). However, since Futuris51 the use of s 39B has been restricted in the same way s 75 proceedings have been restricted which has made it a much less useful litigation tool for taxpayers. Footnotes 34

ADJRA s 10(1)(a).

35

ADJRA s 10(2)(b)(ii).

36

ADJRA s 10(2)(b)(i).

37

ADJRA s 15(1).

38

ADJRA s 3(4).

39

ADJRA s 11(3).

40

ADJRA s 3(1).

41

Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321.

42

ADJRA s 3(1).

43

Griffith University v Tang [2005] HCA 7.

44

ADJRA s 5–6.

45

Park Oh Ho v Minister for Immigration & Ethnic Affairs [1989] HCA 54; 167 CLR 637.

46

ADJRA s 13(1).

47

Air Caledonie International and others v Commonwealth of Australia (1988) 82 ALR 385.

48

Constitution s 75(iii) and (v).

49

ATO, Decision Impact Statement: Commissioner of Taxation v Futuris Corporation Limited (5 January 2008) .

50

FC of T v Futuris Corporation Ltd 2008 ATC ¶20-039; [2008] HCA 32.

51

Ibid.

¶6-050 Tax crime disputes “Tax crime occurs when people abuse the tax and superannuation systems through intentional and dishonest behaviour with the aim of obtaining a financial benefit. It encompasses a broad spectrum of non-compliant activity that can result in criminal sanctions, such as fines or imprisonment”.52 Tax crime is taken very seriously because in addition to loss of revenue, there are links to “organised crime, identity crime and money laundering”. The less serious offences (such as making false or misleading statements, failing to lodge returns or keep records) are prosecuted by the ATO as summary offences (criminal offences that can be heard by a magistrate without a jury) under the TAA. Alternatively, the Commissioner can impose administrative penalties (but can’t do both). Prosecution does not provide relief from the payment of tax.53 More serious tax crimes which can’t be dealt with summarily are referred to the Commonwealth Director of Public Prosecutions to conduct a jury trial on behalf of the Crown. All people accused of a crime have the right to defend themselves, are innocent until proven guilty, and generally guilt has to be proven beyond a reasonable doubt (although some offences are of absolute or strict liability). Absolute and strict liability means that a person only has to commit the offence, their intention or fault is irrelevant. However, with strict liability a defence of mistake of fact is available (while not available for absolute liability offences). For example, failing to provide information to the Commissioner when requested is an offence of absolute liability54. In addition to prison sentences, convictions can result in fines, security bonds and community service orders. It is beyond the scope of this text to go into further detail about criminal tax disputes. Suffice to say that

criminal prosecution is generally reserved for the most serious offences and taxpayers almost always have the presumption of innocence, the right to defend themselves, and need to be proven guilty beyond a reasonable doubt (a high bar). Footnotes 52

ATO, Tax crime explained (3 August 2015) .

53

TAA s 8ZE and 8ZH.

54

TAA s 8C(1)(a).

Collection and recovery Our civic duty

¶7-010

Payment of tax liabilities

¶7-020

Deferring payment and paying by instalments

¶7-030

Security for payment

¶7-040

Waiver

¶7-050

Release

¶7-060

Non-pursuit of tax liabilities — write off

¶7-070

Collection and recovery — measures for enforcement ¶7-080 Recovery from a third party

¶7-090

Going after company directors

¶7-100

Departure prohibition orders

¶7-110

Legal action

¶7-120

Freezing of assets

¶7-130

Other recovery disputes

¶7-140

¶7-010 Our civic duty “Collecting more taxes than is absolutely necessary is legalized robbery.” Calvin Coolidge1 As with most things, perspective is everything. For some, paying any tax is more than is necessary. The Commissioner’s view is that: “Payment of taxes properly payable is an important community responsibility. We expect debtors to pay their taxation debts as and when they fall due for payment. If a debt is not paid when it falls due for payment, we are responsible for collecting it or recovering it in a timely manner.”2 Neither the Commissioner nor the taxpayer (or debtor) want more to be paid than necessary, but as has been seen, what needs to be paid is open to drastically different interpretations and views. In the meantime, the Commissioner requires people to pay voluntarily, or he needs to take recovery action to enforce payment. Accordingly, this is an area ripe for dispute. The Commissioner takes the view that tax debts need to be paid when they fall due because the ATO is not a bank and tax debtors need to give their tax liability equal priority to their other financial obligations. It is also not fair to other taxpayers who pay their taxes on time. Unfortunately, the ATO can often be the last to be paid, especially in times of financial stress, as it doesn’t supply a specific good or service that will stop a business running or an individual obtaining food and shelter. The legislature has given the Commissioner comprehensive powers in relation to collection and recovery, so that he has the flexibility he needs to help those who are trying to do the right thing and just need some additional time to pay, plus sophisticated powers of recovery to use against others. Footnotes 1

The Quote Garden, Quotations about Taxes (9 April 2016) .

2

PS LA 2011/14 General debt collection powers and principles, 4.

¶7-020 Payment of tax liabilities The legal obligation to pay income tax (different taxes contain similar provisions in their legislative framework) arises in ITAA97 s 5-5 and in general terms is (if your return is lodged before it is due) 21 days after the Commissioner gives you an original notice of assessment. Alternatively, if a taxpayer doesn’t lodge until the final day the return is due, a self-assessing taxpayer’s tax is due for payment on the first day of the sixth month following the income year (ie generally 1 December). Whereas a full assessment taxpayer’s liability is due 21 days after they are required to lodge. If the Commissioner issues an amended assessment (say due to an adjustment made via audit), the liability is due to be paid 21 days after the Commissioner gives the notice. The due date is important for two reasons: • shortfall interest charge (SIC) is payable from the original due date until the day before the amended assessment is issued, and • general interest charge (GIC) accrues from the day after the due date for payment (in all cases). The above periods are a minimum and the Commissioner can provide additional time to pay (discussed below at ¶7-030). The 21-day period is calculated by ignoring the date the notice is served (or deemed served) and including the 21st day. For example, if a notice was served personally on the last day of a month, the liability would be due on the 21st day of the following month (as the day the notice is received is ignored). The Commissioner also has the power to bring forward the due date for payment if he is concerned that the relevant citizen may leave Australia before the liability becomes due. 3 Many disputes can arise around payment issues, particularly as interest can become a significant additional liability very quickly. One of the key ways to avoid disputes in this area is to request additional time to pay or the ability to pay via instalments. Footnotes 3

TAA s 255-20 Sch 1.

¶7-030 Deferring payment and paying by instalments Although payment is ordinarily due at specified times (as discussed above), the ATO may defer the time for payment of income tax, or permit the liability to be paid by instalments.4 The ATO is able to do this for individual taxpayers upon request and also for an entire class of taxpayers by publishing a notice on the ATO website. This might occur if there was a large group of taxpayers affected by a significant event (ie a natural disaster). Key difference between deferral and payment by instalments The key difference between deferral and payment by instalments is explained in the following extract from PS LA 2011/14: “Deferring the time for payment — means to vary the time at which a tax-related liability becomes due and payable. In a practical sense, such a deferral extends the time for payment of a debt without attracting additional charges for late payment (provided the debt is paid at or before the deferred time). As a result, the debt is no longer due and payable on the original due date, but becomes payable on the date as deferred. It differs from the situation where a debtor is permitted to pay by instalments where additional charges accrue from the original due date. In the latter case, the time at

which a tax-related liability becomes due and payable is not varied and interest on any unpaid amount begins to accrue from that time.” Accordingly, GIC does not accrue on deferral if the liability is paid by the deferred date (essentially the Commissioner has varied the date the liability is due and provided a new one).5 However, if the liability is not paid by the deferred date for payment, GIC will accrue from that time. Alternatively, where the Commissioner allows payment by instalments, the due date does not change and GIC will accrue and must be paid.6 The Commissioner’s discretion The mere fact that the Commissioner has the power to defer or permit payment by instalments does not provide any debtor the right or expectation that the Commissioner will exercise this power.7 The Commissioner is empowered by government to allow deferment or payment by instalments if he is of the view that either would be appropriate on a case-by-case basis. The Commissioner publishes his criteria in policy, advising the kinds of circumstances where he may exercise his discretion. To that end, any person who has had such a request refused does not have any right to dispute the decision under any tax law. However, as is usually the case, they can seek judicial review of the decision under the Administrative Decisions (Judicial Review) Act 1977 (ADJRA) discussed in Chapter 6 (which can only consider the legal correctness of the decision, not the merits). Deferral of payment Payment deferral is largely intended for debtors who cannot pay by the due date but will have the capacity to pay at a particular time in the future.8 For example a natural disaster has ruined a farmer’s crop therefore negating the capacity to pay this season, however, the capacity will be there next season. This allows the ATO to approach debt recovery strategically (as recovery takes time, costs money and uses the limited resources of the judicial system). It also gives the ATO wider options when considering how to manage debtors who don’t have the capacity to pay right now, but will certainly have the capacity at a specific point in the future. Broad guidance on the factors the ATO will take into account when deciding whether to allow a deferment is contained in PS LA 2011/14, available via the ATO website. In particular, the policy states that deferment will generally not be granted unless the tax debtor can demonstrate: • payment cannot be (or has not been) made by the original due date because of circumstances beyond their control and the debtor has taken reasonable steps to mitigate the effects of those circumstances • payment in full can be made at a later time, once the circumstances that led to non-payment have been alleviated, and • once the circumstances are under control, continuing tax-related liabilities will be paid as and when they fall due (and accordingly, the debt will not escalate after that time).9 It can be expected that the ATO will apply these criteria fairly rigidly as they attempt to ensure fairness between taxpayers. Although each case will be considered on its merits, the following circumstances will likely lead to a deferment if it can be shown that the inability to pay is directly linked: • natural disasters (flood, fire, drought, earthquake and the like) • other disasters that may have, or have had, a significant impact on a debtor or region • the serious illness of the debtor where there is no other person that can make (or could have made) the payment • a legal impediment (such as probate not being granted or access to funds being denied by the order of a court) • the embezzlement of the debtor’s payment by the tax agent, solicitor or other third party.10

These types of circumstances are rare and unusual and will usually lead to a deferment. Few other circumstances would support the grant of deferment.11 Deferment is quite a powerful remedy as it stops both GIC accruing and legal proceedings being commenced for recovery of the liability. However, if the liability is not paid by the deferred due date, it can be expected that the ATO will take action to recover the liability. It would be unusual for the Commissioner to grant a deferment once he has gone to the time and expense of commencing legal proceedings.12 An interesting factor regarding deferment is that each application is considered on its merits, rather than looking at the entire taxpayer. To put it another way, the ATO looks at the circumstances that have given rise to the inability to pay this specific liability and does not take into account whether the taxpayer has other debts or a poor history of complying with their tax obligations (which would usually be the case). This is because deferment is intended to be used in very unusual circumstances when something has happened that is completely outside the taxpayer’s control and it would not be appropriate to treat them differently because of their past behaviour. Because deferment is so beneficial to taxpayers, it should be applied for at the earliest opportunity and in preference to other remedies (in appropriate circumstances) as very rarely does the ATO offer a remedy that does not attract some form of interest. Paying by instalments As previously outlined, the Commissioner has the legal power to permit entities to pay their tax liability by instalments. However, the Commissioner is under no obligation to grant payment by instalments simply because it is requested. The Commissioner provides a policy overview of his attitude to these requests in the following extract from PS LA 2011/14: “Taxpayers have a responsibility to manage their cash flow to ensure they meet all their tax debts when those debts fall due for payment. Some taxpayers may experience cash flow difficulties that will prevent them from paying their debt on time. In those instances the Commissioner will consider requests to accept payment of the debt by instalments over a period of time. Accepting payment by instalments provides the Commissioner with an alternative to more formal recovery procedures.” Unlike a deferment, an arrangement to pay by instalments does not alter the due date for payment and GIC will continue to accrue as in the ordinary course. Another difference to deferment is that although each request to pay by instalments is considered on a case-by-case basis, the ATO looks at the overall picture of the taxpayer, including their previous behaviour such as whether they have a history of complying with their tax affairs or not, whether there are any satisfactory reasons for previous non-compliance and whether they have shown any overarching unwillingness to comply with their tax obligations.13 A taxpayer who has a history of lodging and paying on time will be far more likely to obtain agreement to pay by instalments than a taxpayer who has had prior lodgement or payment issues. Likewise, a taxpayer who approaches the ATO upfront and asks for an arrangement without being pursued is much more likely to be granted an arrangement. It is always worthwhile to contact the ATO and discuss options as soon as becoming aware that there may be an issue with payment. Once the ATO has commenced recovery action it will be much more difficult to obtain concessions or assistance. Requests to pay by instalments should be made as soon as possible, be accompanied by all relevant information and if at all possible, be made before the date the liability is due for payment.14 The Commissioner retains absolute discretion as whether he will grant an arrangement in each instance, but his policy states that he will take into account the following factors: • relevant information (as provided or in the Commissioner’s possession) • circumstances that led to the inability to pay • the taxpayer’s financial position • the stage of legal proceedings • whether the taxpayer can satisfy both the payment arrangement and any other obligations

• any risk to the revenue and whether the risk can be ameliorated by the provision of security (discussed at ¶7-040 below) • solvency of the taxpayer • the taxpayer’s history of complying with tax obligations • whether quicker options for payment exist • the taxpayer’s willingness to pay by direct debit, and • the taxpayer’s willingness to accept the Commissioner’s conditions.15 The Commissioner is able to refuse an offer to pay by instalments for any reason, but as he has published the above guidelines, it can be expected that he will use these to make relevant decisions. Any offer to pay by instalments should be made at the earliest possible time, include all relevant information and address the above categories as thoroughly as possible. The Commissioner’s decision to refuse an offer to pay by instalments is not subject to merits review. However, a taxpayer can seek review under the ADJRA (discussed in Chapter 6), where the Federal Court can only consider the “legal correctness” of the decision. Footnotes 4

TAA s 255-10 and 255-15(1) Sch 1.

5

TAA s 255-10(1) Sch 1.

6

TAA s 255-15(1) Sch 1.

7

PS LA 2011/14 General debt collection powers and principles, 29.

8

Ibid, at 31.

9

Ibid, at 32.

10

Ibid, at 33.

11

Ibid, at 34.

12

Ibid, at 40–42.

13

Ibid, at 55–56.

14

Ibid, at 58–59.

15

Ibid, at 61.

¶7-040 Security for payment The ATO can require an entity to give security for an existing or future tax liability if: • they have reason to believe that:

– a taxpayer is establishing or carrying on an enterprise in Australia, and – they intend to carry on that enterprise for a limited time only, or • the ATO reasonably believes that the requirement is otherwise appropriate, having regard to all relevant circumstances.16 What type of security will be required? Security may consist of a bond, deposit or any other means the ATO thinks is appropriate. The ATO can require it to be given at any time and as often as it thinks appropriate.17 Clearly, these are significant and powerful provisions aimed at protecting the revenue. Given the Commissioner wants the best possible protection, he will insist that a high quality security be provided. Usually, this means a registered first mortgage over freehold property, or a subsequent mortgage if there is sufficient equity in the property. Alternatively, he may accept an unconditional bank guarantee.18 Security provides the ATO the following advantages: • it reinforces the prospects of ultimate recovery of the debt and mitigates the risk of non-compliance • it provides an incentive for a taxpayer to ensure that all possible steps are taken to finalise any review and appeal processes, and any other arrangements for the payment of tax • it allows taxpayers to retain a disputed amount pending completion of the review process • it prevents taxpayers or related entities from divesting themselves of secured assets while a debt remains outstanding, and • it protects the Commissioner’s position during court disputes.19 The common theme is that security ensures that the Commissioner’s position is protected and payment will be made either voluntarily by the taxpayer or in a worst case scenario, by enforcement of the security. To obtain security, the ATO is required to give a taxpayer written notice, explaining why security is required and by when, how it can be provided and the relevant procedures for reviewing the decision. There are no direct rights to object to or appeal the Commissioner’s decision, however, as it is an administrative decision, it is subject to judicial review in the Federal Court (as discussed in Chapter 6), although security notices cannot be defeated on purely technical grounds.20 The security provisions are deliberately powerful in order to protect the revenue. Demonstrating this, the Federal Court in Keris Pty Ltd v DFC of T 2015 ATC ¶20-545; [2015] FCA 1381 found that the Commissioner can require a taxpayer to provide security for an estimated GST liability, even before the transaction has occurred. Significantly, this shows that tentative or prospective transactions can be subject to the security provisions, as long as the Commissioner is of the view that the action is reasonable and has evidence of same. Otherwise, the decision may be able to be overturned on judicial review as not correct at law. Failure to comply with a request for security is a criminal offence that carries a penalty of 100 penalty units for individuals and 500 penalty units for companies.21 In what situations will security be requested? Generally, security will be requested in circumstances where the Commissioner wishes to protect his position as a creditor or to secure the process of debt recovery (such that if a taxpayer was to default on a payment arrangement, it would still be paid via enforcement of the security). Circumstances where the Commissioner may wish to obtain security include where: • a taxpayer has requested deferral or to pay by instalments • a taxpayer is likely to be carrying on a business only for a limited time

• assets are being dissipated • a taxpayer wishes to leave the country but cannot discharge their tax liability immediately • a taxpayer is temporarily unable to pay their tax debt, or • there is any other risk to revenue identified.22 What if you default? Once security has been provided, it is crucial for a taxpayer to ensure they do not default on any agreement with the Commissioner as the security could be enforced without further notice. This means if the security is a first registered mortgage over a property, the property could be sold. Alternatively, the Commissioner may be willing to reach a new agreement, or simply have the tax liability cleared (without having to spend additional money and time to enforce the security). Communication with the ATO is critical to avoid enforcement of the security at what could be a liquidation sale price.23 Footnotes 16

TAA s 255-100(1) Sch 1.

17

TAA s 255-100(2) and (3) Sch 1.

18

PS LA 2011/14 General debt collection powers and principles, 87.

19

Ibid, at 79.

20

TAA s 255-105(1), (2) and (5) Sch 1.

21

TAA s 255-110 Sch 1; Crimes Act 1914 s 4B.

22

PS LA 2011/14 General debt collection powers and principles, 80.

23

Ibid, at 89.

¶7-050 Waiver “The Commissioner has a statutory obligation to pursue the recovery of tax debts. However, a tax debt will not be pursued in certain situations.”24 There are three key mechanisms that allow for the non-pursuit of tax liabilities: waiver (discussed below), release (discussed at ¶7-060) and write off (discussed at ¶7070). Each differ in their application process and effect. Decisions to relieve taxation liabilities must be consistent with both the law and the Commissioner’s published policy. At the highest level, the Public Governance, Performance and Accountability Act 2014 s 63 states that the Finance Minister (on behalf of the Commonwealth) is authorised to waive any amounts owing to the Commonwealth. All tax liabilities (including associated penalties and interest) fall within this power. As the power has not been delegated to the Commissioner of Taxation, the Finance Minister is the only person who is able to waive tax liabilities. The Finance Minister has delegated this power to certain senior officials in the Department of Finance. Waiver is a powerful provision and is only exercised in limited circumstances. The Department of Finance has drafted guidelines and policy (including an application form) which is available via their website. Waiver is intended to give the Minister a wide discretion to consider each request on a case-by-case basis. However, the power is discretionary and there is “no situation which creates an automatic

entitlement to a waiver of debt”25. Debts are usually only waived where the decision maker comes to the view that recovery of the liability “would be inequitable or cause ongoing financial hardship, and that other debt treatment options … are not appropriate”. Waiver is usually only a final option, where all other possibilities have been attempted and failed.26 What constitutes financial hardship? “Financial hardship exists when payment of the debt would leave you unable to provide food, accommodation, clothing, medical treatment, education or other necessities for yourself or your family, or other people for whom you are responsible.”27 Although a demonstration of “financial hardship” will go strongly in the applicant’s favour, it won’t mean that the debt will be automatically waived. The decision maker has the ultimate discretion to either waive the liability or not. Application process Applications for waiver can be made by any entity (individual, company or otherwise). The application must be made in writing (using the appropriate form) and sent to the Department of Finance either by post or email. Ideally, all relevant information and arguments as to why the liability should be waived (including comprehensive financial information demonstrating hardship) should be supplied at the application stage to have the best chance of persuading the decision maker at first instance. The decision-making process can be lengthy and does not include any face-to-face meetings. The Department will consult with the Commissioner before making a decision. The Commissioner also provides relevant information to the Department of Finance to assist the decision maker. This information is also provided to the applicant for their comment. The material provided by the Commissioner will likely include: • details of the liability, including how it arose and whether it remains disputed • whether the Commonwealth has contributed to the applicant’s situation • relevant information the Commissioner holds about the applicant (including their income and assets), and • the Commissioner’s recommendation about whether the waiver request should be accepted or rejected. Although it would be rare, the Commissioner may still seek to recover a liability where an applicant has applied for waiver, but this would only arise where the risk was considered so significant that it remained appropriate to continue recovery action in spite of the application. However, once an application for waiver has been approved, the Commissioner would be unable to seek recovery of the liability as the debt no longer exists. Options available if an application fails Once the Department of Finance has made its decision, that decision will usually be final. If the request is approved, no further action will be taken to recover the liability as the debt has been waived. If the request is denied, the Department will generally not consider a new request unless the applicant can provide new evidence or show that the decision maker made a serious mistake regarding the facts. If either of these factors can be demonstrated, the Department may consider the new request. Otherwise once the decision maker has made their final decision, the rights of review are limited. There is no opportunity for a merits based review. However, if an applicant is unhappy they have two options to have aspects of the decision reviewed: Complain to the Ombudsman If an applicant is unhappy with the manner in which the Department of Finance handled their request (not the ultimate decision per se), they can lodge a complaint with the Commonwealth Ombudsman. If the Ombudsman chooses to investigate, they will undertake an independent, informal, private and free enquiry. Subject to the investigation, they cannot change the decision but can make recommendations

that the matter be reviewed again. The advantage with involving the Ombudsman is that they can undertake a wide ranging review and the Department will not lightly ignore any recommendations made. The disadvantages are that they can only make recommendations and they are also unable to investigate any decisions of the Minister (which means if the Minister made the decision, the Ombudsman has no power to investigate). Judicial review in the Federal Court Alternatively, an applicant also has the right to seek judicial review of the decision in the Federal Court under the ADJRA (discussed further in Chapter 6). The court can only consider whether the decision was made correctly at law and cannot review the merits of the decision, nor substitute its own decision. At best the court can set the decision aside and send it back to the Department of Finance to make the decision again. This won’t mean that the Department will make a different decision, rather they may come to the same view while ensuring that they do not make the error of law that allowed the decision to be set aside by the court. Another consideration for applicants contemplating an application for judicial review is that in addition to the time and cost involved, they may also be required to pay the legal costs of the Department if they are unsuccessful. Footnotes 24

PS LA 2011/17 Debt relief, waiver and write off, 1; Public Governance Performance and Accountability Rule 2014 s 11; Legal Services Directions 2017 4.3.

25

Department of Finance, Waiver of Debt Mechanism (4 April 2016) .

26

Ibid.

27

Ibid.

¶7-060 Release Although the Commissioner has not been delegated the power to waive tax debts, he has been given the authority to release certain taxpayers from paying all or part of their tax liability on the grounds of serious hardship. Although release and waiver would appear to be similar concepts, they have key differences, especially in relation to how the respective decisions can be reviewed. The Commissioner has the power (under TAA s 340-5 Sch 1) to release some taxpayers of their obligations to pay certain tax debts. Only individuals or the trustee of the estate of a deceased person are eligible for release. An individual must demonstrate that payment of the liability will cause them serious hardship. For the trustee of a deceased estate, it must be demonstrated that the dependants of the deceased individual would suffer serious hardship. Tax debts eligible for release Interestingly, the Commissioner does not have the power to release taxpayers from all tax liabilities. This is different to waiver, where the Minister for Finance has an unfettered power to waive all liabilities owing to the Commonwealth. The liabilities that are eligible for release include: • income tax (including instalments) • fringe benefits tax (including instalments) • Medicare levy and surcharge

• various withholding taxes (such as on dividends, interest and royalties), and • various penalties and interest payments associated with these taxes. The detailed list of taxation liabilities eligible for release is outlined at TAA s 340-10 Sch 1. Tax debts not eligible for release What is interesting to note are the types of liabilities that are not eligible for release. These include: • the goods and services tax (GST) • PAYG withholding (tax withheld on behalf of employees), and • any obligation to pay superannuation. What is so significant about these types of liabilities that they are specifically excluded from release? The key difference is that they are funds withheld to be paid to the government for others. The GST is collected for the government, while the others are collected on behalf of employees. Amounts owed by an entity on its own behalf are subject to the lower threshold of release. However, amounts owed on behalf of, or to, others are subject to a higher standard for which the Commissioner is not empowered to grant release. Application process The application for release must be made using the “approved form”28 which is available on the ATO website. Clearly, it is in the best interests of the taxpayer to include with the application all relevant information and arguments to persuade the Commissioner that it is appropriate to grant release. In addition, the ATO advises that for an application to be processed, the following criteria must be satisfied: • all relevant information is provided • all lodgements are up-to-date (to ensure all current tax liabilities are established and clear) • there are no outstanding tax disputes (this may affect the decision-making process as the debt may be lower than it currently stands), and • there are no other disputes of any kind (eg insurance, compensation or damages as this may affect the taxpayer’s financial situation and any ultimate assessment of hardship).29 GIC implications From a disputes perspective, the Commissioner’s attitude clearly states that he requires all collateral disputes to be finalised before he will consider an application for release. However, he doesn’t say that an application will be refused, it is more likely that it will be held in abeyance. Does this then mean that he will seek to recover outstanding amounts if a release application is on foot? As is usually the case, the Commissioner’s policy position is that he will decide these matters on a case-by-case basis according to an assessment of the risk.30 However, he states that generally recovery action will be deferred unless the application for release is frivolous, lacks merit or poses a serious risk to recovery. This is to avoid abuse of the process where individuals could use release applications to “hold” recovery action while they dissipate assets, trade insolvently, or as a general tactic of delay. It is for this reason that GIC will continue to run on liabilities pending the determination of an application for release. If the application is ultimately successful in full, any interest accrued will also be released. Failing that, any interest that accrued from the time of the application is payable. Previously, interest was put on hold pending the outcome of applications for release, but this situation was changed as it was open to abuse whereby individuals would lodge frivolous applications purely to reduce their interest bill. The Commissioner must advise of his decision in writing within 28 days.31 What constitutes serious hardship?

The decision to grant release is based on whether payment of the tax liability would cause “serious hardship” to the taxpayer (or the dependants of a deceased taxpayer). The Commissioner’s policy defines “serious hardship” as follows: “where the payment of a tax liability would result in a person being left without the means to afford basics such as food, clothing, medical supplies, accommodation, or education”.32 A full understanding of these criteria is more difficult to ascertain as it remains arguable as to what level of these necessities is considered “basic” and further, what if the applicant is the main provider for a large family? A basic level of food and education to some will be excessive to others. How then should the Commissioner apply this test between taxpayers? The Commissioner uses three tests to determine hardship applications: the income/outgoings test, the assets/liabilities test and whether there are any other relevant factors that should be taken into account. Income/outgoings test The income/outgoings test is used to assess a taxpayer’s capacity to pay their tax debt from their income. This is then considered in relation to whether their spending or outgoings could be considered reasonable. It is also necessary to consider their outgoings in the context of who they have responsibility for (ie any dependants) and the degree of responsibility held. To this end, four key factors are taken into account: • Scope to increase income. The Commissioner would look at whether a taxpayer could earn more money relatively easily. For example, if they were only working three days a week and could easily increase that to five, their application would be assessed on the increased earning capacity. • Whether expenditure is reasonable. If household funds were being spent on unnecessary luxuries (such as a domestic housekeeper or expensive high-end fashion), the Commissioner would assess the application on the basis that the taxpayer has more funds available to pay their taxation liability. • Whether attempts have been made to defer other financial commitments. • Capacity to pay in a reasonable timeframe. Once the above have been taken into account, it is appropriate to analyse whether the taxpayer could pay their liability within a reasonable timeframe (via instalments). What is reasonable is objective, but generally the Commissioner would expect a liability to be paid within one to two years. If the liability could be paid on this basis, the Commissioner would find that the taxpayer was not in serious hardship. If the taxpayer is found to be in serious hardship, the second test (assets/liabilities) does not need to be considered and the Commissioner moves to the third part of the test — other relevant factors. However, if the income/outgoings test is not satisfied, the assets/liabilities test will be used to establish if the taxpayer is in serious hardship. Assets/liabilities test This test looks at whether the taxpayer has sufficient equity in assets that would allow them to pay their liability. The Commissioner looks at all assets owned by a taxpayer (individually, jointly or otherwise) and takes into account relevant liabilities that are held over those assets (or separately) to establish the liquidity of the taxpayer and the capacity to pay if that liquidity were realised.33 The Commissioner takes a reasonable approach to these issues and acknowledges that some assets are “normal and reasonable possessions” which would not be expected to be sold to satisfy a tax liability as long as they are of a “modest nature”. Assets which fall into this category include: • taxpayer’s own home • car • furniture and household effects • tools for work

• cash/funds to meet daily living expenses, and • funds for funeral expenses. What must be remembered is that these assets must be reasonable and modest. A standard suburban home would not be included, but a waterfront mansion would be unlikely to be accepted as reasonable or modest. Apart from these specified assets, anything else that is held by the taxpayer needs to be analysed to decide whether there is capacity to pay via the sale or leveraging of the asset. Other relevant factors The tests above are used to assess serious hardship. However, for serious hardship to exist, there needs to be a cause and effect relationship between the requirement to pay the tax liability and the serious hardship. The mere existence of the liability does not create serious hardship on its own (especially if the liability is not due).34 Once an assessment has been made as to whether requiring a taxpayer to pay their tax liability will cause serious hardship, release is not granted automatically. There is no obligation on the Commissioner to grant release. A third and final test (other relevant factors) is used to decide whether it is appropriate for the Commissioner to exercise his discretion to grant release. This ensures that the Commissioner complies with his obligation “to act reasonably and responsibly, and … not act arbitrarily or capriciously”.35 The Commissioner may decide not to grant release even when a finding of serious hardship has been made. Examples of other relevant factors include: • assets have been acquired in preference to paying tax • funds or assets have been disposed of in preference to paying tax • release will not prevent hardship (ie another creditor will likely bankrupt the taxpayer) • other debts have been paid in preference to tax • the taxpayer unreasonably failed to pursue liabilities owed • serious hardship is temporary • the taxpayer has a history of poor compliance • the taxpayer is unable to show they have planned for future liabilities • the taxpayer has contrived the situation to place themselves in serious hardship, and • the taxpayer’s delay in lodging returns has created a debt they cannot pay. Once the Commissioner has considered all of these factors, he will decide whether or not to grant release and if so, whether to grant full or partial release. The Commissioner will generally provide the minimum amount of release required to avoid serious hardship (ie partial release will be considered in preference to full release). If the taxpayer is not released from their GIC liability, they can still apply for remission of that liability (discussed in Chapter 4). Options if an application fails If a taxpayer is unhappy with the Commissioner’s decision, they can lodge an objection against the decision with the ATO. If they are unhappy with the ATO’s objection decision they can either apply to the AAT for a merits review of the decision or the Federal Court for judicial review of the decision. If release is refused, there is nothing prohibiting a taxpayer from reapplying for release (but they should not expect a different decision unless they have new facts to submit or their circumstances have changed). Footnotes

Footnotes 28

TAA s 340-5(2) Sch 1.

29

PS LA 2011/17 Debt relief, waiver and write off, 3.

30

Ibid, at 4.

31

TAA s 340-5(5) Sch 1.

32

PS LA 2011/17 Debt relief, waiver and write off, 5.

33

Ibid.

34

XPLZ and Commissioner of Taxation [2016] AATA 466.

35

PS LA 2011/17 Debt relief, waiver and write off [8].

¶7-070 Non-pursuit of tax liabilities — write off The Commissioner can decide not to pursue a tax liability that is “uneconomical to pursue” or “irrecoverable at law”36. The difference between the two is that a liability that cannot be recovered at law is completely extinguished. However, a liability that is written off by the Commissioner on the basis of being uneconomical can be raised again by the Commissioner at a future time at the Commissioner’s discretion (usually because the taxpayer has lodged a tax return showing they are due a refund which can be offset against the outstanding liability).37 Uneconomical to pursue Although the Commissioner has the discretion not to pursue debts, he may decide to pursue a liability because it is in the public interest due to the taxpayer’s poor compliance history. Ultimately, the decision is at the Commissioner’s discretion and although there are no definitive guidelines, the following factors will likely be given consideration: • whether the cost of recovery will exceed the debt • age of the debt • the type of debt (superannuation debts will likely be pursued because they are funds belonging to employees) • whether the taxpayer has disappeared • assets held by the taxpayer • whether bankruptcy can be pursued • whether a company is trading, and • whether a deceased estate has assets to satisfy the tax owed. If the Commissioner decides to write the debt off, it can be raised again in appropriate circumstances at the Commissioner’s discretion. It should not be presumed to be a permanent solution to an ongoing dispute. Also, this option cannot be formally requested by the taxpayer and will only be initiated by the Commissioner.

Unrecoverable at law Where the tax liability is unrecoverable at law, the debt is extinguished. The circumstances where this occurs are generally associated with legal (including bankruptcy and insolvency) action. Examples include: • the debt cannot be recovered in court (because there is no cause of action or a court has made a final finding against the Commissioner in relation to recovering the debt) • the debt is extinguished by bankruptcy or insolvency arrangements or proceedings, or • where the Commissioner has agreed to settle or compromise the debt via deed. It is only in these situations that a tax liability will be unrecoverable at law. Footnotes 36

Public Governance, Performance and Accountability Rule 2014 s 11.

37

PS LA 2011/17 Debt relief, waiver and write off, 13.

¶7-080 Collection and recovery — measures for enforcement “The Australian Taxation Office (ATO) expects taxpayers to pay their tax-related liabilities as and when they fall due for payment. If a tax-related liability remains unpaid after its due date, it is the ATO’s responsibility to instigate the most appropriate action to collect that debt as soon as practicable.”38 ATO’s approach The ATO’s approach to the collection and recovery of tax debts is outlined in PS LA 2011/18. The ATO chooses its response on the basis of risk and the individual circumstances of each taxpayer to ensure recovery action is fair, transparent and professional. The ATO has a wide variety of enforcement measures which can be used as required in the appropriate circumstances to collect and recover “taxrelated liabilities”39. If taxes and associated penalties and interest become due and payable, they then become a debt that is due to the Commonwealth. The Commissioner then has the power to recover those amounts using civil proceedings in any court with competent jurisdiction. In addition to taking court action (which is usually a blunt instrument, plus slow and expensive), the ATO has a wide variety of additional options to recover outstanding tax liabilities (which have varying degrees of efficiency). It is important for the ATO to be strategic in the action they take. These recovery options are legislated and referred to as “sanctions”. The Commissioner sees “[e]nforcement measures of increasing consequence … [as] a normal commercial response to nonpayment of a debt and often result in significant costs for the ATO (which will be recouped from the tax debtor or their estate, where possible)”. Generally, a written notice will first be issued to a tax debtor requesting payment before collection activity commences (although there is no legal requirement for the Commissioner to do this). Enforcement measures (or sanctions) then increase in severity according to the ATO’s assessment of the risk, along with a strategic analysis of the most efficient and effective method to recover the liability (ie taking into account financial and time costs compared to the anticipated benefit). The final response at law for tax debtors who do not pay, or come to an arrangement with the ATO to pay (eg to pay via instalments), is “sequestration of an individual’s estate in bankruptcy or the liquidation of a company”. Although this action would normally only occur after all other appropriate recovery actions have been attempted, thereby rendering the tax liability and debtor “high risk”. The ATO will undertake a variety of the following activities to recover the liability: • further contact (written or by phone)

• accepting payment by instalments (discussed in ¶7-030) • accepting security (discussed in ¶7-040) • legal activity (including liquidation and bankruptcy — discussed in ¶7-120) • use of estimates (discussed in ¶7-100) • use of director penalty notices (discussed in ¶7-100) • recovery from third parties — use of garnishee notices (discussed in ¶7-090) • use of departure prohibition orders (discussed in ¶7-110) • use of writs/warrants for execution, seizure or sale (of property of land) • oral examinations (discussed in ¶3-030) • freezing orders (discussed in ¶7-130) • notices to provide information (discussed in ¶3-030), and • use of equitable remedies/declaratory and restitution orders. Footnotes 38

PS LA 2011/18 Enforcement measures for the collection and recovery of tax-related liabilities and other amounts, 1.

39

TAA s 255-1(1) Sch 1.

¶7-090 Recovery from a third party Where a “tax-related liability” is payable, the Commissioner is able to issue notice under TAA s 260-5 Sch 1 that requires any person that owes money to that taxpayer to pay that money to the ATO instead. This can be an efficient and effective way to recover funds without the need for further enforcement action (such as seeking a judgment for the outstanding tax liability). This also reduces the likelihood of costly disputation as the debt will be paid, saving the associated time and cost that would otherwise have been incurred if the ATO had needed to take active steps to recover the liability. “Garnishee notices” However, “[t]he issue of a garnishee notice is an exercise of a coercive power so care must be taken when exercising [the] power”.40 When deciding whether to issue a notice, the ATO considers: • the financial position and circumstances of the debtor and the steps taken to make prompt payment • other debts • the risk to the revenue: are other creditors being paid in preference to the ATO? • the impact a notice would have on a family or business. A notice issued under TAA s 260-5 Sch 1 is similar to what is normally known as a “garnishee notice” — a term often used in this context so will be adopted. Issuing a garnishee notice

The process for issuing a garnishee notice is that service of the notice on a third party creates a statutory charge in favour of the Commissioner over any moneys payable (or becoming payable) by the notice recipient.41 A garnishee notice will be valid regardless of whether the debt is payable (although it must be due), however it won’t be valid if the court has granted a stay of the judgment requiring payment.42 Unless there are “special circumstances”, the ATO has no obligation to provide advance warning of their intention to issue a notice (advance warning could reduce the likelihood of compliance).43 Special circumstances include situations where a notice is issued to oppress a taxpayer or collect monies not personally owed by the taxpayer.44 It is also important to note that while minor errors in a garnishee notice will not automatically invalidate it45, it will be invalid if the notice is ambiguous.46 Failure to comply If a third party fails to comply with a notice, they commit a criminal offence and are liable to a penalty of 20 penalty units (currently $3,600) and if convicted may also be subject to payment of the amount stated in the garnishee notice. The Commissioner can also sue the entity directly for the amount once payment is due.47 In addition to this, if the third party served with the notice complies, the payment is taken to have been authorised by the debtor (plus anyone else entitled to payment) and the third party indemnified for the amount paid.48 Accordingly, these factors provide a significant incentive for entities issued with a garnishee notice to comply with the notice. Challenging a garnishee notice The first step to consider in relation to challenging a notice is to ensure there are no “special circumstances”, stays of judgment or any ambiguity in the notice itself. Notices can also be challenged by any person with an interest in the matter, on the basis that the notice was issued for an improper purpose or in bad faith.49 However, the underlying assessment of the notice can only be challenged via proceedings brought under TAA Pt IVC 50 (discussed in detail in Chapter 6). The decision to issue a notice is subject to judicial review in the Federal Court51 (discussed in detail in Chapter 6). Garnishee notices will also be ineffective where the funds are held in a joint account,52 are in a foreign currency53 or issued to the official trustee in bankruptcy54. Other considerations Because this is a powerful tool and has been subject to extensive legal disputation, it is beyond the scope of this text to undertake a more comprehensive review of the circumstances where garnishee notices may be subject to challenge. From the perspective of taxation disputes and dispute resolution, this is an area that is ripe for disputation in the appropriate circumstances, however, because of the draconian effects that a garnishee notice can have on an entity, especially if carrying on a business, it is most prudent to avoid these kind of disputes with the ATO if at all possible (as a garnishee notice can effectively destroy the cash flow of a business and force it to stop trading). The best response is to avoid the accrual of outstanding tax liabilities (especially large amounts as these are more likely to attract the attention of the ATO) and if a liability cannot be avoided, ensure that open communication occurs with the ATO, so that they are aware that the liability cannot be paid on time and a request for a deferment or to pay over time is made at the earliest opportunity. The Commissioner will also consider any reasonable request for the withdrawal of a garnishee notice (or variation) as long as alternative arrangements for payment are made. Accordingly, talking to the ATO at all times, even after the issue of the garnishee notice can be critical in the avoidance or resolution of a dispute (as a taxpayer may be able to have the notice withdrawn before it is actioned).55 It is also wise to be cognisant that the ATO may not be aware of all opportunities to garnish funds. There is no need to volunteer unnecessary information which may be used to found a garnishee (regarding bank accounts or the sale of property) unless under a legal obligation to do so (ie via a statutory notice to provide the information). Footnotes

40

Ibid, at 101.

41

DFC of T v Donnelly & Ors 89 ATC 5071; FC of T v Lanstel Pty Ltd 96 ATC 5213.

42

Denlay & Anor v FC of T [2013] FCA 307.

43

Woodroffe v DFC of T [2000] FCA 1379.

44

Edelsten v Wilcox & Anor 88 ATC 4484.

45

Goodin & Anor v Commissioner of Taxation & Anor [2002] VSC 241.

46

FC of T v De Martin and Gasparini Pty Ltd [2011] FCA 286.

47

FC of T v Barnes Development Pty Ltd [2009] FCA 830.

48

TAA s 260-15 Sch 1.

49

Sunrise Auto Limited v DFC of T; DFC of T v Sunrise Auto Limited 94 ATC 4536; 95 ATC 4840.

50

Rossi and Commissioner of Taxation [2015] AATA 601.

51

Edelsten v Wilcox & Anor 88 ATC 4484.

52

DFC of T v Westpac Savings Banks Ltd & Ors 87 ATC 4346.

53

DFC of T v Conley & Ors 98 ATC 5090 (1998).

54

DFC of T and Anor v Kunz 90 ATC 4977.

55

PS LA 2011/18 Enforcement measures for the collection and recovery of tax-related liabilities and other amounts, 103.

¶7-100 Going after company directors In the ordinary course of events, company directors are largely immune from responsibility for the liabilities of any company for which they are a director. This is commonly known as the “corporate veil” and is based on the principle that the company structure should be encouraged for enterprise and risk, such that directors are not fearful of personal liability if the company fails and shareholders are only exposed to the extent of their shareholding. Piercing the “corporate veil” The problem with this in the Australian taxation system is that companies (as employers) have a special role to withhold and remit the tax and super for their employees. Unlike most other taxes that companies pay, tax and super withheld on behalf of employees is never the company’s money. Unlike most other liabilities of a company, these funds have never belonged to the company and it is the role of each company as an employer, to collect and pay these funds as appropriate. In return for playing this part in the taxation and superannuation systems, each company is allowed to use the funds (to run their business, invest or simply hold) as they see fit until the funds are due to be paid to

either the ATO or relevant super fund as appropriate. Unfortunately, at times this doesn’t occur and the companies keep some or all of the funds (particularly in times of financial stress) and when some ultimately go into liquidation, the funds are still owed. For this reason the Australian Government has decided to take measures to ensure these funds are either paid or action can be taken to ensure the company goes quickly into liquidation (so that they cannot trade insolvently and incur more debt). The corporate veil can be pierced in very specific circumstances to make the directors of the relevant company personally liable for any amounts of withholding or superannuation that have not been paid. This means that the directors have a personal obligation to ensure the company either meets its obligations, goes into administration, liquidation or the directors become personally liable for these specific debts of the company (jointly and severally). It is a trigger for action, to guarantee directors ensure they are informed as to the financial viability of the company and are properly motivated to act if the company cannot meet its withholding and super obligations. The Australian taxation system contains special regimes that allow the Commissioner to recover unpaid amounts of superannuation (or more specifically unpaid superannuation guarantee charge) and PAYG withholding. The regimes are outlined in TAA Div 268 and 269 Sch 1. Division 268 — estimates of liabilities Estimates of liabilities are used where a company fails to inform the ATO of its PAYG withholding or superannuation obligations by the appropriate due date. This is seen as a significant risk as the company is neglecting to provide the relevant information as to whether amounts need to be paid — placing the ATO at a significant disadvantage. The estimate provisions allow the ATO to make a “reasonable” estimate of the amounts owing using any information they think is relevant, but will likely have specific regard to what previous liabilities have been (ie if the PAYG withholding liability has regularly been reported as $10,000, the estimate would likely be for this amount).56 Estimates must be given in writing and: (a) identify the underlying liability (b) specify the date of the estimate (c) set out the amount of the estimate (d) state that the amount of the estimate is due and payable, and (e) explain how the amount of the estimate can be reduced or revoked. The estimate is due and payable when the Commissioner “gives” the notice and he may take legal action to recover the liability. Notices are deemed to be given to the recipient company “at the time the Commissioner leaves or posts it”. If the Commissioner posts a notice today, it is deemed to be given and he may commence immediate recovery action (on the basis that the company is or should be aware of the liability). GIC is payable on the estimate when it remains unpaid for seven days.57 Challenging an estimate Once an estimate has been given, the recipient can only have it reduced (either partially or to nil) by making a statutory declaration or affidavit stating that there is no liability or alternatively stating what the liability is. If the Commissioner has commenced recovery proceedings, the defendant can defend the proceeding by providing evidence that the liability has been paid, is less than the estimate, or is nil.58 Alternatively, estimates can be challenged on the basis that they do not fulfil what is required to be advised under the legislation. This would include the requirements outlined in TAA s 268-15(1) Sch 1 (outlined above), such as the amount or the date is not correctly identified. If a recipient wishes to challenge an estimate in court, careful analysis of the estimate itself and whether it satisfies the formal requirements outlined in the legislation is critical and may prove fruitful if a mistake can be discovered. If any part of the estimate is ambiguous, it may also be open to challenge. Otherwise, the remaining avenue for challenge will be to demonstrate that the estimate is incorrect (but the company will need to be able to

show what the amount owing is, or that is has been paid). If the company does not pay or have the estimates reduced, the directors can become personally liable under the director penalty regime — discussed below. Division 269 — director penalties Directors of companies that fail to remit certain amounts to the ATO are personally liable for an equivalent penalty (jointly and/or severally). The director penalty regime applies where a company was required to remit, but failed to do so, an amount in respect of: (1) PAYG withholding (2) alienated personal services payment (3) a non-cash benefit provided (4) an estimate under Div 268, and (5) a superannuation guarantee charge. A duty is placed on company directors to ensure that their companies: • pay estimates or remit amounts they were required to withhold • are placed in voluntary administration, or • commence winding up.59 Incurring a penalty If one of these three things is not done by the due date for remittance, each director becomes personally liable for a penalty equal to the amount of the company’s liability. Former and new directors can also be liable in certain circumstances.60 However, if either the company or a director has taken steps to pay the debt by a formal instalment arrangement under TAA s 255-15 Sch 1 which the Commissioner has agreed to, the ATO is not able to recover either the penalty or the underlying debt while the instalment arrangement is in place. If the instalments arrangement is not complied with, it will no longer be in place and the ATO will be able to recover both the debt and the penalty. Three-month time limit to act Although taking one of the steps listed above would normally remit the penalty, the government has enacted “lock-down” provisions if one of the three steps has not been taken within three months of the date the relevant amount was due to be paid. This means that if action isn’t taken within three months, the directors will always be personally liable for the penalty until it is paid. Once the three-month period has passed, the penalty can never be remitted (even if the company goes into liquidation or is wound up). This means that the director’s personal liability will endure (which is the purpose of the legislation). Recovery of the penalty Before a penalty can be recovered (whether before or after the lapse of the three-month period), the ATO is required to give a director 21 days written notice before commencing legal proceedings to recover the penalty. It is important to note that the notice is only a condition precedent for commencing the legal proceedings, it should not be confused with the date upon which a director’s obligation arises. Notices are taken to be given by the Commissioner on the day they are posted to the recipient, this means that the 21 days runs from the day the notice was placed in the post (not when it was or should have been received). Therefore, it is irrelevant whether the notice was actually received. The main area for disputation regarding service of notices is whether it was sent to the correct address. The Commissioner can send the notice to a director’s place of residence or business as listed on the Australian Securities and Investment Commission (ASIC) records if those records show that the director had been a director of the company in question within the last seven days. The Commissioner can also send the notice to the address of the director’s tax agent (if registered with the ATO). Outside of these

situations the Commissioner would have to ensure that a director was served personally with a notice. Subject to the above, the Commissioner can commence legal proceedings against each director for the penalty. Given the penalty is joint and several, the Commissioner can sue each director for the same amount (so long as he does not recover the same amount twice). Accordingly, the reduction of the penalty of one director (by payment) will reduce the penalties of the other directors by the same amount, however, the paying director can seek contribution from the other directors for the payment made. Defending a penalty In legal proceedings for the recovery of director penalties, defendants only have three defences available: (1) At the relevant time the director did not take part in the management of the company due to illness (or another good reason). It also needs to have been unreasonable to expect them to have taken part. (2) The director took all reasonable steps to ensure the directors complied with their obligations (or there were none that could be taken). (3) With respect to a penalty in relation to the super guarantee charge, the company acted in a way that was “reasonably arguable”, or took “reasonable care”.61 Although these defences would appear to give some scope for directors to defend against recovery of a penalty, the courts have set a high bar in this regard. In the case of DFC of T v Saunig [2002] NSWCA 390, the defendant did not succeed on the second defence in spite of the fact that he had tried to get the other directors to comply, because he still had the power as a single director to commence winding up the company. The courts also have little sympathy for directors with a lack of understanding of the provisions or knowledge of the financial position of the company, as it is their responsibility to ensure they are informed (even if that means taking steps to make enquiries before accepting an appointment as a director)62 and to seek out professional advice about their responsibilities. It would be reasonable to draw the conclusion that directors will not succeed in making out these defences other than in the most extreme circumstances. For example, a director fell into a coma on the day before the obligation arose and there was no way they could reasonably take part in the management of the company, nor were there any reasonable steps they could have taken to ensure the other directors complied with their obligations. Footnotes 56

Ibid, at 33.

57

TAA s 268-15, 268-20 and 268-75 Sch 1.

58

TAA s 268-40(1) and 268-90 Sch 1.

59

TAA s 269-15 Sch 1.

60

TAA s 269-20 Sch 1.

61

TAA s 269-35 Sch 1.

62

Fitzgerald v DFC of T 95 ATC 4587.

¶7-110 Departure prohibition orders

The Commissioner has the power (under TAA Pt IVA) to issue a departure prohibition order (DPO) on an individual who has a tax liability to prevent them leaving Australia, regardless of whether they have an intention to return. This ensures that a tax debtor does not leave Australia without either discharging their tax debt or making suitable arrangements for it to be paid.63 The penalty for breaching a DPO is severe and includes a fine of up to 50 penalty units (currently $9,000) and/or up to a year in prison. Given these are powerful provisions with significant consequences, the Commissioner has to strike a sensitive balance between the primary intent of the DPO provisions (to protect the revenue) “with the severe intrusion into a person’s liberty, privacy and freedom of movement that a DPO represents”.64 The Commissioner provides comprehensive guidance to his officers about how these powers are to be exercised in PS LA 2011/18. In what circumstances will a DPO be issued? The Commissioner takes into account a wide variety of factors when deciding whether to issue a DPO, including whether: • there is a tax liability and whether it can be recovered • known assets are sufficient to pay existing and future tax liabilities and whether those assets are in a readily-realisable form • recovery proceedings are in course • the tax debtor has recently disposed of assets to associated persons or entities (the transaction may be overturned in bankruptcy) • there is any information to suggest concealment of assets (bank accounts in false names, use of an alias) or movement of funds (AUSTRAC reports) • the tax debtor has entered into transactions that “charged” assets in Australia and then moved the borrowed funds offshore • the tax debtor has assets overseas adequate to maintain a comfortable lifestyle • funds have been transferred overseas (and the purpose of the transfer) • the tax debtor has significant business interests in Australia • the tax debtor is subject to investigation for criminal activities (and whether any charges have been laid) • there is a threat against the tax debtor’s life as a result of criminal or other activities • there is ATO audit activity (or similar activity from other government agencies) • the tax debtor holds (or the tax debtor has applied for) an Australian or foreign passport/visa/work permit • the tax debtor has given an indication of likely overseas travel, and there is no apparent need for travel • there are issues relating to the tax debtor’s family situation (this information may not be relevant by itself, but when combined with a number of other factors, it may influence a decision to issue a DPO), and • the tax debtor has a history of frequent overseas travel for business or other genuine reasons. The key element for the Commissioner is that he must believe that the DPO should be issued on “reasonable grounds”.65 The above considerations are examples of elements that the Commissioner will

take into account when evaluating whether he has such grounds. To that end any thought of challenging the Commissioner’s decision to issue a DPO should start with the above list. Service of a DPO As soon as a DPO is made, the Commissioner is required to serve a copy on the person the subject of the order, the Immigration Secretary and anyone else appropriate.66 However, it is important to note that service of the DPO is not required for it to be effective or enforceable. Indeed, it would be counterintuitive if a tax debtor could leave Australia by avoiding service of the DPO. Accordingly, the DPO comes into effect immediately and while the Commissioner is required to try to advise the recipient straightway, failure to do so will not affect the enforceability of the notice. Options when responding to a DPO Once a DPO has been issued, there are only three ways in which a tax debtor will be allowed to leave Australia: • the Commissioner revokes the DPO • the tax debtor obtains a Departure Authorisation Certificate (DAC), or • the tax debtor successfully appeals to the Federal or Supreme Court. Getting a DPO revoked The Commissioner is required to revoke a DPO where the debtor’s current liabilities have been discharged and he is satisfied that future liabilities will be discharged (or are not recoverable), or if the Commissioner is satisfied that all liabilities are irrecoverable.67 Obtaining a DAC The second way in which a tax debtor can leave the country is if they obtain a DAC. The Commissioner is required to issue a DAC where he is satisfied that: • the person will return to Australia, the liability will be discharged or is irrecoverable and security is not required • security has been provided, or • where security can’t be provided, there are sufficient humanitarian grounds or it is in the interests of Australia.68 The simplest way to obtain a DAC is to provide appropriate security for the liability. The Commissioner specifically states that the size of the security does not need to equate to the size of the liability and that the considerations he takes into account include (but are not limited to) the following: • the risk that the tax debtor may not return to Australia as required under the DAC, and the impact this would have on the prospects of the tax liabilities being wholly discharged • whether the asset being offered as security is owned by a person or entity other than the tax debtor • the impact on the tax debtor (as distinct from the person or entity providing the security) should the security be forfeited due to their failure to return to Australia • the size of the security compared to the amount of tax liabilities outstanding (or the amount expected to be outstanding when any outstanding objection or appeal is finally determined) • the size of the security compared to the value of assets controlled by the tax debtor, and • the willingness of the tax debtor to fully disclose financial and other information to enable the Commissioner to properly consider their application for a DAC. The central theme is whether the security appears to be sufficient or important enough to the tax debtor to

mitigate the risk that they won’t return. If suitable security cannot be agreed on, a tax debtor will need to persuade the Commissioner that either humanitarian or national interest grounds exist to allow the issue of a DAC. Disputing a DPO If the recipient of a DPO is dissatisfied with the issue of the DPO or believes that the Commissioner should properly revoke it or issue a DAC, there are three options available: • They can appeal to either the Federal Court or the Supreme Court of any state or territory against the decision to issue the DPO.69 • There is also the option to apply directly to the Federal Court for judicial review of the decision under the ADJRA which is discussed in detail in Chapter 6. • The subject of a DPO who has been refused a request for it to be revoked or has been denied a DAC can apply to the AAT for a review of that decision70 (although the AAT has no power to review the decision to issue a DPO).71 Given a DPO is a significant restraint on personal liberty and freedom, the courts and AAT have taken a diligent and balanced approach when weighing up the interests of the individual versus the interests of the revenue. There are various examples where both taxpayers and the Commissioner have succeeded in DPO disputes both on questions of whether to issue the DPO, revocation and refusal to issue a DAC. Illustrative of this approach, in Crockett72, a taxpayer was granted a DAC on humanitarian grounds by the AAT where he wanted to leave Australia to see his wife and children, sick relatives and undertake volunteer work. In contrast, in Lui73 the Full Federal Court refused to grant a taxpayer a DAC when his wife was dying overseas, despite the provision of security, as the security was insufficient compared to his $23m tax debt. This demonstrates that the courts and AAT seek to strike and uphold the delicate balance of the DPO regime. Resolving DPO disputes Any attempt to resolve a DPO dispute will clearly turn on the individual circumstances of the case, weighed against the risk to the revenue. The leanest approach to resolving such issues is to attempt to negotiate a resolution with the Commissioner directly, incorporating a careful analysis of the facts of the case and the Commissioner’s policy for the issuing of a DPO and what constitutes sufficient security. Successful persuasion of the Commissioner that the recipient of the DPO will return to Australia is critical in resolving the dispute outside of litigation. If this cannot be done, careful consideration needs to be given to the facts of the case and whether there is sufficient grounds to persuade a court or the AAT that the tax debtor should be able to leave the country. This analysis should clearly weigh the competing priorities of protecting the revenue and the interests of the individual. Footnotes 63

TAA s 14S(1).

64

PS LA 2011/18 Enforcement measures for the collection and recovery of tax-related liabilities and other amounts, 150.

65

TAA s 14S(1).

66

TAA s 14S(4).

67

TAA s 14T(1).

68

TAA s 14S(1)(b)(i) and (ii), 14U(1)(a).

69

TAA s 14V(1).

70

TAA s 14Y.

71

Case 7/95, 95 ATC 152.

72

Crockett v FC of T 99 ATC 2218.

73

Lui v FC of T (No 2) [2009] FCAFC 115.

¶7-120 Legal action “Where a tax debtor does not propose or adhere to an acceptable proposal to pay a tax debt, the Commissioner may commence legal recovery proceedings. If the debt remains unpaid at the conclusion of those proceedings, in appropriate circumstances the Commissioner will take bankruptcy or liquidation action against the tax debtor.”74 Once the Commissioner commences legal action to recover a taxation liability, it means that the risk has been assessed to be of appropriate significance that legal action is required. This also takes into account both the time and cost involved in pursuing legal action, and the prospects of recovery. Generally, the Commissioner would not spend significant resources to pursue a minor debt unless that action could be justified, eg to stop an insolvent tax debtor continuing to trade and accumulate further liabilities.75 In the ordinary course, legal action involves three steps: (1) filing a court summons (either by writ or claim depending on the jurisdiction) (2) obtaining judgment on that summons, and (3) executing on that judgment.76 The court summons A court summons is usually filed in the relevant state court appropriate to the size of the debt. If the tax debtor resides in NSW, the summons will be filed in NSW. Depending on the size of the claim (continuing the example of NSW), it will either be filed in the Local (up to $100,000), District ($100,000 to $750,000) or Supreme Court (over $750,000). Although the names and jurisdictional limits differ between the states and territories, most operate on a similar basis (except Tasmania, the Australian Capital Territory, the Northern Territory and Norfolk Island, none of which have the equivalent of a District Court). Once a summons is filed, it is then served on the defendant tax debtor. They then have a certain time to file a defence (usually 28 days after service or other time the court allows), otherwise default judgment can be entered for the Deputy Commissioner of Taxation (as the Commissioner has delegated his debt recovery powers to a Deputy Commissioner). Although tax debtors can also file a defence to a summons, it is difficult to defend these matters in recovery proceedings in the state and territory courts as the Australian income tax law has been designed so that disputes about the assessment of tax are determined by the AAT (merits review) or Federal Court (judicial review or appeal from the AAT) — discussed in detail in Chapter 6. Accordingly, the tax law states that if the Commissioner produces a notice of assessment, that notice is “conclusive evidence” that the assessment was properly made and the amounts and particulars are correct (except in Pt IVC proceedings in the AAT or Federal Court).77 This means that outside of Pt IVC proceedings, the courts cannot look behind the assessment. In recovery proceedings for liabilities raised by assessment (such as income tax), the Deputy Commissioner has to do little more than produce a copy of the assessment to obtain judgment.

The situation is different in other types of proceedings for recovery of other types of liabilities (such as director penalties as discussed earlier in this chapter) but are still challenging to defend as those liabilities are usually founded on self-reported amounts and the tax debtor would have to prove that they reported incorrectly (exposing them to additional penalties and costs). A judgment and its execution Once judgment has been obtained, if the liability still isn’t paid by the tax debtor, the Deputy Commissioner will take appropriate action to execute the judgment and recover the liability. Consideration will be given to the most efficient and effective method for recovery and will generally entail using either a warrant of execution or taking action to liquidate a company or bankrupt an individual. Writ or warrant of execution A writ or warrant of execution is used when a judgment debt is not paid and the Deputy Commissioner asks a court to issue a warrant to seize and (if the judgment remains unpaid) sell the property of the tax debtor, with the proceeds used to pay the tax liability. This task is generally carried out by the sheriff or bailiff. This can be effective when the debt isn’t large and is useful in triggering the tax debtor either to pay the debt (to recover their property) or to agree to pay via instalments. Decisions to execute a warrant are made on a case-by-case basis, but should be carefully considered when the debtor has unsecured real or personal assets sufficient to pay the debt. In circumstances where a warrant of execution is not appropriate, the Commissioner has limited options but to write off the debt (discussed earlier in this chapter at ¶7-070) in circumstances where the cost of recovery outweighs the possible benefit, or to initiate insolvency action. Bankruptcy and liquidation Bankruptcy is the final sanction for an individual debtor, and liquidation for a corporate debtor. Either can occur voluntarily or via petitioning of creditors. In the case of bankruptcy, a trustee is appointed over the estate for the benefit of creditors. In liquidation, a liquidator is appointed to take control of the company’s assets and sell them for the benefit of creditors. Before initiating either action, the Commissioner will consider the circumstances of each case, plus: • the debtor’s assets • the size and type of debt • the debtor’s future income • risk to revenue, and • cost versus benefit.78 If the Commissioner decides to proceed with insolvency, he can issue a statutory demand (the debt must be over $2,000) to a company or a Bankruptcy Notice (over $5,000) for an individual. The debtor can either satisfy the liability demanded or apply to the court to set aside the demand or notice respectively. Failure to do so allows the Deputy Commissioner to commence bankruptcy/liquidation proceedings, where they will likely be declared insolvent and a trustee/liquidator appointed unless they can prove by direct evidence that the order should not be made (generally that would only occur if they can prove they are solvent, that is to say they can pay their debts as they fall due and payable). The area of insolvency disputes is specialised and intricate, and beyond the scope of this text. Footnotes 74

PS LA 2011/16 Insolvency — collection, recovery and enforcement issues for entities under external administration, 3.

75

PS LA 2011/18 Enforcement measures for the collection and recovery of tax-related liabilities and other amounts, 22.

76

Ibid, at 22.

77

TAA s 353-10(1) Sch 1.

78

PS LA 2011/16 Insolvency — collection, recovery and enforcement issues for entities under external administration, 11.

¶7-130 Freezing of assets A freezing order sought against a tax debtor restrains them from removing or disposing of assets until the court allows it. The Commissioner makes the decision as to whether to seek such an order on the basis of risk. A freezing order is also sometimes referred to as a “Mareva injunction” or “asset preservation order”. The term “Mareva injuction” comes from the case where the remedy was first used: Mareva Compania Naviera SA v International Bulkcarriers SA [the Mareva] [1975] 2 Llyod’s Rep 509. If the Commissioner forms the view “that in the absence of an injunction any assets wherever located which the respondent may have, will be dissipated or dealt with in some fashion such that the applicant will not be able to have the judgment satisfied”, and that the level of risk is not acceptable to the revenue, he will take appropriate action. Given the serious and possibly damaging consequences that may arise by the granting of a freezing order, ATO officers at the Senior Executive Service level only have the authority to approve seeking one. Given the purpose of a freezing order is to stop another party disposing of assets, they cannot be given advanced warning of the application. Accordingly, such applications are made ex parte. Requirements for the application of a freezing order The requirements to obtain a freezing order include: (1) there must be a prima facie cause of action (2) all issues (including those that are prejudicial) must be made known to the court (3) there must be evidence that the assets are in the relevant jurisdiction (4) there must be evidence that there is a “real risk” that the assets will be moved or dissipated, and (5) given the significance of the proceedings for a tax debtor’s business, the Commissioner must be willing to give an undertaking as to damages. If the Commissioner can satisfy the court accordingly, the assets will be frozen until such time as the court orders otherwise. This usually entails the tax debtor and the Commissioner coming to some arrangement for payment or security of the liability. In this situation, it can be very difficult to avoid a dispute with the Commissioner, as often the assessment will issue immediately before the injunction is sought. Accordingly, the dispute will have to be dealt with and negotiated on its merits once the tax debtor is advised of the freezing order (generally the order must be served on the debtor once it has been granted).

¶7-140 Other recovery disputes The area of debt recovery in a taxation context is extremely diverse and varied, incorporating disputes in the Family Court where the Commissioner intervenes in divorce proceedings to ensure the tax liability is given due consideration when dividing the matrimonial assets, to reinstating deregistered companies so that assessments for ITAA36 Pt IVA tax avoidance can be issued.79 It also includes disputes where the Commissioner is required to refund monies to trustees or liquidators on the basis that the Commissioner has received preferential payment as compared to other creditors.

It is beyond the scope of this book to detail every possible tax recovery dispute as some (such as insolvency) would require their own chapters in order to do the topic justice. What is important to note is that each of these types of dispute commence at a much earlier stage and it is beneficial (for all involved) to address these issues (whether by discussion, negotiation, settlement or disputation in the AAT) before the Deputy Commissioner elects to commence recovery action. It is infinitely more difficult to negotiate at the recovery stage as the dispute has then been ongoing for some time and significant resources have been invested. It also begs the question: is it fair to other taxpayers who comply with their obligations on time, to grant the non-complying tax debtor an unfair advantage by allowing any advantageous treatment? Footnotes 79

James Hardie Australia Finance (2008) 26 ACLC 897.

Settlement To settle or not to settle?

¶8-010

Settlement

¶8-020

The legislative framework for settlement

¶8-030

Commissioner’s approach to settlement

¶8-040

The Code of Settlement — underlying principles ¶8-050 Settlement negotiations

¶8-060

Settlement considerations

¶8-070

The settlement decision

¶8-080

Responsibilities

¶8-090

Settlement deeds

¶8-100

Future years

¶8-110

Settlement of widely-based tax disputes

¶8-120

Settlement of debt disputes

¶8-130

Ten settlement/dispute myths

¶8-140

How is a settlement calculated?

¶8-150

¶8-010 To settle or not to settle? “It’s not what you make, it’s what you keep.” Anonymous1 Settlement of tax disputes sounds anomalous. However, the ATO could never have the resources to pursue every line of enquiry, nor every dispute. Decisions regarding settlement need to be made strategically based on risk, within the legislative framework empowering the Commissioner and the decisions of the judiciary that interpret his power. Within that context the Commissioner is enabled to craft appropriate policy as to how he will implement those powers. It is first important to establish a common understanding of “settlement”. To that end, this chapter commences by defining “settlement”, while highlighting differences between the Commissioner’s definition and the common understanding. Surprisingly, there are some significant disparities which likely contribute to misunderstandings between the ATO and taxpayers. Having defined the important terminology, it is then necessary to review the legislation and relevant judicial decisions that empower the Commissioner to settle disputes. Without the power to settle, the Commissioner would have to pursue every dispute, which the ATO could never be resourced to do. This goes to the very nature of taxation settlements and why as a matter of public policy, it is crucial that the Commissioner is empowered to make commercial decisions as to disputes he will pursue, as well as disputes he will settle. This allows him to achieve important public policy objectives of ensuring the good management of public resources, as well as being empowered to make strategic decisions. This point cannot be overstated, if the Commissioner pursued every dispute, taxpayers who have made an inadvertent mistake would be treated in the same way as those who have made a deliberate decision to defraud the Commonwealth. This would not only be manifestly unfair, it would create a system that did not reward those trying to do the right thing and would inadvertently create greater non-compliance. This goes to the very core of voluntary compliance and ensuring the tax system is robust and sustainable (ie those trying to do the right thing are assisted, while those deliberately doing the wrong thing are pursued). The Commissioner interprets his legislative responsibilities into policy which ATO staff are required to

follow. The policy allows settlements to occur within appropriate parameters, which provide the necessary checks and balances. Footnotes 1

Jeffrey L Yablon, As Certain As Death — Quotations About Taxes (Tax Analysts, 2010) 30.

¶8-020 Settlement “While the ATO does not settle disputes at any cost, the sensible use of settlements is part of our commitment to earlier and more effective dispute resolution”.2 The ATO approach to early resolution of disputes saw pre-litigation settlements increase from 84% in the 2014/15 financial year to 95% in the 2015/16 financial year. This was matched with a substantial decrease of disputes proceeding to the Administrative Appeals Tribunal (AAT), with the number decreasing from 533 to 396 over the same period.3 These movements can be explained in part by the ATO’s changing attitude to settlement. Another key component is an increasing focus on alternative dispute resolution (discussed in detail in Chapter 9). The Commissioner has significant powers to settle disputes. However, before venturing into a discussion about the basis for settlement, it is important to define what “settlement” is and what it isn’t. Usefully, the ATO provides some guidance as to its interpretation of settlement in its “Code of Settlement”4. However, before progressing to policy, it is appropriate to start with a plain English definition. A definition of “settlement” The term “settlement” has a wide and varied meaning, but when it comes to the resolution of disputes under the law, a standard definition is “the satisfying of a claim; a coming to terms”5. In contrast, the ATO defines a settlement as: “an agreement between parties to resolve matters in dispute where one or more parties make concessions on what they consider is the legally correct position”6. What is important to note here is that the standard or colloquial understanding of “settlement” focusses on the resolution of a dispute. However, the ATO definition has added a critical element — the phrase “concessions … on the legally correct position”. The reason for the difference is simple but important — the ATO focusses its settlement decision on what it believes to be the correct interpretation of the law and how far it needs to move away from this to get a result. Speaking a different language Most people don’t think like this; rather their focus is on what they require to satisfy their underlying interests (ie needs, hopes, fears or desires7) and how close they can get to that result. This dichotomy underlies most disputes with the ATO and emphasises why the ATO and the ordinary taxpayer can find it difficult to come to terms. The reason for this is that they are speaking different languages. The taxpayer thinks about cutting a deal, or making a commercial decision to cut or mitigate loss while the ATO thinks about making a defensible decision in the context of the law. The first step for any entity attempting to settle a dispute with the ATO is to understand the language barrier and appreciate the legislative and policy structure driving the Commissioner’s decision-making. This allows those elements to be addressed as part of settlement discussions and not become a barrier (which often occurs if they are not understood). Understanding the Commissioner’s power to settle The executive (ie the ATO and its Minister, the Assistant Treasurer) implement the laws made by parliament and are accountable to parliament for their actions. The judiciary makes decisions about the rights of individuals under those laws and the executive implements them, subject to government policy and legislative intent (ie the Commissioner has the general administration of the tax law, which means

that he is able to decide how to implement the law when there is no contrary legislative or policy intent expressed by government). This means that to understand the Commissioner’s power to settle taxation disputes, one must first look to the legislation, then the appropriate cases and finally any relevant policy. Footnotes 2

ATO, Settlements (23 November 2016) .

3

Ibid.

4

PS LA 2015/1 Code of Settlement (15 January 2015) .

5

Macquarie Dictionary Publishers, Settlement (2017) Macquarie Dictionary .

6

PS LA 2015/1 Code of Settlement (15 January 2015) .

7

Roger Fisher, William Ury and Bruce Patton, Getting to Yes — Negotiating an Agreement Without Giving In (Random House Business Books, 2nd ed, 1992) 45.

¶8-030 The legislative framework for settlement Without a legislative basis for the Commissioner to settle or resolve disputes, it would be impossible for the Commissioner to finalise any disagreements other than by determinative process (through the courts or AAT), a change of view (the Commissioner deciding a contrary legal interpretation is preferable), or a new interpretation of the existing facts. All of these factors are of course valid reasons for the Commissioner to resolve or settle disputes. However, they are not the only reasons and there will always be circumstances where it is appropriate for the Commissioner to resolve a dispute for a smaller payment because of various factors (including legal risk and to avoid the cost of protracted disputation). The Commissioner’s power to administer the tax law “The Commissioner’s power to settle or compromise proceedings to which he is a party derives from section 8 of the Act [ITAA 1936] which provides that the Commissioner shall have the general administration of the Act.”8 This statement by the Full Federal Court in Grofam9 made it very clear that the Commissioner had the legislative power to “settle or compromise” proceedings. Indeed in that same case, the court urged the parties to attempt a commercial resolution to the dispute in order to avoid “further protracted litigation with its consequent delays and expense”. As with much legislation, it is up to the judiciary to clarify its parameters and intent, but the Full Federal Court has been very clear in explaining that the Commissioner’s wide powers under ITAA36 s 8 are intended to include the discretion for the commercial resolution of tax disputes. Public accountability Commonwealth legislation is always subject to the impact of other Commonwealth legislation. One piece of legislation in particular impacts the Commissioner’s powers of general administration — the Public Governance, Performance and Accountability Act 2013 (PGPAA). The objectives of the PGPAA are set out in s 8: “The objects of this Act are: (a) to establish a coherent system of governance and accountability across Commonwealth entities; and

(b) to establish a performance framework across Commonwealth entities; and (c) to require the Commonwealth and Commonwealth entities: (i) to meet high standards of governance, performance and accountability; and (ii) to provide meaningful information to the Parliament and the public; and (iii) to use and manage public resources properly; and (iv) to work cooperatively with others to achieve common objectives, where practicable; and (d) to require Commonwealth companies to meet high standards of governance, performance and accountability.” These objectives are supported by s 15 which directs how a Commonwealth entity must be governed (in this case how the ATO is governed by the Commissioner of Taxation): “Duty to govern the Commonwealth entity (1) The accountable authority of a Commonwealth entity must govern the entity in a way that: (a) promotes the proper use and management of public resources for which the authority is responsible; and (b) promotes the achievement of the purposes of the entity; and (c) promotes the financial sustainability of the entity. Note: Section 21 (which is about the application of government policy) affects how this duty applies to accountable authorities of non-corporate Commonwealth entities.

(2) In making decisions for the purposes of subsection (1), the accountable authority must take into account the effect of those decisions on public resources generally.” The key point to note is that the PGPAA gives a specific legislative direction to government entities that they are to manage and operate in such a way that promotes the “proper” use of public resources. This means the definition of “proper” for the purposes of the PGPAA is very important to understand. Section 8 of the PGPAA provides the following definition: “‘proper’, when used in relation to the use or management of public resources, means efficient, effective, economical and ethical.” The good management rule Taken together, these elements place an obligation on the Commissioner that extends beyond the general responsibilities of administering the taxation law. The PGPAA places additional requirements and responsibilities on the Commissioner to administer the ATO as a Commonwealth entity in such a manner that complies with the PGPAA. When reference is made to the Commissioner being required to manage the ATO in such a way that “promotes the proper use and management of public resources”, this means the Commissioner can only spend public monies in such a way that ensures they are used efficiently, effectively, economically and ethically. This is known as the “good management rule”.10 The “good management rule” has been endorsed by the courts, which have noted that: “it is open to the Commissioner to make sensible decisions having regard to the best use of the limited resources available. The Commissioner is not obliged to relentlessly pursue every last tax dollar where that would clearly be uneconomic or where the outcome is at best problematic”11. Put simply, the Commissioner is required by law to ensure that he administers the tax system such that public funds are spent efficiently, effectively, economically and ethically. However, neither the courts nor the legislature provide a detailed set of rules as to how this should be done. The Commissioner is required to interpret and apply the law as he believes to be appropriate. Footnotes

Footnotes 8

Grofam Pty Ltd v FC of T 97 ATC 4656, at 4665.

9

Ibid.

10

ATO, A Practical Guide to the Code of Settlement — 8 Background (13 February 2017) .

11

Ibid.

¶8-040 Commissioner’s approach to settlement The Commissioner provides general public guidance on his interpretation of important laws or aspects of taxation administration and the settlement of taxation disputes is no different. The Commissioner outlines his views regarding settlement in two key documents: (1) PS LA 2015/1 Code of Settlement — the “Code” (2) A Practical Guide to the Code of Settlement — the “Practical Guide”. Unlike its previous iteration, which was incredibly lengthy and complex, the Code of Settlement is now written in a concise, principled and accessible manner. It is now also encapsulated within an ATO Law Administration Practice Statement (LAPS). A LAPS provides guidance to ATO staff when undertaking their work,12 but of greater importance, ATO staff are required to follow their direction.13 This makes the Code a powerful document and an equally powerful resource for citizens and their tax advisors as it provides mandatory public guidance as to how the Commissioner will settle taxation disputes. In contrast, the Practical Guide is a lengthier supporting document, largely following the same structure as the Code, but providing additional context and practical examples of how the ATO will settle disputes in practice, making it another valuable resource. However, unlike the Code, the Practical Guide is not a LAPS; so although it is illustrative and useful, there is no mandatory requirement for ATO staff to apply it in their decision-making. The Code is broken up into 10 sections: (1) What this Code is about (2) What is a settlement? (3) Settlement is part of good administration (4) Settlement negotiations (5) Settlement considerations (6) Settlement decision (7) Responsibilities (8) Settlement deed (9) Future years (10) More information The Practical Guide follows the same structure, with small differences of minor consequence. Footnotes

Footnotes 12

ATO, Law Administration Practice Statements (19 February 2015) .

13

Ibid 3.

¶8-050 The Code of Settlement — underlying principles The Code commences with three statements of principle: 1. The Code applies to the settlement of tax, super and debt disputes. 2. The ATO strives to resolve disputes quickly and collaboratively. 3. ATO staff must act with integrity with regard to settlements. The first statement is unsurprising except for the mention of debt disputes. As discussed in Chapter 7, debt disputes are generally managed differently to disputes involving tax and super. From a legislative or common law perspective, there is no apparent reason that debt disputes are excluded from the “good management rule” of the PGPAA. However, the Commissioner has a separate LAPS for settlement of debt disputes in litigation; PS LA 2011/7 Settlement of debt litigation proceedings. This document states: “8. This practice statement should be read in conjunction with the ATO’s Code of settlement practice (Code). 9. The Code sets out the ATO’s official guidelines on the settlement of taxation disputes that arise under Part IVC of the TAA. It provides guidance as to the situations in which settlement of such disputes could be considered and outlines the processes which should be followed to settle such disputes. 10. Debt litigation proceedings has been expressly excluded from the scope of the Code because the Code concerns resolving what the correct liabilities and entitlements of a taxpayer are, while debt litigation proceedings are largely concerned with the recovery of debts due to the Commonwealth in relation to taxation and other liabilities and entitlements that arise under the various legislation administered by the Commissioner.” At first glance it would appear that the two policies are inconsistent. PS LA 2011/7 will be discussed later in this chapter, however given it was originally published in 2011 (last reviewed in 2014) and the Code was released in 2015, it could be that the ATO has taken a different direction since the release of the policy regarding debt litigation disputes by drawing them into the Code. In either event, PS LA 2011/7 only applies to “debt litigation proceedings”, which means debt recovery pre-litigation fall outside its scope. Further discussion of PS LA 2011/7 and analysis of whether the Commissioner’s policy has changed with respect to settlement of debt litigation and, if so, the consequences of such changes, will be considered later in this chapter. The second statement (point 9) is aspirational, while the third (point 10) is drawn from the APS Code of Conduct. What is a settlement? The ATO defines a settlement as “an agreement between parties to resolve matters in dispute where one or more parties makes concessions on what they consider is the legally correct position”.14 As highlighted previously (at ¶8-020), this definition is somewhat unique as it focuses on the trading of concessions, rather than resolving the underlying issue (or issues) at hand, which may or may not involve one or both parties making concessions. This definition is expanded in the Practical Guide, which makes four important points: • Disputes can be over a tax or superannuation debt, liability, entitlement or decision.

– This is an interesting clarification as disputes about debt are included for the purposes of the Code, and casts doubt on the currency and appropriateness of PS LA 2011/7. This discussion is taken up later in this chapter at ¶8-070. • The Commissioner will consider a dispute appropriate for settlement where an individual has (or will have) the ability to challenge the decision. – Settlement for the purposes of the Code is predicated on the existence of an individual taxpayer having the legal right to challenge a decision of the Commissioner (either existing or contingent). • A settlement does not include the situation where one party decides that the other party is right and decides to adopt that view. – A party conceding their view entirely is not considered a settlement. • A tax or superannuation liability or entitlement includes: – tax (including any tax, levy, charge, duty or excise imposed under a law administered by the Commissioner) – penalties (but not penalties imposed by a court) – payments (including any offset, grant or benefit under a law administered by the Commissioner) – notional tax on losses – franking credits and debits – foreign tax credits – credits and refunds of indirect taxes – general interest charge – shortfall interest charge and interest. Settlement is part of good administration Both the Code and the Practical Guide outline the obligation for the Commissioner to operate the ATO in accordance with the “good management rule” (discussed previously at ¶8-030). The Code in particular makes a strong statement that “[s]ettlement is an important element of the administration of the tax system”. This is a positive statement of intent, confirming that the Commissioner understands his obligations arising under the PGPAA and will use settlement in accordance with those obligations, including the “good management rule”, ensuring that public funds are spent efficiently, economically, effectively and ethically. Footnotes 14

Ibid.

¶8-060 Settlement negotiations The ATO outlines that settlement can occur at any stage of a dispute (even before a position paper or during litigation) and may be the focus of alternative dispute resolution (ADR) processes. This provides the parties with the greatest amount of flexibility. Previously, a common view was that settlement could not occur before the facts and issues in dispute were identified. This usually occurred either when the position paper or a draft position paper was issued. The difficulty with this is that often a great deal of time

and expense has been incurred by this stage, especially in relation to issues that are easily explained or will be settled. This more flexible approach allows the parties to circumvent the formality of waiting for the ATO to crystallise its view, allowing for significant savings of time and cost all round. In addition, the Code and Practical Guide identify the elements that need to be considered when negotiating a settlement resolution. Either party may initiate discussions Although it may appear obvious that either party may initiate discussion, it counters a commonly held perception or myth that the Commissioner will not initiate settlement discussions or make the first “offer”. Who will be involved? The Practical Guide states that “[I]n significant cases, generally more than one ATO officer should be present during settlement negotiations”. This is clearly a sensible approach to ensure an appropriate balance is struck between ensuring the accountability of decision-making and the protection of the individual against unfounded claims (ie whether something did or did not occur can be difficult to prove when such claims fall to the word of the individual taxpayer versus the individual ATO officer). Accordingly, having more than one person attend for each party is advisable. Having said that, it would be unusual for the ATO not to send two officers to a settlement discussion. The decision maker should attend the settlement discussion personally or, if that is not possible, be readily available. This applies for both parties. If the dispute involves a discussion about payment as well as liability (ie how the debt will be paid rather than simply whether the liability is excessive), it is important to ensure that all appropriate areas of the ATO are involved in the discussion. This arises from the current demarcation within the ATO between the various business lines that assess (ie determine liability), and the business line which is solely responsible for recovering liabilities. If both issues are involved, it is critical that both business lines are involved in settlement discussions. If the ATO does not identify this issue itself, it is important for individuals (or their representatives) to raise it with the ATO and ask for both areas to be party to negotiations. Settlement agreements can include what will happen in the future Settlement agreements can include what the parties agree will or will not happen in the future (ie a party may give an undertaking to lodge outstanding income tax returns or to lodge upcoming returns on time). The ATO cannot give an undertaking that prosecution action will not occur, as it is not their decision. However, they can agree not to take steps regarding prosecution (ie not to allocate resources or refer the matter to another agency for consideration of prosecution). Settlement should resolve dispute Settlement agreements should ensure that they do not create other disputes in relation to their enforcement. This means that the agreement should address all issues, including collateral issues arising such as payment. For example: • If settlement results in an outstanding liability, how and by when will it be paid? • Will interest accrue? • What is the consequence of not complying with the agreement? Settlements can cover multiple taxpayers Sometimes multiple taxpayers will be involved in a dispute (whether they are aware of it or not). This includes instances where numerous unrelated taxpayers are involved in a specific “tax arrangement”. Rather than incurring the time and expense by negotiating with each party individually (as there could be hundreds of parties), the ATO will develop a “widely based settlement position”, which is a “settlement” that will be offered to all parties (even those that aren’t currently aware of the dispute). Settlement discussions are confidential

The Code provides a comprehensive statement regarding the necessity of confidentiality when parties are attempting to settle a dispute. “Statements made during settlement negotiations are not to be construed as an admission of liability and cannot be given in evidence. This is to ensure that, in the event that negotiations break down, parties are not prejudiced as a result of the position taken in the course of trying to resolve the matter”. While this offers parties a significant level of protection, it cannot stop parties from using “objective facts” that can be proved by evidence, even if the only reason that party is aware of the information is due to the negotiation. Parties need to take care as to the extent of the information they divulge in settlement negotiations, in particular if there is any inclination that settlement is unlikely. This is especially so if the other party is not demonstrating a good faith intention to settle (which may indicate they are participating to further their investigation — sometimes referred to as a “fishing expedition”). As ATO officers are subject to numerous legislative and policy based responsibilities that prohibit such behaviour (including the APS Code of Conduct), this should be unlikely.

¶8-070 Settlement considerations The Code states: “When deciding whether or not to settle, all of the following factors must be considered: • the relative strength of the parties’ position • the cost versus the benefits of continuing the dispute • the impact on future compliance for the taxpayer and broader community. Settlement would generally not be considered where: • there is a contentious point of law which requires clarification • it is in the public interest to litigate • the behaviour is such that we need to send a strong message to the community.” The policy intent is twofold — the first statement contains mandatory considerations and the second carves out specific exclusions. As the Code is enshrined in a Practice Statement, it is mandatory for ATO officers to follow it. The Practical Guide expands on this and states that the decision to settle “must reflect a fair, effective and efficient use of resources”, which largely mirrors the considerations the Commissioner must take into account under the PGPAA. ATO policy — what’s missing? Interestingly, the “economic” consideration has been left out. Although the Commissioner is still under a legal obligation (under the PGPAA) to take economic considerations into account, leaving it out of the policy has a dual effect. ATO officers attending settlement negotiations will most likely rely on the policy rather than the PGPAA itself, even if they are aware of the origin of the obligation. In addition, it places the officers in an unusual position — where they are not informed by the policy of a legal obligation to take economic considerations into account. As a consequence, settlements could potentially be rejected on the basis that they do not satisfy the Code because economic considerations were not taken into account. Whether the omission was deliberate or an oversight is impossible to know, although economic considerations have also been left out of the Practical Guide in respect of the Commissioner’s obligations under the PGPAA. Although the reason for the omission is unclear, two possible reasons exist: • First, it could be an oversight. This is unlikely as the other three requirements arising under the PGPAA definition of the “proper” use of government resources are correctly included; namely “efficient”, “effective” and “ethical”. • The other possibility is that the omission was deliberate.

With that in mind, a deliberate omission would mean that the ATO has taken a policy decision that economic considerations are not relevant to settlement decisions. A possible reason could be that the Commissioner is of the view that tax settlements should not be subject to economic drivers or, to put it another way, disputes should not be settled purely on a cost/benefit or commercial analysis as the consequences are too important. However, the legal obligation still remains. Interestingly, the Code states that a cost/benefit analysis must be considered, which draws in the commercial or economic component even though not stated expressly. This leads to the likely conclusion that, although the Commissioner is aware of his obligation to take into account economic considerations under the PGPAA, he has taken the considered view that it is not an element to be highlighted.

Tip With this in mind, it would be prudent when negotiating with the ATO to remind them of the source of their obligations arising under the PGPAA and, to the extent they feel the policy is inconsistent with the law, the law should prevail and they should escalate the identified anomaly in accordance with ATO procedure.

The following discussion explores each key settlement element of the Practical Guide in detail. Relative strength of the parties’ positions — litigation risk The Practical Guide gives additional guidance on this point, stating that: “[t]he relative strength of the party’s position involves an evaluation of the evidence, the application of the law to the facts and the quantum of the tax in dispute and the possible litigation outcome”. This statement identifies four components the Commissioner believes need to be taken into account: • the facts • the law applied to those facts • the amount in dispute, and • the litigation risk (the Commissioner’s likelihood of winning if the matter goes to court). An ordinary assessment of litigation risk would entail identifying the facts, applying the law and then establishing the likelihood a party will be successful at court. A high estimate makes settlement less likely. However, it should be noted that no matter how good a party’s case is, litigation is inherently uncertain and there is no such thing as a court case that can’t be lost and even a very strong case would have a 20% to 30% chance of loss.

Tip Litigation risk is best assessed by seeking legal advice (often from a barrister or experienced litigation lawyer). It can be quite difficult to obtain advice that will state what the prospects of success are as a number (as it is too uncertain), but it is important to derive a figure when considering settlement so that settlement offers can be made and considered in the most objective manner possible. It can also lead the parties into more constructive negotiations as they try to persuade the other why their figure is correct, or their opponent’s is incorrect. Prior to serious settlement discussions, it is prudent to obtain legal advice regarding the prospects of success. If the advisor won’t commit to a number, they will usually use certain terminology that can be translated into a numerical range as follows:

• Poor or no prospects of success = below 50%. This case should not be run in court and should either be conceded or settled. • Reasonable prospects of success = 50%. This is the most common advice terminology used and means that each party has an equal likelihood of success. The risk is still substantial and settlement should be considered seriously. • Good prospects of success = 60% to 80%. This indicates the party has a very strong case. However, due to the inherent risks involved in litigation, the outcome is far from certain. Settlement should still be considered, but only in proportion to the identified risk (ie a party with good prospects would be ill advised to settle for less than 60% of the amount in dispute, unless other relevant factors need to be taken into account). A litigation risk assessment is best used to derive a numerical value to assist with settlement considerations. Settlement should then be based on that risk. It would be rarely appropriate to settle outside these parameters, unless something is identified within the discussions that changes the risk assessment, or there are other important elements that need to be taken into account. For a taxpayer, this could include the reputation damage that a tax dispute could cause to them or their business if it were to become public knowledge. In which case it may be worthwhile to settle for less than would otherwise be appropriate. Importantly, the ATO is also strongly influenced by the consideration of litigation risk (due to the PGPAA and the Code). Accordingly, taxpayers are advised to negotiate with the ATO with this in mind — attempt to identify what they believe the ATO litigation risk is and persuade them that their risk is greater than identified.

The final element that the Practical Guide instructs ATO officers to consider is the amount of tax in dispute. This would normally not seem to be relevant to an assessment of litigation risk. However, what the ATO seems to be indicating here is that it considers larger sums to be more important and, although the amount itself cannot be directly relevant to litigation risk, it is a risk to the revenue and the Commissioner will be less likely to settle a dispute involving a large sum as opposed to a smaller sum (even if the litigation risk in both matters is the same). Costs versus benefits With respect to a cost/benefit analysis, the Practical Guide states that: “The ATO must consider the costs and benefits of continuing the dispute and make an objective assessment. Considerations include: • the internal and external ATO legal costs • the cost and risk in collecting the liability (including a taxpayer’s ability to pay) • the financial position of the taxpayer and related entities • the effective and efficient use of resources. If the costs of continuing the dispute exceed the benefits then settlement is likely a preferable option.” Two important elements should be noted. First, the list is not exhaustive and second it firmly encourages ATO officers to settle a dispute if the costs outweigh the possible benefit.

Tip From the perspective of an individual taxpayer, this means that it is important not only to undertake their own cost/benefit analysis to decide whether they should attempt to settle the dispute, they

should also attempt to do one for the ATO in order to help them negotiate. This can begin by using educated guesses before asking the ATO relevant questions to ensure that an appropriate cost/benefit analysis is undertaken before formal settlement discussions begin. For example, if the costs of pursuing a dispute to litigation is $100,000 and the amount of tax in dispute is only $1,000, the dispute should ordinarily be settled as the costs significantly outweigh the benefits — which is not an effective and efficient use of resources. The situation could of course differ if there are other relevant factors that need to be considered. For example, the dispute may involve a highly recalcitrant tax evader for whom the benefit to the ATO of making an example of them outweighs the financial cost. In any event, knowledge is power in settlement discussions so the most important thing a taxpayer or their representative can do is to establish the Commissioner’s cost/benefit analysis in order to encourage settlement, or to establish why the Commissioner won’t settle (ie if he thinks the taxpayer needs to be made an example of) and then persuade the Commissioner otherwise.

Future compliance “When considering a settlement involving concessions on past liabilities, the ATO will apply the ‘good management rule’ where it will achieve compliance by the taxpayer, group of taxpayers, or a section of the public, for current and future years, in a cost effective way”. When the Commissioner is considering settlement, future compliance by an individual or group may persuade the Commissioner to accept a result that he otherwise would not. This is because the “good management rule” directs him to spend public money in an effective, efficient, ethical and economic manner and settle disputes where appropriate to avoid unnecessary delay and expense (including commercial settlements).15 This can be justified on the basis that there will be future cost efficiencies by avoiding future disputes with one or many entities. Test case The ATO will not normally settle disputes involving a legal point which it believes to be of such significance that the court needs to consider the point in order to clarify the law. In this situation, a taxpayer should apply for test case funding — where the ATO will pay for the taxpayer’s legal costs. Although test case funding is not granted easily or automatically, where the ATO has identified a dispute to be a test case, there would be a high likelihood of any request being approved. If this occurs the taxpayer can run their dispute at minimal financial cost and potentially no tax liability if they win (although the tax liability will remain if they lose). Public interest Settlement is usually not appropriate where it is in the public interest to litigate. “Public interest” is a wide term and open to interpretation (not provided by the ATO). In broad terms, it refers to situations where the Australian public will benefit from the dispute proceeding to court rather than being settled. This may be because it affects a large number of people (possibly regarding a common deduction), or involves an issue that will pose a significant risk to the revenue if not resolved. Behaviour “Behaviour” refers to taxpayer behaviour and in particular circumstances where there needs to be a strong message sent to the community that the Commissioner will not tolerate what has been done. This also applies to situations where the behaviour has been so bad that the community in general would expect the Commissioner to take legal action and not to settle. For example, where an entity has been running a scheme defrauding the Commonwealth of large sums over a long period of time. Footnotes 15

Grofam Pty Ltd v FC of T 97 ATC 4656, at 4665.

¶8-080 The settlement decision The decision to settle can only be made by senior ATO officers who either have appropriate delegation or authorisation to make that decision. This authority varies according to the size of the debt.

Tip It is advisable to ask the ATO whether someone with authority to approve settlement will attend a settlement negotiation and, if so, who that will be. If no one with authority will attend, it may not be appropriate to proceed with the discussion. The reason for this is that if an agreement is reached, it will only be a preliminary agreement that can be overturned by the ultimate decision maker who was not a party to the original discussion, may not have all of the information, and to whom the taxpayer has no opportunity to address or persuade. In many respects (depending on the situation), it would be advisable to refuse the meeting unless the decision maker attends. If this request is refused, ask that it be escalated to the relevant Assistant Commissioner. If the decision maker still refuses to attend, it would be appropriate to consider lodging a complaint (see ¶9-160). All senior executive service (SES) officers have the delegation to settle (this is the Assistant Commissioner level and above). Some areas have authorised more junior officers to settle matters. The key element is to understand whether someone with authority will attend, who that is and how high their authority extends (sometimes their authority will only extend to a certain amount).

ATO settlement panels In some areas the ATO has established settlement panels which provide internal guidance to officers on the appropriate parameters for settlement. It is important to be aware if a settlement panel is being consulted, as they provide non-binding advice that can become a blocker to successful negotiation as the decision maker can feel bound by the recommendation of a panel that is not a direct party to the negotiation (ie they may not be aware of all of the information or information that arises at the negotiation).

Tip It is recommended that any party entering into settlement discussions ask whether a settlement panel is involved, whether the decision maker is a part of that panel, and also whether they are more senior or junior to the members of the panel (as it can be difficult for a junior officer to go against the recommendation of a panel of senior officers). Asking these questions allows taxpayers and their representatives to make fully informed decisions, including whether they would like to provide a submission to the panel or request a more senior officer to be the decision maker.

All settlement decisions should be documented so that all parties have no doubt as to what has been agreed.

¶8-090 Responsibilities In broad terms, the Code requires both parties to conduct settlement discussions fairly, honestly and in good faith — disclosing all appropriate information. This means that it can be expected that the ATO will abide by the highest standards of disclosure and fair play in settlement discussions. If it is felt that ATO staff are not abiding by their obligation, it should be raised immediately and directly. If this does not lead

to a resolution, consideration should be given to withdrawing from the discussion and lodging a complaint (see ¶9-160). Although the ATO attempts to place the same obligations on taxpayers, it has no legal authority to do so. This can be interpreted as an expectation rather than an obligation. Having said that, if the ATO became aware that these expectations were not being met, it is likely that they would withdraw from settlement negotiations. It would be advisable for taxpayers to meet such obligations to the extent they are not disadvantaged.

¶8-100 Settlement deeds It is strongly advisable that all settlement agreements be documented, and it can be expected that the ATO will insist on it. The type of documentation will depend on the complexity of the dispute or settlement. A simple dispute may only require the parties to draft a simple agreement (or similar) that is signed and dated. More complex agreements will require the parties to execute a Deed of Settlement. The ATO has standard deeds available for use on its website, including those suitable for use in complex and less complex disputes.16 All parties should expect that any agreement to settle will be final and would only be changed in exceptional circumstances. However, it may be appropriate to reopen a settlement in cases where the ATO changes its legal view after the settlement.17 Footnotes 16

ATO, Model settlement deeds (15 January 2015) .

17

ATO A Practical Guide to the Code of Settlement — 8 Background (13 February 2017) .

¶8-110 Future years Generally, the ATO will treat future years in a similar manner unless: • the parties agree not to • the law has changed • a relevant tax ruling has since been released • there has since been a court or tribunal decision • the law is still unclear, or • the taxpayer’s situation has changed.

¶8-120 Settlement of widely-based tax disputes The Commissioner takes a slightly different approach to the settlement of “widely-based” tax disputes (outlined in PS LA 2007/6). This includes disputes involving at least 20 taxpayers, or disputes involving tax avoidance arrangements (under ITAA36 Pt IVA). This allows either the ATO or taxpayers to propose settlements that would cover a group of similar taxpayers. Widely-based settlements panel This approach does not oust the Code, nor does it negate the Commissioner’s obligations under the PGPAA or common law to apply the principles of good management when spending public money.

However, what it does is require relevant matters to go before a “widely-based settlements panel” for advice before making a settlement decision, although any advice given does not fetter the decision maker’s ability to accept a settlement proposal. “The purpose of the Panel is to ensure that the terms and conditions of widely-based settlement proposals adopted by the ATO are consistent and appropriate and that the reasons for the adopted proposals are transparent.”18 Transparency is achieved through the publication on the ATO website of the general terms of widelybased settlements. Interestingly, when formulating its advice, the panel will consider the Taxpayers’ Charter and the compliance model, in addition to the Code. Although the Code is still the primary document for consideration of settlement, different factors need to be taken into account in widely-based disputes and PS LA 2007/6 therefore supplements the Code. The reason for this is because of the level of scrutiny applied to the ATO’s administration of mass-marketed investment schemes and employee benefit arrangements — meaning the ATO also needs to give particular attention to questions of fairness, consistency and transparency of widely-based settlement proposals across groups of taxpayers and across different kinds of arrangements. Essentially what this means is that the Commissioner is going to provide rigorous guidance on widely-based settlement proposals, giving particular attention to issues of compliance and behaviour of the taxpayer(s) involved. Some of the panel’s key considerations are worth noting: • Revenue cost: What is the cost to the revenue? • Compliance impact: Will the settlement encourage the parties and the community to comply with their tax obligations? • Consistency: Is the settlement consistent with similar settlements? • Community confidence: Does the settlement reflect people’s expectations and promote confidence in the tax system? • Individual circumstances: Were the taxpayers unwitting participants in a scheme? • Legal issues: Have there been any cases or other settlement proposals on this issue? It is important for taxpayers and their representatives to note that the ATO approaches the settlement of widely-based tax disputes differently to regular settlements. In many respects this makes any proposal more complex as an additional layer is added. However, the ATO also offers widely-based settlements where the decision for the taxpayer is simple — whether to reject or accept the offer. Considering a settlement offer Given the complexities involved, any widely-based settlement offer from the ATO should be given serious consideration as it is extremely unlikely that the ATO will vary a settlement that is being offered to a group of taxpayers which has undergone such significant scrutiny and is published on the ATO website. If a taxpayer or group of taxpayers wishes to suggest a proposal, it would be advisable to develop the proposal with the ATO (in consultation with the widely-based settlement panel) to ensure the greatest prospect of approval, while minimising wasted costs and time. If for any reason there is a view that the ATO is not giving appropriate consideration to the views of the taxpayer(s), placing too much emphasis on policy rather than the Commissioner’s legal obligations under the PGPAA and common law, it is important to raise this with the ATO directly at first instance and attempt to persuade them accordingly. Alternatively, a request should be made for the matter to be escalated internally and considered by a more senior officer, failing which a complaint can be made. Footnotes 18

Ibid 4.

¶8-130 Settlement of debt disputes As indicated earlier in this chapter, the Code states that it applies to settlement of all tax disputes, including those relating to debt recovery. This is entirely appropriate as the PGPAA and common law do not carve out debt recovery as an exception to the expenditure of public money. However, the guidance in PS LA 2011/7 states that debt litigation proceedings have been deliberately excluded from the Code, as the Code is concerned with resolving how much is owed rather than how and when the debt will be paid. This statement would appear to have been overtaken as the Code has been published subsequently and specifically states that it applies to disputes involving debt. However, Public Governance, Performance and Accountability Rule 2014 (PGPAR), s 11 states that noncorporate Commonwealth bodies (such as the ATO) must pursue all debts except where the debt: • is not economical to pursue • is not legally recoverable, or • has been written off under an Act. Apart from being sensible exclusions, they are not as broad as those allowed under the Code which is likely why PS LA 2011/7 attempts to exclude debt litigation from the Code. Does this then mean debt disputes cannot be settled outside of the three situations listed in the PGPAR? Not necessarily as the PGPAA is an Act of parliament and the PGPAR is a rule made by the Finance Minister as delegated, secondary or subordinate legislation. This means that if there is an inconsistency, the Act would ordinarily prevail. Without judicial determination it is impossible to be conclusive, however suffice to say there is a strong argument that all debt disputes can be settled legally under the PGPAA. For further discussion of debt disputes generally, refer to Chapter 7.

¶8-140 Ten settlement/dispute myths Various myths have arisen over time regarding the Commissioner’s power to settle or resolve disputes. The explanations debunking these myths have been addressed throughout this chapter. Ten of the most common myths are debunked below: 1. The Commissioner can’t settle tax disputes — myth. 2. The Commissioner can’t settle on a commercial basis — myth. 3. The Commissioner can only settle on a “principled basis” — myth. 4. The Commissioner can’t settle with one taxpayer and not others — myth (while the Commissioner aims to be fair between taxpayers in similar situations, all settlements will be considered on the merits). 5. The Commissioner can’t settle for less than the full amount — myth. 6. The Commissioner can’t settle debt disputes — myth (the Commissioner can settle all disputes, subject only to any legal restrictions). 7. The Commissioner can’t settle disputes involving fraud or evasion — myth. 8. The Commissioner will litigate or pursue every dispute — myth (the Commissioner does not have the resources, nor would it be an effective use of public money to pursue all disputes). 9. The Commissioner won’t litigate a small amount (say $1,000) — myth (if the dispute raises important

legal issues, principle or the taxpayer is recalcitrant, the Commissioner may litigate). 10. The Commissioner has no litigation risk in some disputes — myth (all litigation carries risk).

¶8-150 How is a settlement calculated? One of the most difficult challenges is working out how to calculate a settlement proposal. In making settlement decisions, the Commissioner analyses the following: (1) litigation risk (2) cost versus benefit, and (3) impact on future compliance. He also would not generally settle when he is of the view that the issue should be pursued to clarify the law, is in the public interest or to address recalcitrant behaviour. Taxpayers and their representatives will not know the Commissioner’s mind on these points. Importantly they do not preclude settlement, so they can be ignored for the purposes of developing a settlement offer. Therefore, a taxpayer’s settlement offer would generally be calculated as follows: Settlement offer = (Amount in dispute) × (litigation risk) − (cost/benefit) − (impact on future compliance) Litigation risk, cost/benefit analysis and future compliance have all been discussed in ¶8-070. Example The amount in dispute is $500,000 of income tax. The taxpayer has obtained advice from senior counsel that the prospects of success are “good”. The taxpayer’s lawyers have advised that this equates to a 60% to 80% chance of winning (ie a litigation risk of 20% to 40%). The lawyers estimate that the cost to the Commissioner to run this matter to hearing will be $10,000 (internal and legal costs), with minimal discernible benefits. They also estimate that the impact on future compliance is $5,000. For simplicity, interest and penalties have been excluded from this example as different considerations may apply (see Chapters 4 and 7 for additional discussion). The settlement calculation is as follows (using the formula above): • Settlement offer = $500,000 × (%20 to 40%) − $10,000 − $5,000 As the litigation risk is expressed as a range, the offer will be constructed with high and low parameters (note the upper limit): • Lower limit = ($500,000 × 0.2) − $10,000 − $5,000 = $85,000 • Upper limit = ($500,000 × 0.4) − $10,000 − $5,000 = $185,000 Accordingly, a settlement offer should be made in the range of $85,000 to $185,000. Any settlement should generally be within this range unless additional factors come to light within discussions that change either the assessed litigation risk, cost benefit analysis or impact on future compliance.

Dispute resolution Good management of disputes

¶9-010

Defining disputes

¶9-020

What is dispute resolution?

¶9-030

What is alternative dispute resolution (ADR)?

¶9-040

Types of ADR

¶9-050

What is the difference between ADR and DR?

¶9-060

Why not leave it to the courts and tribunals?

¶9-070

Why not just negotiate?

¶9-080

The regulatory framework for ADR

¶9-090

The Government’s approach to dispute resolution ¶9-100 The ATO’s approach to dispute resolution

¶9-110

Confidentiality of ADR

¶9-120

Documenting an ADR outcome

¶9-130

What are the benefits of ADR?

¶9-140

Types of dispute resolution processes

¶9-150

I’m still unhappy

¶9-160

¶9-010 Good management of disputes “Conflict is inevitable, but combat is optional.” Max Lucade1 Apart from the lawyers, few benefit from ongoing disputation. Indeed the ATO acknowledges the damage caused by ongoing disputation, stating “[w]e recognise that when disputes are not managed well, the effects can be long-lasting and costly for everyone involved — not only in time, money and effort, but also emotional stress”.2 As discussed in Chapter 8, the Commissioner is also under a statutory obligation (supported by the common law) to ensure that public money is only expended in accordance with the principles of “good management” (economic, efficient, equitable and effective).3 Given the complexity of Australian taxation law, disputes are inevitable. However, the dispute experience does not need to be dreadful and, over recent years, the ATO has taken significant steps toward advancing its dispute resolution repertoire, progressing from lagging behind other tax jurisdictions, to becoming a world leader and influencer. Footnotes 1

Dispute Resolution Quotes, adrtoolbox .

2

ATO, Our commitment to you in resolving your dispute (18 February 2016) .

3

PGPAA s 8 and 15.

¶9-020 Defining disputes The importance of definitions Issues of definition have plagued the development and common understanding of dispute resolution and alternative dispute resolution (ADR) since the early days of its common usage in law and business. It is important to establish clear and consistent terminology both for the purposes of this book and the development of ADR in Australia and internationally. What is a dispute? Before tackling the concept of resolving disputes, it is necessary to define “disputes” and “taxation disputes” in the context of dispute resolution. The former National Alternative Dispute Resolution Advisory Council (NADRAC) provides the following definition: “Disputes are normal. Sometimes things happen that you did not expect, or you will have a different view or disagree with someone about something. This could be about: • goals • information • how you communicate • priorities • the way things should be done • beliefs. When this occurs and it stops you from being yourself or harms your relationships, you may have a dispute.”4 The NADRAC definition is especially useful as it was developed by an independent non-statutory body tasked with providing expert ADR advice to the Australian Attorney-General, along with promoting ADR. Although NADRAC concluded in 2013 due to a government decision to rationalise government business, until then it had made significant contributions to ADR in Australia, most of which remain highly relevant.5 Rather than taking a dictionary definition of disputes (which describe them as “arguments” or “disagreements”, each of which have strong negative connotations), the NADRAC definition states firmly that disputes are an ordinary occurrence and occur in a wide variety of circumstances (normalising disputes rather than indicating that they are exceptional). Following the NADRAC definition, disputes can be about a variety of issues, but are usually about the “needs, concerns, desires or fears”6 of each party, otherwise known as their “interests”7. Interests include the key needs of a party — what is driving them and what they require. They can often be very different to what others expect them to be and when parties are operating on imperfect information (as is mostly the case), misunderstandings and misinterpretations can lead to increased disputation. This contrasts with what most disputes end up being about — the “legal rights” of each party (or who will win in court). Accordingly, disputes can become very difficult and often intractable when one party is focussed on their “rights” and the other on their “interests”. With this in mind, the concept of resolving disputes takes on new meaning and importance. Most people will find themselves in dispute at various times of life, usually not by choice, and will have to decide what they should do. Following the NADRAC definition and focussing on interests rather than rights, leads to a more sophisticated understanding of disputation. This understanding encourages the parties to ask what is important to them and to focus on that. This allows them to make an educated choice about how best to engage with the dispute (rather than simply react), which in turn allows for opportunities for change, growth and improved (or less damaged) relationships.

However, as with many concepts in a complex modern society, the Australian taxation system is unique with its own peculiarities and difficulties. What is a tax dispute? Although there is no definitive definition, the ATO provides some assistance by defining disputes with respect to settlement (in its Practical Guide to the ATO Code of Settlement): “A settlement is an agreement between parties to resolve matters in dispute where one or all parties make concessions on what they consider is the legally correct position. In this context, a dispute can be about — a: • tax or superannuation liability or entitlement • tax or superannuation debt • decision under a tax or superannuation law. A reference to a disputed ‘liability or entitlement’ in this context includes: • tax (including any tax, levy, charge, duty or excise imposed under a law administered by the Commissioner of Taxation) • penalties (but not penalties imposed by a Court) • payments (including any offset, grant or benefit under a law administered by the Commissioner of Taxation) • notional tax on losses • franking credits and debits • foreign tax credits • credits and refunds of indirect taxes • general interest charge • shortfall interest charge and interest. A dispute considered for settlement is one where the taxpayer has (or will have) a right to challenge the Commissioner’s decision, although settlement should be potentially considered as a way to resolve a wide range of disputes and disagreements.” Accordingly, tax disputes are typically about: • establishing liability • payment, or • decision-making. In general terms, taxation disputes are defined by the ATO with reference to the “rights” of parties, although the ATO acknowledges a wider variety of disputes and disagreements. However, given there are many different types of tax disputes, combined with the fact that the NADRAC definition of disputes focusses on “interests” rather than simply “rights”, a wider definition is preferred that includes defining tax disputes as also occurring when the ATO and a taxpayer have different views or disagree about an issue involving the ATO and its administration of the tax and super laws generally. Footnotes 4

NADRAC, Your Guide to Dispute Resolution (2012) Attorney-General’s Department

. 5

Attorney-General’s Department, Alternative Dispute Resolution .

6

Roger Fisher, William Ury and Bruce Patton, Getting to Yes — Negotiating an Agreement Without Giving In (Random House Business Books, 2nd ed, 1992) 42.

7

Ibid.

¶9-030 What is dispute resolution? Despite being a somewhat generic term with common usage, the term “dispute resolution” can mean various things to different people. NADRAC offers the following definition: “Dispute resolution refers to all processes that are used to resolve disputes, whether within or outside court proceedings. Dispute resolution processes may be facilitative, advisory or determinative”.8 The ATO provides: “Dispute resolution is an inclusive term for all processes where parties attempt to resolve the issues between them, and includes: • negotiating with another party directly • asking a court or tribunal to make a decision.”9 Both definitions are complementary and indicate that the ATO likely followed the NADRAC definition. Both definitions are acceptable and show the concept of “dispute resolution” incorporates all attempts to resolve conflict, including judicial processes and direct negotiation. Footnotes 8

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department .

9

ATO, ATO plain English guide to alternative dispute resolution (1 June 2015) .

¶9-040 What is alternative dispute resolution (ADR)? ADR has always been difficult to define, with conflicted stakeholders attempting to narrow or expand the definition for their own purposes. However, the definition has evolved with time and developed common features. For the purposes of this text and taxation disputes, guidance can again be sought from NADRAC and the ATO. NADRAC defines ADR as follows: “ADR is an umbrella term for processes, other than judicial determination, in which an impartial person assists those in a dispute to resolve the issues between them. ADR is commonly used as an abbreviation for alternative dispute resolution, but can also be used to mean assisted or appropriate dispute resolution. Some also use the term ADR to include approaches that enable parties to prevent or manage their own disputes without outside assistance”.10

While the ATO states: “ADR is an inclusive term for all processes, other than judicial or tribunal determination, in which an impartial person assists those in dispute to resolve or narrow the issues between them.”11 The common features of both definitions are that ADR involves using a third party to assist in resolving a dispute, outside of the court or judicial process. This makes sense as ADR is meant to be an alternative to incurring the expense, wasted time and emotional cost of litigation. NADRAC also states that sometimes ADR is used to refer to situations where parties prevent or manage their own disputes by direct negotiation (ie without a third party). While this is acknowledged, it should be rejected (as it is by the ATO definition) as ADR relies on twin fundamental tenets: that disputes are resolved outside of court/tribunal determination with the assistance of a third party. Removing either of those tenets changes the context of ADR, making any such process more appropriately referred to as “dispute resolution”. Footnotes 10

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department .

11

ATO, ATO plain English guide to alternative dispute resolution (1 June 2015) .

¶9-050 Types of ADR The four types of ADR process are as follows: • facilitative • advisory • determinative, and • blended. Each process is defined by the differences in how it is conducted. All ADR processes use a trained and skilled third person to assist the parties resolve their dispute. The key difference for each process is how much “intervention” or “control” the third party has over the process. This third person is often referred to as a “dispute resolution practitioner”12. Intervention/ADR framework

Facilitative ADR “Facilitative ADR” is defined by NADRAC as:

“processes in which a dispute resolution practitioner assists the parties to a dispute to identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement about some issues or the whole dispute. Examples of facilitative processes are mediation, facilitation and facilitated negotiation”13. This definition has been adopted by the ATO. The key features of facilitative ADR are that the third person assisting the parties to discuss and resolve the dispute has a minimal interventionist role. This means that they will manage the process (ie work with the parties to draft and follow an agenda, ensure the discussion remains civil and ask questions), but they will not give advice to the parties or make any decisions. This is because the key tenet of facilitative ADR is that the third party is engaged to manage the process and assist the disputing parties to have a constructive discussion that (hopefully) leads to a resolution.

Tip Facilitative ADR is very popular as it is generally cheaper and quicker (as the third party does not need to be briefed with all the evidence and arguments of the dispute as would be the case if they were required to provide advice or make a decision), plus it leaves the parties in charge of their own decision-making process. This allows them to attempt to negotiate and persuade the other side of the merits of their case without having a third party give their “unknown” view (which could dramatically sway the discussion one way or the other). It also allows the parties to focus on intangible aspects of the dispute, such as communication or relationship issues which may require a solution involving the willing participation of both parties.

Facilitative ADR is generally conducted by a suitably qualified professional such as an accredited mediator.14 This person may or may not have additional specialist skills in the subject area of the dispute (on the relevant law or subject matter). Specialist knowledge would not ordinarily be required as they are managing the process and not providing advice to the parties. The most common and well-known form of facilitative ADR is mediation (facilitative mediation). This is the standard or ordinary mediation used in all manner of commercial and everyday disputes. The ATO’s inhouse facilitation service (discussed at ¶9-150) is an example of facilitative mediation. Advisory ADR “Advisory ADR” is defined by NADRAC as: “processes in which a dispute resolution practitioner considers and appraises the dispute and provides advice as to the facts of the dispute, the law and, in some cases, possible or desirable outcomes, and how these may be achieved. Advisory processes include expert appraisal, case appraisal, case presentation, mini-trial and early neutral evaluation”.15 The ATO has adopted this definition. In advisory ADR, the third person will provide the parties advice on the dispute and sometimes their opinion as to each party’s respective prospect of success if the dispute was to proceed to litigation. What this advice covers, plus when and how it is given, will differ according to the type of ADR process used. The characteristics of the third party may also differ depending on what sort of process is being conducted. If legal advice is required, the third party would likely be a lawyer with expertise in the relevant area. Alternatively, if the third party was to assess the evidence and apply it to the law (as would occur in litigation), the third party would likely be an ex-judge. Another possibility is that if the issue in dispute related to an area of specialist expertise (ie accounting method or valuation), the third party may be selected for their specialist understanding of the subject matter. Sometimes advisory ADR is said to include “advisory mediation”. This includes instances (which often occur in taxation disputes) where an ex-judge with taxation expertise is engaged to mediate a taxation

dispute. It would be expected that in these instances the ex-judge would also be an accredited mediator, as “advisory mediation” uses the method of a “facilitative mediation” but also allows the mediator to give the parties advice on questions of law, determining facts and how a court might apply the facts to the law. Advisory mediation is similar to (arguably the same as) conciliation which is a “blended ADR” process (discussed below).

Tip Due to its unique nature, advisory ADR has some specific advantages over other types of ADR. For example, it allows the parties to obtain independent expert advice from someone who has considered the detail of the dispute, whether that be facts, law, arguments or a combination. It retains the non-binding nature of facilitative ADR so that the parties are not bound by anything the third party says or does. It also allows the parties to negotiate in the light of the advice provided and frame their concessions and settlement offers with that advice in mind. This has the potential to assist in resolving the dispute. However, engaging an “expert” third party and having them dedicate sufficient time to the dispute to provide advice can be a lengthy and costly endeavour. Accordingly, the parties need to make an educated decision as to whether the additional time and expense is warranted in the context of the overall dispute.

Determinative ADR “Determinative ADR” is defined by NADRAC as a: “process in which a dispute resolution practitioner evaluates the dispute (which may include the hearing of formal evidence from the parties) and makes a determination. Examples of determinative dispute resolution processes are arbitration, expert determination and private judging.”16 While the ATO has adopted this definition, it has also made the policy decision that determinative processes are not appropriate for tax disputes. Although the ATO does not go into detail as to why determinative processes are not appropriate for tax disputes, it does provide the following statement in its ADR practice statement which provides some insight: “Arbitration is generally not appropriate for tax disputes because it can incur similar costs and delays as litigation, potentially conflicts with the statutory responsibilities of the Commissioner as decisionmaker, and can lack the openness and transparency of court or tribunal decisions.”17 Deconstructing this policy statement, it would appear that the ATO dislikes arbitration because of its similarities to litigation, without the associated transparency. The ATO also hints that the Commissioner may be abrogating his statutory responsibilities by participating in arbitration. However, none of these arguments are definitive, nor does the ATO say that it will never participate in arbitration. Further, given the ATO’s concerns would apply equally to all types of determinative ADR, they should be considered against this wider subset. In addressing the ATO’s concern that some types of determinative ADR may be similar to litigation, it is worth noting that having an expert or arbitrator determine a specific point upon which a dispute turns at an early stage will always be much cheaper and quicker than litigation. Further, parties are able to design determinative ADR processes that suit their needs (ie ensure they are quick and cost-effective). Also as a public litigant, the ATO must be mindful of its use of limited court and tribunal resources, thus there is a strong argument that if the ATO were to keep some matters out of court by using determinative ADR, it would significantly boost access to justice, by allowing others to access the limited court and tribunal resources. Concerns about transparency are arguable and can flow both ways. Important issues of law clarification

or “test cases” will always go into the judicial system, meaning their decisions are publicly reported. So what other transparency is required? All taxpayer information is restrained by privacy and secrecy provisions, and the ATO doesn’t report on matters that it settles other than in the most generic and anonymised terms. Arguably, if transparency is a core concern, this could also be done for decisions regarding determinative ADR. However, it is more likely that the ATO does not want a second tier of quasi-judicial decision-making potentially undermining its views or judicial decisions. This could be countered by participating in determinative ADR on the basis that it is not precedential and clearly expressing that policy intent wherever appropriate. Finally, the ATO expresses the concern that participating in determinative ADR possibly conflicts with the Commissioner’s statutory decision-making responsibilities. However, this is arguably countered by the Commissioner’s general powers of administration and the lack of a contrary stated legislative intent.

Tip The ATO statement that it will not generally participate in determinative ADR would seem to be a policy decision, rather than a legal issue. This is likely why the ATO does not state in exact terms that it won’t participate in determinative ADR or that it cannot participate. This allows twin conclusions to be drawn: the ATO may change its view on this issue in the future and, if a taxpayer in dispute wants determinative ADR as they believe it is the most appropriate mechanism to resolve their dispute, they should argue their case, push for it and, if rejected, ask the ATO to provide reasons (as is required by ATO policy)18.

Blended processes NADRAC refers to blended processes as “combined or hybrid dispute resolution processes” and defines them as: “processes in which the dispute resolution practitioner plays multiple roles. For example, in conciliation and in conferencing, the dispute resolution practitioner may facilitate discussions, as well as provide advice on the merits of the dispute. In hybrid processes, such as med-arb, the practitioner first uses one process (mediation) and then a different one (arbitration).”19 The ATO has adopted this definition. Blended processes are very useful as they allow the parties to draw from the best elements of different processes. Given the ATO’s general reluctance to use any form of determinative ADR, the main blended process it uses is conciliation, which is similar to advisory mediation. The reason for the ATO’s high use of conciliation is not one of choice, but because most tax litigation occurs in the AAT which tends to prefer the use of conciliation over mediation, as the third party (usually an AAT member) is able to advise the parties as to the strengths and weaknesses of their case, plus their likely prospects of success. This allows both parties to analyse their case critically and decide whether to resolve the dispute and if so, work out fair terms for doing so. Adding to the strength of this process is the fact that AAT members regularly hear tax disputes, so the parties are receiving the expert opinion of someone who could otherwise be hearing the dispute (although they would never conduct both roles for the same matter as it would be a clear conflict of interest). Footnotes 12

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department, 6 .

13

Ibid, at 7.

14

An accredited mediator in Australia refers to a mediator who has been successfully accredited

under the National Mediation Accreditation Standards (NMAS). 15

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department, 4 .

16

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department, 6 .

17

PS LA 2013/3 Alternative Dispute Resolution (ADR) in ATO disputes (20 August 2013) .

18

Ibid, at 22.

19

NADRAC, Dispute Resolution Terms (September 2003) Attorney-General’s Department, 5 .

¶9-060 What is the difference between ADR and DR? Dispute resolution (DR) refers to all processes used to attempt to resolve disputes, including direct negotiation and decision by a court or tribunal. ADR refers to all processes which use a “third party” to assist in resolving the dispute, except for determination by a court or tribunal. ADR does not include negotiation or where a court or tribunal makes a determination. The reason for this is that ADR was created as an alternative to litigation, so that the parties could use a different process and avoid the associated transactional costs (financial, time, emotional and relational). Is the process DR, ADR or litigation?

¶9-070 Why not leave it to the courts and tribunals? This is an extremely common question. In a perfect world with unlimited resources, all disputes would be decided by the courts and tribunals. Everyone would have their day in court and there would be justice for all! However, in an imperfect world with limited time and budgets, the judicial system could never have the capacity to hear all ATO disputes,

let alone all disputes. Therefore, the ATO (as with all people and entities) has to take a strategic and riskbased approach to decide which disputes it will pursue through litigation and which it will resolve in other ways (including direct negotiation and ADR), thereby managing its limited resources effectively and increasing “access to justice” by ensuring it is not using a disproportionate amount of judicial resources.

¶9-080 Why not just negotiate? Another common question. If litigation isn’t the answer, why can’t disputes simply be resolved by negotiation (avoiding the additional time and cost associated with ADR). The answer is remarkably simple. Most disputes are resolved by negotiation without any outside intervention. It is the disputes that can’t be resolved at first instance by negotiation that require additional assistance. But even disputes that couldn’t be resolved by negotiation at first instance, surely they can be resolved if another attempt is made? Again the answer is simple: yes, they often can be resolved if a further or more sophisticated attempt is made. But what about when the dispute (for one reason or another) gets stuck and can’t be resolved by negotiation? Perhaps the disputants are no longer speaking or simply don’t have the skills to negotiate effectively. What then? What needs to be remembered is that if negotiation was easy and everyone was great at it, there would be very few disputes. Unfortunately this isn’t the case, so when the parties cannot resolve the dispute themselves, what should they do? Litigation is time consuming, expensive, stressful and often destroys the relationship between the parties. Surely there is another option? This is the point at which ADR steps in, as engaging an independent third party can assist the disputants to agree on and participate in an appropriate process that will provide them with the greatest prospects of resolving their dispute, with minimal time and cost forgone, and also possibly repairing the broken relations between the parties.

¶9-090 The regulatory framework for ADR The regulatory framework for managing tax disputes is covered by a rich tapestry of laws and policies, including: • the Public Service Act 1999 — incorporating the APS Values and Code of Conduct (s 10 and 13) • the Taxpayers’ Charter • the Public Governance, Performance and Accountability Act 2013 • the ATO Code of Settlement • administrative and judicial processes for challenging/reviewing decisions (Chapters 5 and 6), and • the ATO Disputes Policy and Dispute Management Plan (¶9-110). Much of this framework has been discussed at length elsewhere in this text. The regulatory framework for ADR is founded upon these elements. The Commonwealth AttorneyGeneral has general responsibility for ADR and the associated regulatory framework.20 The specific regulatory framework for ADR is outlined in the following policy, legislation and legislative instruments: • Strategic Framework for Access to Justice • Office of Legal Service Coordination (OLSC) Guidance Note 12 • Legal Services Directions 2017, and • Civil Dispute Resolution Act 2011.

The Commissioner implements these requirements via various policies, most notably PS LA 2013/3. Strategic Framework for Access to Justice For some time it has been the policy of successive Commonwealth governments to encourage the use of ADR. The strategic reasons for this have been to drive down government legal expenditure (which had reached record highs), increase efficiency (both legal and administrative) by reducing the number of disputes plus the time taken for their resolution and to support access to justice. The strategic framework for access to justice aims to ensure all Australians are given the appropriate type of support with respect to their disputes, regardless of their resources. This combines both equipping people to resolve their own disputes and ensuring that the justice system is both accessible and simple enough to use for ordinary people. The general principle is that a lot of people are able to avoid or resolve their disputes without the assistance of a third party. In addition, it notes that people should be supported and encouraged to do this. The Attorney-General’s Department (AGD) provides the following visual representation:

Usefully, justice is divided into three concepts: everyday (avoid and negotiate), informal (ADR), and formal (litigation). Although this system is currently in place, it is also aspirational as the goal is to move an increasing number of disputes out of the formal and informal justice systems (especially disputes involving government agencies, which occupy a disproportionate amount of resources). OLSC Guidance Note 12 This provides guidance to Commonwealth agencies and advice to the public with respect to ADR. The note is predicated on the twin concepts of litigation avoidance and effective dispute management. In particular, it outlines that parties should think about using alternatives to litigation in order to resolve disputes. In this respect ADR is most effectively used early, so that the parties obtain the most significant time and cost savings from early resolution. However, this should not be taken to say that ADR should not be used throughout litigation as resolution at this later stage can still derive significant benefits to the parties, especially in a winner takes all situation such as litigation. In addition, Commonwealth agencies are encouraged to manage disputes in a proactive manner, seeking out early advice and resolution wherever possible. This demonstrates that proper use of ADR is not limited to consideration and participation, but ensuring that risk and settlement is considered fully and effectively both at the earliest possible stage and on an ongoing basis. Legal Services Directions 2017 The Legal Services Directions are a set of rules issued by the Commonwealth Attorney-General under the Judiciary Act 1903. These binding rules cover all legal work conducted by or on behalf of the Commonwealth. All Commonwealth agencies are required to act as “model litigants” when handling

claims and conducting litigation (known as the “model litigant obligation”). This is relevant to the regulatory framework for ADR as the rules were amended in 2008 to require the appropriate consideration and use of ADR by government agencies when handling claims and litigation on behalf of the Commonwealth. In the latest version of the Legal Services Directions (released in 2017), this focus on ADR is reflected as follows: • avoiding and limiting litigation by considering ADR before and throughout all proceedings (para 2(d)) • using ADR to resolve litigation (para 2(e)(iii)) • not commencing litigation unless other resolution methods have been considered (including ADR and settlement) (para 5.1), and • participating in ADR “fully and effectively” (para 5.2). This requires all Commonwealth agencies (including the ATO) to consider ADR actively before starting and during litigation. In addition, it ensures that participation in ADR is active (rather than passive) as agencies are required to participate fully, which stops them from simply turning up and not trying to resolve the dispute (passive resistance). Commonwealth agencies are required to include penalties when contracting with their legal service providers for any breach of the directions that the provider has contributed to.21 In addition, the Commonwealth Attorney-General may also impose sanctions.22 Civil Dispute Resolution Act 2011 The Civil Dispute Resolution Act commenced operation on 1 August 2011 and requires all parties to disputes in the Federal and Federal Circuit Courts, to take “genuine steps” to resolve the dispute before commencing legal proceedings. The goal of this legislation is to ensure that parties attempt to resolve their dispute before proceeding to litigation. A collateral benefit is that by trying to resolve the dispute before litigation, the parties are likely to narrow the issues in dispute or be able to define the dispute more effectively. “For the purposes of this Act, a person takes genuine steps to resolve a dispute if the steps taken by the person in relation to the dispute constitute a sincere and genuine attempt to resolve the dispute, having regard to the person’s circumstances and the nature and circumstances of the dispute.”23 Although the Act includes ADR as an example of a “genuine step”, it is not intended to be a restrictive term and will be determined according to the sincerity of the attempt in the circumstances.24 The applicant commencing proceedings is required to file a “genuine steps statement” outlining the steps taken to resolve the dispute (if any) prior to starting legal proceedings.25 Upon receiving such a statement, the other party is required to file their own statement stating whether they agree and if not, the reasons why.26 Failure to take “genuine steps” or to file a statement does not invalidate proceedings, but the court may take that fact into account when performing its functions and awarding costs.27 The Federal Court indicated its willingness to impose sanctions for a non-compliant party in Superior IP International Pty Limited v Ahearn Fox Patent and Trade Marks Attorneys [2012] FCA 282. Although various disputes are excluded from the Act, it applies to Federal Court tax appeals filed under TAA Pt IVC. Footnotes 20

Office of Legal Services Coordination, Guidance Note 12 — Use of Alternative Dispute Resolution (July 2015) Attorney-General’s Department .

21

Legal Services Directions 2017 14.2.

22

Ibid, 14.1.

23

Civil Dispute Resolution Act 2011 s 4(1A).

24

Ibid, s 4(1).

25

Ibid, s 6.

26

Ibid, s 7.

27

Ibid, s 11–12.

¶9-100 The Government’s approach to dispute resolution The Australian government’s approach to dispute resolution is largely encapsulated in the regulatory framework discussed above at ¶9-090. However, the government in turn delegates the administrative aspects of its dispute management policy in government agencies to the AGD. The AGD strongly encourages government agencies to engage in effective dispute management in the interests of increased efficiency (reduced cost and greater output). The AGD emphasises four important elements for effective dispute management: 28 • early engagement • using ADR • using litigation appropriately for long running or complicated disputes, and • data collection. These elements outline the AGD’s overarching dispute management strategy. That strategy is to avoid disputes or resolve them quickly if they do occur by engaging with disputing parties at the earliest opportunity (or even prior to the dispute escalating). If the dispute can’t be resolved by early engagement negotiation, use an appropriate ADR process to either resolve the dispute or at least narrow the issues. Then use litigation as a last resort for appropriate protracted and complicated disputes that can’t be resolved by the judicial system. This emphasises the important role the courts continue to play as the final arbiter of dispute resolution in appropriate circumstances and only when the dispute cannot be resolved by more efficient methods. Finally, the AGD emphasises the importance of data collection and reporting with respect to dispute management, as data highlights the efficiencies gained by certain resolution methods over others (ie ADR over litigation) which then continues to drive innovation, change and best practice in order to derive those efficiencies in a system with ever increasing disputes of growing complexity. Ultimately, the AGD operationalises this by strongly encouraging (yet not mandating) all agencies to develop their own unique “dispute management plans” which outline how each agency will manage its disputes. Comprehensive material has been published by the former NADRAC on the development of these plans which is still available via the AGD website. However, the AGD usefully summarises the key elements for each agency to focus, as follows: • dispute identification and causes • define goals • identify and improve existing dispute management framework

• obtain endorsement from senior leadership, and • include review mechanisms. As each agency is different (with varying types of disputes), it is important for each to undertake the process individually. Some agencies with a large policy focus will mainly have employee type disputes while others such as the ATO will have varying types of disputes in large numbers, including those with corporate taxpayers, members of the public and employees. The AGD and the ATO have each published plans. The ATO plan is discussed at ¶9-110. Footnotes 28

Ibid.

¶9-110 The ATO’s approach to dispute resolution The ATO outlines its approach to dispute resolution in various policy statements. These statements are typically consistent with others and encompass the ATO approach to disputes generally, ADR, litigation and settlement. Disputes Policy and Dispute Management Plan At the highest level, the ATO has a “Disputes Policy” and an annual “Dispute Management Plan” which outline respectively how the ATO manages all of its disputes and specific annual focus areas for improvement, goal setting and measurement. The policy was created to stand behind and support the ATO’s annual “Dispute Management Plan”. With respect to these documents, the ATO states: “Our Dispute Management Plan (DMP) outlines the ATO’s high-level framework for managing and resolving disputes, including identifying our key principles. Our disputes policy is a supporting document that complements and provides the underpinning framework for our DMP”.29 The ATO has released two Dispute Management Plans, the first for 2012/13 focussed on tax disputes. The follow up plan for 2013/14 focussed on debt disputes. The ATO has not issued a plan since this time. As these plans were issued on an annual basis and only applied for one year, it appears that the ATO does not have a current plan (in contrast to its public statements). Although the 2013/14 plan is still accessible online and its general principles are likely still relevant, caution should be taken with respect to relying on its statements as the ATO is not bound to apply outdated policy, particularly if it has subsequently published contrary policy information. Accordingly, 2013/14 plan will not be addressed further as it is out of date. The ATO’s disputes policy is relevant to all ATO disputes, including: • tax • super • debt • complaints • access to information • contract • workplace, and

• compensation (excepting workers compensation). Given the breadth of disputes covered, this policy is extremely wide-ranging and accordingly high level. It gives a broad overview as to the dispute process for each type of dispute, while also covering the ATO’s objectives and strategies, along with types of resolution processes available and its expectations of all parties in dispute. Most relevantly the ATO outlines that its overarching objective is to use the information provided “to promote a resolution culture based on … effective communication, genuine engagement, collaboration [and] strategies that are fair and proportionate to the matters in dispute [and] lead to early resolution at minimal cost”30. Effectively, the ATO has designed its disputes framework to ensure that it generates a culture of resolution, encouraging its staff to manage issues before they escalate and if they do escalate, resolve them in an appropriate manner to ensure that the time and cost incurred is proportionate to the dispute. This structure informs the remainder of the ATO policy framework on dispute resolution. PS LA 2013/3 Alternative dispute resolution in ATO disputes Dispute resolution The key policy document that outlines the ATO approach to both dispute resolution and ADR is PS LA 2013/3. In this policy the ATO outlines its overarching approach to managing disputes. “Most taxpayer interactions with the ATO do not end up in dispute. When disputes do occur, the ATO prefers to resolve them as soon as possible at minimal cost to the parties. Most disputes are resolved quickly and informally, through direct negotiation and discussions between the ATO and taxpayers”. The policy continues to outline that the ATO is committed to collaborating with taxpayers to: • avoid disputes • resolve disputes quickly • resolve disputes simply and cheaply • clarify disputes by listening, and • manage disputes equitably. The ATO generally tries to avoid disputes and if they do occur, avoid them escalating further by negotiating directly with taxpayers. If a dispute cannot be resolved in this manner, the ATO aims to resolve it promptly, fairly, simply and as cheaply as possible. This approach is expected and appropriate, and complies with the general principles for effective dispute prevention and management. However, given most disputes never come to general attention as they are prevented or resolved via direct negotiation, it is particularly important to analyse how the ATO approaches dispute resolution when disputes escalate. ADR When disputes cannot be avoided or resolved by direct negotiation, unless the parties are committed to litigation, it is necessary to consider what alternatives are available for resolving the dispute. This is when ADR has a critical role to play. The ATO provides the following policy statement on its approach to ADR: “When disputes cannot be resolved by early engagement and direct negotiation, the ATO is committed to using ADR where appropriate to resolve disputes. It is important to recognise though that not all cases are suitable for ADR. In cases where ADR is suitable, the ATO and the taxpayer should choose a process which is suited to the circumstances and the nature of the dispute”. This statement appears to be contradictory, somewhat supportive of ADR in principle but with significant qualifications on when ADR will be appropriate. As a general observation, the existence of a policy on ADR does not necessarily indicate an

organisation’s support (it can often be the reverse). It is not suggested that this is a case in point, rather it is raised as a point of contention for future debate and discussion in relevant literature. Fortunately, the policy provides additional guidance for when ADR is, and is not, appropriate for tax disputes. When does the ATO use ADR? The ATO makes two statements regarding when ADR “may” be appropriate, summarised as follows: • there is something to negotiate • the dispute can be settled under ATO policy • resolution is better than litigation • obtain payment • manage relationship, and • proportionality (the benefit outweighs the costs). Essentially, the ATO is stating that there must be some benefits for it to participate and the ATO can’t be expected to go outside its policy to resolve the dispute in ADR. Although no party can be expected to operate other than in self-interest, this raises the question as to whether the ATO should be obliged to consider wider factors of public policy (such as access to justice) when making these decisions. Adding to this argument is the fact that no litigant ever operates on full and complete information, accordingly it is arguable as to whether the ATO is able to make a satisfactory assessment of the indicated factors. This is likely to be the reason that the ATO makes these policy statements in general terms.

Tip Disputants seeking ADR should not be deterred if they think (or are informed by the ATO) that their dispute falls outside these criteria, as the ATO will generally participate in ADR if pressed and if it refuses, the ATO will likely be compelled to participate in ADR when the matter is before the AAT or Federal Court (regardless of any ATO policy).

When does the ATO not use ADR? In contrast, the ATO states that ADR “may” not be appropriate where: • resolution requires the ATO to depart from a “precedential ATO view” (based on the same facts as the dispute) • proportionality (costs outweigh the benefits) • there is a public benefit in litigating a legal issue • the law and facts are clear, and • the dispute involves fraud or evasion. Again, the statements made above regarding when ADR is appropriate apply equally here. Disputants should press for ADR (if that is their wish) regardless of policy as ultimately it is highly likely that the ATO will be compelled to participate in ADR at litigation. The ATO should be informed of this fact and advised that in the interests of proportionality, it would be preferable to resolve the dispute at the earliest stage. If

the ATO continues to refuse, the issue should be escalated within the ATO and/or a complaint made. Litigation Ultimately, if a dispute is unable to be resolved by negotiation or ADR, it will likely need to proceed to litigation. It could be expected that the ATO litigation policy mirrors the ADR policy (as it could be assumed that only matters that can’t be resolved by ADR would or should proceed to litigation). This would be an incorrect assumption. The ATO litigation policy states that litigation will only be pursued where: • the law needs to be clarified and it is in the public interest to clarify by litigation • the taxpayer’s conduct is very bad and a message needs to be given • in spite of attempting alternative methods of resolution, the dispute cannot be resolved, and • there is a debt which cannot be collected by any other means. This doesn’t align correctly with the ADR policy. The reason for this is likely that the litigation policy was published after the ADR policy and indicates a change of policy direction for the ATO. This is supported by the fact that the ATO’s Code of Settlement (also published after the ADR policy) also mirrors the litigation policy, stating that litigation would only be considered in very limited circumstances: either when the law requires clarification, litigation is in the public interest or the taxpayer’s behaviour is so bad that litigation is required to send a message to the community in general.31 Accordingly, it can be surmised that the ATO’s approach to litigation is to avoid it other than in very limited and specific circumstances. In a nutshell Despite inconsistent policy statements, it is clear that the ATO approach to disputes is that litigation should be avoided other than in the limited circumstances described above. In turn this means that the ATO’s approach to disputes is: • prevent and avoid • resolve by negotiation (including settlement) • resolve by ADR (including settlement), and • litigate by exception and only if the four specific criteria stated in the “litigation policy” are satisfied. Footnotes 29

ATO, Options for resolving disputes, including Alternative Dispute Resolution (ADR), litigation and settlement (6 October 2016) .

30

Ibid.

31

ATO, Code of Settlement (18 August 2015) .

¶9-120 Confidentiality of ADR One of the often cited benefits of ADR is that it is a confidential process which encourages open and safe discussion of the issues in dispute without fear of that discussion (or information disclosed) being used in future legal proceedings. This is indeed an excellent benefit. The ATO approach to ADR confidentiality is stated in their ADR policy: “[u]nless the parties agree otherwise, all ADR processes are conducted in a confidential and on a ‘without prejudice’ basis” and “[a]ny communications between parties for the purposes of an ADR process is privileged and cannot be

used in legal proceedings without the consent of the other party”. Ordinarily, this would mean that what is said in an ADR process, stays in that process. However, unfortunately it is not that simple as various exceptions may apply and it is important to be aware of them — in particular if a party is relying on ADR confidentiality. Generally, an ADR practitioner will say that the process is “as confidential as the law allows” and invite the parties to seek their own independent legal advice on confidentiality as it is a complex and evolving area. One of the most effective ways to ensure confidentiality is to sign a confidentiality agreement prior to the ADR process. Generally, the ADR practitioner will provide this for the parties to sign, but it is up to the parties to review it, ensure their understanding, seek legal advice and request changes if necessary. This will not make confidentiality certain, but it will ensure that it is given the strongest chance of success if challenged. Exceptions to confidentiality The former NADRAC identified several common situations where an exception to confidentiality may exist: • the parties agree to a full or partial waiver • there are affected parties who are not participating • when seeking professional advice (ie from an accountant or lawyer) • research purposes (the information is de-identified), and • required by law (ie to report a risk to a person’s life or safety). Where information has been disclosed to third parties affected by the ADR or for professional advice, the third party would be required to keep that information confidential and not disclose it further. Confidentiality — ATO specific considerations The situation is more complicated when it comes to ADR processes involving the ATO as it is an offence (punishable by up to two years imprisonment) for a tax officer to disclose a taxpayer’s “protected information”32 regardless of the taxpayer’s consent, unless it is disclosed in the course of the tax officer’s duties.33 This is clearly an area of significant complexity and is beyond the scope of the present discussion. What is important to note is that given the personal liability faced by tax officers for breaching confidentiality, it can be presumed that the ATO will not disclose information. However, (consistent with its policy) a likely workaround is that the ATO may not oppose a request for waiver, which would in turn allow the taxpayer to make the disclosure without fear of prosecution or penalty. Without prejudice privilege As indicated in the ATO policy on ADR, ADR is conducted on a “without prejudice” basis, which is commonly known as “without prejudice privilege”. This privilege applies to written and verbal communication undertaken as part of a genuine attempt to resolve a dispute (as would generally be the case with ADR communications however they occur). This privilege prohibits such communications from being put into evidence without the consent of the parties. Originally a common law privilege, it has now been codified in the Evidence Act 1995 s 131(1). Footnotes 32

Generally information that can reasonably identify the entity.

33

TAA Div 355 Sch 1.

¶9-130 Documenting an ADR outcome

An ADR outcome would usually resolve the dispute entirely, or at least in part. It is critical to ensure that the parties are of a common understanding as to what has been agreed. Invariably parties will have different recollections about an ADR process, so a good practitioner will encourage the parties to record their agreement to limit the prospects of having a future dispute about the agreement. ATO approach to documenting an ADR outcome The ATO approach is outlined in its ADR policy and restates that ATO officers must draft any settlement in accordance with the ATO Code of Settlement (discussed in Chapter 8), which may require the execution of a deed. It also goes on to state that the agreement: • should be easily understood and reflect the agreement • ideally become enforceable on execution, and • should be encapsulated in a “Heads of Agreement” if a formal settlement deed cannot be executed at ADR (say due to time constraints). However, in this case, the parties should indicate whether they intend to be legally bound by the Heads of Agreement. Most of these elements are uncontroversial. Interestingly, the reason the ATO states that the parties should indicate whether they intend to be legally bound is that a draft or Heads of Agreement can be binding even if the parties intend to draft a formal deed or agreement in the future. The test is whether “objectively viewed, did each of the parties have the necessary intent to create legal relations and did they, in fact, do so?”34. In various cases, the courts have found such preliminary documents (variously titled) to be legally binding agreements.35

Tip To avoid such problems and limit further disputation, the easiest method is to include the intention of the parties in any draft agreements. In this way there can be little disagreement as to whether the parties had the intention of entering a legally binding agreement. This also has the added benefit of providing certainty for the parties and guidance to the courts if required.

Footnotes 34

Weimann v Allphones Retail Pty Ltd (No 2) [2009] FCA 1230, 71.

35

Barry v City West Water Ltd [2002] FCA 1214; Cassegrain v Commonwealth Development Bank of Australia Ltd and Ors [2003] NSWCA 260.

¶9-140 What are the benefits of ADR? ADR can be very beneficial to the parties and (as an added bonus) frees up the resources of the courts and tribunals and allows them to dedicate these resources to disputes that really need the intervention of a court or tribunal (increasing access to justice). In broad terms, some of the most significant benefits were identified by the former NADRAC as follows: • flexibility (the process can be adapted to the dispute) • ADR is generally private and confidential • ADR is self-directed: – the parties agree on the process, practitioner and often the outcome

– lawyers are often not required • ADR is cheaper, less formal and can focus on things that courts cannot (such as rebuilding damaged relations between the parties), and • ADR can help parties develop improved dispute management skills. All of these elements provide benefits to both the ATO, taxpayers and the public (by increasing the efficiency of tax administration).

¶9-150 Types of dispute resolution processes The ATO uses a variety of different processes. Each process has its own advantages and disadvantages and the ATO generally tries to match the most appropriate type of process to the unique aspects of the individual dispute. The main types of dispute resolution used by the ATO are as follows: • do nothing • negotiation • in-house facilitation • facilitative mediation • advisory mediation • conciliation • early neutral evaluation (ENE), and • litigation. The ATO does not generally use arbitration and accordingly it won’t be addressed further. Do nothing The most universal method for resolving disputes is the “do nothing” approach. Most disputes are resolved this way, including tax disputes. There are many disputes the ATO elects not to pursue for varying reasons. Likewise, taxpayers chose not to dispute many issues because it is cheaper, quicker and less stressful to accept the decision and move on. Acquiescence is not necessarily agreement, but often a pragmatic approach to difficult issues. All entities considering disputation with the ATO should first undertake a cost/benefit analysis to decide whether they are better off to accept the ATO’s decision and move on. If not, they should then consider other methods of resolving the dispute. Negotiation Negotiation takes its ordinary meaning and is the ATO’s preferred method for resolving disputes. Traditionally, negotiation occurs when two disputants talk (in person or virtually) to resolve their dispute. There are various styles of negotiation (eg positional or interest based — which are beyond the scope of this text36) that may be appropriate depending on the parties involved. The ATO uses negotiation as a prevention measure (to avoid disputes occurring or to stop them escalating). It also uses negotiation as a first response to most types of dispute or attempt at resolution whenever that occurs (whether early on in the dispute timeline or even at the litigation stage). However, this can be problematic when similar parties are involved in numerous attempts at resolution, or if they have been involved in the dispute for some time as they can find it difficult to look at the issues (or indeed the other parties) objectively. In these circumstances it can be useful to engage an independent third

party practitioner to assist the parties to resolve the dispute. Once negotiation has failed, it is usually appropriate to try using a third party to resolve the dispute (ADR). In-house facilitation The ATO offers in-house facilitation to parties to attempt to resolve disputes. Although it is aimed at smaller, less complex disputes involving small businesses and individuals, in reality it has been used successfully to resolve a wide variety of disputes. The ATO also does not specifically exclude any type of dispute or taxpayer from requesting and participating in in-house facilitation. In-house facilitation is a type of facilitative mediation. The ATO provides the following description of its in-house facilitation process: “In-house facilitation is the ATO’s version of mediation where a trained independent ATO officer assists participants to negotiate their dispute. The in-house facilitator helps the parties identify disputed issues, develop options, consider alternatives, and attempt to reach an agreement. The facilitator will not establish facts, take sides, give advice, make a decision or decide who is ‘right or wrong’. The facilitator merely guides the parties through the process and will assist them to ensure there are open lines of clear communication, and messages are correctly received. There is no cost associated with in-house facilitation.” The ATO encourages the use of in-house facilitation as a low-cost form of ADR that can occur at the earliest possible stage (outside of the court of tribunal system). It has invested significant resources in training appropriate staff (of varying seniority) to provide this service. More experienced facilitators are generally allocated more complex disputes. This is an efficient use of resources for the ATO. By investing a relatively small amount upfront in the provision of this service, significant savings can be obtained by resolving disputes early.

Tip The facilitation process is a low-cost option, rather than a no cost one (as taxpayers need to consider the cost of their time for participating in the process, plus the cost of any advisors they wish to engage). There is also a small cost to the ATO (albeit significantly less than the alternatives). Although neutral, the facilitator can never be truly impartial as they are employed by the ATO. However, the ATO states that the facilitator will have (and have had) nothing to do with the substantive dispute. The best advice is to seek this assurance in each matter and escalate any concerns. In-house facilitators are not usually experts in the subject matter of the dispute as they are not providing technical advice to the parties or making any decisions — rather they are experts in the process of in-house facilitation and conflict resolution.

Like all types of ADR, in-house facilitation can be requested at any time by the taxpayer. The request form is available on the ATO website and should be sent (completed) to [email protected]. The facilitation process is voluntary and does not affect the legal rights of the taxpayer in any way. Given in-house facilitation is an efficient and cost-effective type of ADR, the best approach is to try it if negotiations have broken down. Other types of dispute resolution are still available to the parties if it doesn’t work. For further information, the ATO provides detailed information (including an explanatory video) on its website. Facilitative mediation Facilitative mediation is the most universally understood and applied type of mediation. The ADR

practitioner (or mediator) manages the process as an independent third party, but does not give advice, make decisions or tell the parties what to do. The former NADRAC provides a useful definition: “[A] process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the mediator), identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted. Mediation may be undertaken voluntarily, under a court order, or subject to an existing contractual agreement.” Mediation is commenced when the parties agree to engage a private independent mediator, however it can also occur as part of tribunal or court proceedings. It is generally a more expensive process as the parties need to pay the mediator’s fees and expenses. These are generally split equally between the parties, so the taxpayer will be liable for their share of the costs (a liability they do not incur when using inhouse facilitation). Facilitative mediators are not usually experts in the subject matter of the dispute as they are not providing technical advice to the parties or making any decisions, rather they are experts in the process of mediation and conflict resolution. Advisory mediation Advisory or evaluative mediation is similar to facilitative mediation, except the ADR practitioner (or mediator) will listen to the parties and advise them as to the merits and risks of their case (usually with each party in private). This allows the parties to assess their risk in the light of the advice of an objective independent third party. Because the mediator is giving advice, they must be legally qualified and appropriately insured. Former judges often fill this role, as well as experienced barristers and solicitors. Given the mediator is often a senior legal professional, the costs of advisory mediation can be high. Although the mediator gives advice, it doesn’t mean that the advice is correct or accepted and the parties need to assess their risk with that in mind. Advisory mediation is best suited for highly complex or significant disputes that the parties would prefer to resolve (or to test their arguments) confidentially outside of the judicial system. Advisory mediation is often confused with facilitative mediation, but is substantially different. Conciliation Conciliation is regularly used in tax disputes before the AAT. The former NADRAC provides the following definition: “[A] process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the conciliator), identify the issues in dispute, develop options, consider alternatives and endeavour to reach an agreement. The conciliator may have an advisory role on the content of the dispute or the outcome of its resolution, but not a determinative role. The conciliator may advise on or determine the process of conciliation whereby resolution is attempted, and may make suggestions for terms of settlement, give expert advice on likely settlement terms, and may actively encourage the participants to reach an agreement”. Conciliation is clearly similar to advisory mediation and the terms are often used interchangeably. A different approach has been taken here in order to highlight that advisory mediation (or conciliation) is not the same as facilitative mediation as this is a common misunderstanding in tax disputes. Conciliation works successfully in the AAT as an expert AAT member (who is an independent third party, employed in a quasi-judicial role) conducts the process and provides advice to the parties at the same time. It is particularly useful as the AAT member regularly makes tribunal decisions about tax disputes and is an expert in the tax field (although they would not be able to conduct a conciliation and a hearing for the same dispute, as they would be conflicted). Conciliation is generally used to resolve disputes at the litigation stage in the AAT.

Early neutral evaluation (ENE) The ATO defines ENE as follows: “Neutral evaluation … is a process where the participants to a dispute present their arguments to an ADR practitioner who gives advice on the appropriate manner of resolving the dispute. In tax and super disputes the ADR practitioner usually has substantial experience in tax law and gives advice about the decision a court or tribunal may make if the dispute proceeds to litigation. It is up to each party if they accept the advice of the evaluator and how they use that information.” ENE is generally an expensive and time-consuming process as the evaluator is generally an ex-judge who is provided with comprehensive information upon which to write their advice. Accordingly, it is best used early to try and obtain the most benefit from it. If the parties wait until a late stage, it may not be much more cost-effective than proceeding to litigation. It is often a useful and effective process when the facts are largely agreed and the parties simply want expert advice on the law, and what the law will be when applied to the facts. ENE is most useful in highly complex disputes, where the parties wish to resolve their issues confidentially. It is most efficient when conducted early, but this may not be a concern for parties if their main priority is avoiding a publicly available litigated decision. Litigation Litigation is the most well understood method for resolving disputes. Ultimately, if the parties are unable to resolve the dispute themselves, the court will consider the facts and law, before making a declaration of rights accordingly. It is usually an expensive and time-consuming process but it has one key advantage over all other methods of dispute resolution — the parties will be given an answer and there will be a winner and a loser. Unfortunately, this can destroy the relations and goodwill between parties. Footnotes 36

For an excellent discussion on positional versus interest based bargaining, refer to Roger Fisher, William Ury and Bruce Patton, Getting to Yes — Negotiating an Agreement Without Giving In (Random House Business Books, 2nd ed, 1992).

¶9-160 I’m still unhappy Taxpayers who are unhappy with the decisions or service of the ATO are able to lodge a complaint. This may be because they have been unable to resolve their dispute, or have resolved it but are unhappy with the actions of the ATO. Taxpayers can also seek compensation for any loss. Complaints The Taxpayers’ Charter outlines that the ATO recognises and supports the rights of taxpayers to complain when they are unhappy with a decision, service or action of the ATO. The ATO is “committed to treating complaints seriously, dealing with them quickly and learning from them”37. How to complain The ATO encourages taxpayers to try first to negotiate with the tax officer they have been dealing with (as this is the most efficient way of resolving the issue for both the ATO and the taxpayer). If this does not resolve the dispute, the taxpayer should then speak to the manager of the tax officer. If still unhappy, the taxpayer is able to lodge a formal complaint with the ATO. Complaints may be lodged by contacting ATO complaints on 1800 199 010. Alternatively, taxpayers may use the online form, or send a written complaint to: Complaints Australian Taxation Office

PO Box Albury 1271 Albury NSW 2640 It is important to follow the appropriate steps as otherwise the ATO may be unwilling to formally consider the complaint until appropriate attempts have been made to resolve the issue with the tax officer and their manager. This is important in the interests of efficient administration. If the taxpayer is not able to resolve their issue with the ATO or is unhappy with how their complaint was handled, they can complain to the Inspector-General of Taxation via www.igt.gov.au or by writing to: The Inspector-General of Taxation GPO Box 551 Sydney NSW 2001 The Inspector-General of Taxation As of 1 May 2015, the Inspector-General took over the function of investigating tax complaints from the Commonwealth Ombudsman. The Inspector will conduct an investigation and try to assist the parties to resolve their issues through consultation and negotiation. If the complaint cannot be resolved, the Inspector will provide the parties with a written report that may contain recommendations to the Commissioner and sometimes government. The Inspector has the discretion not to investigate or to cease an investigation in certain circumstances (ie if the complaint is frivolous). Compensation In addition to all other rights of dispute and complaint, taxpayers may also seek compensation from the ATO when the actions of the ATO have caused loss to the taxpayer. Compensation is intended to place the taxpayer back in the financial position that they would have been in but for the conduct of the ATO. Compensation can be claimed on the following bases: • legal liability, or • detriment from defective administration. If compensation does not apply in either of the above circumstances, taxpayers can apply for an “act of grace” payment which is administered by the Department of Finance and Administration. This is a unique discretionary power where payments can be made to people who have been disadvantaged by the actions of government and where they have no other way to make a claim. The disadvantage may be caused by legislation, acts or omissions by government agencies such as the ATO. Legal liability The ATO’s liability for compensation at law is considered in the same manner as any regular claim for compensation. The ATO may be legally liable to pay compensation in situations including: • breaching a duty of care • breaching privacy • breach of contract, and • discrimination. The ATO is required to resolve such claims in accordance with Appendix C to the Commonwealth Attorney-General’s Legal Services Directions 2017. Detriment from defective administration

Compensation can also be paid under the scheme for Compensation for Detriment caused by Defective Administration (CDDA). This scheme applies to all government agencies. If the ATO has acted unreasonably, or provided misleading or incorrect information that has led to a loss (financial or sometimes non-financial), compensation will be paid regardless of whether the act or omission would lead to an actual legal liability. The CDDA scheme defines defective administration as: • a specific and unreasonable lapse in complying with existing administrative procedures • an unreasonable failure to institute appropriate administrative procedures • an unreasonable failure to give to (or for) a claimant the proper advice that was within the official’s power and knowledge to give (or reasonably capable of being obtained by the official to give), or • giving advice to (or for) a claimant that was, in all the circumstances, incorrect or ambiguous. The Department of Finance outlines the criteria that decision makers must consider when deciding CDDA claims in the “Resource Management Guide” — available from the Department’s website. Losses which may generally be claimed: • professional fees • interest (if statutory interest has not been paid), and • administrative fees (including bank fees). Losses which can’t generally be claimed: • personal time • stress, anxiety, pain and suffering • interest (if statutory interest has been paid) • costs for claiming compensation • claims with substantive rights that could (or should) have been pursued, and • compliance costs (ie audit or appeal costs). Applying for compensation Claims for compensation can be made by completing the “Applying for compensation” form available on the ATO website. Footnotes 37

ATO, Complaints (23 November 2016) .

List of Abbreviations AAT

Administrative Appeals Tribunal

AATA

Administrative Appeals Tribunal Act 1975

ADJRA

Administrative Decisions (Judicial Review) Act 1977

ADR

alternative dispute resolution

AGD

Attorney-General’s Department

AIC

Australian Information Commissioner

APS

Australian Public Service

ASIC

Australian Securities and Investments Commission

ATC

Australian Tax Cases

ATO

Australian Taxation Office

AUSTRAC

Australian Transaction Reports and Analysis Centre

CDDA

Compensation for Detriment caused by Defective Administration

CDRA

Civil Disputes Resolution Act 2011

DAC

Departure Authorisation Certificate

DFC of T

Deputy Federal Commissioner of Taxation

Div

Division

DMP

Dispute Management Plan

DPO

departure prohibition order

DR

dispute resolution

ENE

early neutral evaluation

FCA

Federal Court of Australia

FC of T

Federal Commissioner of Taxation

FLC

Family Law Cases

FIO

freedom of information

FOIA

Freedom of Information Act 1982

GIC

general interest charge

GST

goods and services tax

HCA

High Court of Australia

IGT

Inspector-General of Taxation

IR

independent review

ITAA36

Income Tax Assessment Act 1936

ITAA97

Income Tax Assessment Act 1997

ITRIP

Income Tax Refund Integrity Program

LAPS

Law Administration Practice Statement

LSD

Legal Services Directions 2005

MLO

model litigant obligation

MT

Miscellaneous Taxation Ruling

NADRAC

National Alternative Dispute Resolution Advisory Council

OAIC

Office of the Australian Information Commissioner

OLSC

Office of Legal Service Coordination

PAYG

pay as you go

PGPAA

Public Governance, Performance and Accountability Act 2013

PGPAR

Public Governance, Performance and Accountability Rule 2014

Pt

Part

reg

regulation

s

section

SIC

special interest charge

SOAP

Statement of Audit Position

TAA

Taxation Administration Act 1953

TAR

Taxation Administration Regulations

Index All references are to paragraph numbers.

A Access to information Commissioner's right of access

¶3-020

limitations on Commissioner's formal powers

¶3-040

— accountants’ concession

¶3-070

— corporate board advice concessions

¶3-080

— legal professional privilege

¶3-050

neighbour effect

¶3-010

obtaining information and evidence

¶3-030

public interest immunity

¶3-060

Accountants’ concession documents

¶3-070

Administrative Appeals Tribunal

¶1-030

Advisory mediation

¶9-050; ¶9-150

Alternative dispute resolution (ADR)

¶9-040

advisory

¶9-050

benefits

¶9-140

blended process

¶9-050

confidentiality

¶9-120

determinative

¶9-050

documentation of outcome

¶9-130

facilitative

¶9-050

regulatory framework

¶9-090

Appeals

¶6-010

penalty decisions

¶4-140

tribunal or court

¶6-020

Assessments amendments/corrections

¶2-030

challenging an assessment — access

¶5-030

— administrative review process

¶5-100

— independent review by OAIC

¶5-070

— independent review for large taxpayers

¶5-120

— legislative review process

¶5-090

— multi-layer process

¶5-010

— right to obtain information, taxpayer

¶5-020

— strategy for disputes involving access to information

¶5-080

— Taxpayers’ Charter

¶5-110

default assessments

¶2-020

foundation

¶2-010

self-assessment

¶1-020; ¶1-030; ¶2-010; ¶2-040

serving an assessment

¶2-020

Asset freezing

¶7-130

Audits

¶2-050

timeframes

¶2-050

B Bankruptcy legal action

¶7-120

Benchmarking

¶2-040

Board of Review

¶1-030

C Challenging an assessment — see Assessments Code of settlement underlying principles

¶8-050

Collection and recovery civic duty

¶7-010

company directors — corporate veil

¶7-100

— director penalties

¶7-100

— estimates of liabilities

¶7-100

debt recovery a diverse area

¶7-140

departure prohibition orders

¶7-110

enforcement measures

¶7-080

freezing of assets

¶7-130

legal action

¶7-120

payment — deferred payment

¶7-030

— instalments

¶7-030

— security

¶7-040

— tax liabilities

¶7-020

recovery from a third party

¶7-090

release

¶7-060

waiver

¶7-050

writing off

¶7-070

Compensation

¶9-160

Complaints

¶9-160

Corporate board advice concession

¶3-080

Corporate veil

¶7-100

Courts and tribunals

¶9-070

D Data matching

¶2-040

Debt recovery — see Collection and recovery Default assessments

¶2-020

Departure prohibition orders

¶7-110

Directors collection and recovery — corporate veil

¶7-100

— director penalties

¶7-100

— estimates of liabilities

¶7-100

Dispute definition

¶9-020

example

¶1-070

framework, flowchart

¶1-080

Dispute resolution

¶9-030

alternative dispute resolution

¶9-040

— benefits

¶9-140

— confidentiality

¶9-120

— documentation of outcome

¶9-130

— regulatory framework

¶9-090

— types

¶9-050

ATO’s approach

¶9-110

complaints

¶9-160

conciliation

¶9-150

courts and tribunals

¶9-070

difference between alternative dispute resolution and dispute resolution

¶9-060

dispute, definition

¶9-020

early neutral evaluation (ENE)

¶9-150

evolution of ATO decision review process

¶1-030

facilitation

¶9-150

good management

¶9-010

Government’s approach

¶9-100

litigation mediation negotiation

¶6-030; ¶6-040; ¶9-150 ¶9-150 ¶9-080; ¶9-150

Dispute systems improvement

¶1-060

reviews

¶1-060

Disputes process

¶1-010

Pt IVC — comparison of previous and current systems

¶1-050

— disputing a tax decision

¶1-080

— outline

¶1-040

E Early neutral evaluation (ENE)

¶9-150

External review additional litigation options

¶6-040

appeals

¶6-010

Commissioner’s decision to litigate

— obligations and considerations

¶6-030

tax crime disputes

¶6-050

taxpayer’s decision to appeal

¶6-020

F Facilitative mediation Federal Court

¶9-050; ¶9-150 ¶1-040

Freedom of Information (FOI) access, refusal of request

¶5-050

internal review of decisions

¶5-060

making request

¶5-040

Full assessment change to self-assessment

¶1-020; ¶1-030

G General Interest Charge (GIC)

¶4-040

dispute

¶4-060

I Income Tax Refund Integrity Program (ITRIP)

¶2-040

Independent review

¶5-120

Information, access — see Access to information Inspector-General of Taxation reviewing and improving the disputes system

¶1-060

Interest purpose

¶4-030

role

¶4-020

Internal review

¶5-110

J Judicial review — see External review

L

Legal professional privilege disputes

¶3-050

exceptions

¶3-050

Litigation

¶6-030; ¶6-040; ¶9-150

M Mediation

¶9-150

N Notice production of documents

¶3-030

O Objections

¶1-040

P Penalties — see also Interest audit

¶2-050

director penalties

¶7-100

failing to lodge on time

¶4-110

fairness

¶4-010

miscellaneous

¶4-120

objections and appeals

¶4-140

purpose

¶4-080

resolving penalty disputes

¶4-130

role

¶4-020

schemes

¶4-100

taxpayer statements

¶4-090

Public interest immunity

¶3-060

R Reviews

¶2-050

ATO’s approach

¶2-050

following an audit

¶2-050

Taxpayers’ Charter

¶2-050

timeframes

¶2-050

Risk differentiation framework

¶2-040

Risk management compliance model

¶2-040

S Self-assessment

¶2-010; ¶2-040

change from full assessment

¶1-020

Settlement

¶8-010

calculation

¶8-150

Code of Settlement — underlying principles

¶8-050

Commissioner’s approach

¶8-040

consideration

¶8-070

debt disputes

¶8-130

decision

¶8-080

deeds

¶8-100

definition

¶8-020

dispute myths

¶8-140

future years

¶8-110

legislative framework

¶8-030

negotiation

¶8-060

responsibilities

¶8-090

widely-based tax disputes

¶8-120

Shortfall Interest Charge (SIC)

¶4-050

dispute

¶4-070

T Tax assessments — see Assessments Tax crime disputes

¶6-050

Tax disputes — see Dispute resolution Taxation decisions dispute

¶1-080

Taxpayer behaviours

¶2-040

Taxpayers’ Charter

¶5-110

reviews and audits

¶2-050

Time limits assessments

¶2-030

U Unfettered power

¶3-010

V Valid requests

¶2-030

W Writing off

¶7-070

Case Table A Paragraph Administrative Appeals Tribunal cases Case 7/95 95 ATC 152

¶7-110

Case 29/97 97 ATC 327

¶3-050

ANZ Banking Group Ltd v Konza & Anor (No 2) 2012 ATC ¶20-347

¶3-030

ANZ Banking Group Ltd; FC of T & Ors v 79 ATC 4039

¶3-030

ANZ Savings Bank Ltd; FC of T v 94 ATC 4844

¶2-020

Air Caledonie International & Ors Commonwealth of Australia (1988) 82 ALR 385 ¶6-040 Allen, Allen & Hemsley v DFC of T & Ors 88 ATC 4734; 89 ATC 4249

¶3-050

Aon Risk Services Australia Ltd v Australian National University [2009] HCA 27

¶1-030

Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321

¶6-040

Australian Communist Party v The Commonwealth (1951) 83 CLR 1

¶1-010

Australian Crime Commission v Stoddart [2011] HCA 47

¶3-030

B Paragraph Barnes Development Pty Ltd; FC of T v [2009] FCA 830

¶7-090

Barry v City West Water Ltd [2002] FCA 1214

¶9-130

Batagol v FC of T (Cth) [1963] HCA 51

¶2-020

Bayer v DFC of T 99 ATC 4895

¶1-050

Binetter v DFC of T 2012 ATC ¶20-331

¶3-030

Briggs v DFC of T 86 ATC 4583

¶2-020

Briggs v DFC of T (WA) & Ors; Ex parte Briggs 87 ATC 4278 ¶2-020 British Imperial Oil Co Ltd v FC of T (1925) 35 CLR 422

¶1-030

C Paragraph Cassegrain v Commonwealth Development Bank of Australia Ltd & Ors [2003] NSWCA 260

¶9-130

Citibank Ltd; FC of T & Ors v 89 ATC 4268

¶3-020; ¶3-040; ¶3050

Clarke v DFC of T 89 ATC 4521

¶3-030; ¶3-050

Clements, Dunne & Bell Pty Ltd v Commr of Australian Federal Police 2002 ATC

¶3-050

4072 Comaz (Aust) Pty Ltd v Commr of State Revenue [2015] VSC 294

¶6-030

Commr of Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501

¶3-050

Conley & Ors; DFC of T v 98 ATC 5090

¶7-090

Coombes (No 2); FC of T v 99 ATC 4634

¶3-030; ¶3-050

Crockett v FC of T 99 ATC 2218

¶7-110

D Paragraph Dalco; FC of T v 90 ATC 4088

¶2-020

Darling and Anor; C of T & (2014) FLC ¶93-583

¶3-020

De Martin and Gasparini Pty Ltd; FC of T v [2011] FCA 286

¶7-090

De Vonk v DFC of T 95 ATC 4538

¶3-030

Deloitte Touche Tohmatsu & Ors v DFC of T 98 ATC 5192

¶3-030

Denlay & Anor v FC of T [2013] FCA 307

¶7-090

Derry v Peek (1889) 14 App Cas 337

¶2-030

Donnelly & Ors; DFC of T v 89 ATC 5071

¶7-090

Donovan v DFC of T 92 ATC 4114

¶3-030

Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577 ¶1-030 Dunkel v DFC of T 91 ATC 4142

¶3-030

E Paragraph Edelsten v Wilcox & Anor 88 ATC 4484

¶7-090

Esso Australia Resources Ltd v FC of T 2000 ATC 4042

¶3-040; ¶3-050

F Paragraph Fitzgerald v DFC of T 95 ATC 4587

¶7-100

Futuris Corporation Ltd v FC of T 2009 ATC ¶20-115

¶5-010; ¶5-020

Futuris Corporation Ltd; FC of T v [2008] HCA 32; 2008 ATC ¶20-039 ¶6-040

G Paragraph Goodin & Anor v C of T & Anor [2002] VSC 241

¶7-090

Grant & Ors v DFC of T 2000 ATC 4649

¶3-010

Griffith University v Tang [2005] HCA 7

¶6-040

Grofam Pty Ltd v FC of T 97 ATC 4656

¶8-030; ¶8-070

H Paragraph Hart v DFC of T 2005 ATC 5022

¶3-030

Herald & Weekly Times Ltd v Williams (formerly identified as Vai) & Ors 2003 ATC ¶6-020 4868 Holmes & Ors v DFC of T 88 ATC 4906

¶3-030

Hua Wang Bank Berhad v FC of T 2016 [2016] HCA 45; ATC ¶20-589

¶6-030

I Paragraph Industrial Equity Ltd & Anor v DFC of T & Ors 90 ATC 5008 ¶3-020

K Paragraph ‘K’ and Department of Immigration and Citizenship, Re [2012] AICmr 20 ¶5-040 Keris Pty Ltd v DFC of T [2015] FCA 1381; 2015 ATC ¶20-545

¶7-040

Kunz v DFC of T v 90 ATC 4977

¶7-090

J Paragraph JMA Accounting Pty Ltd & Anor v Carmody & Ors 2004 ATC 4916 ¶3-020; ¶3-050 James Hardie Australia Finance, Re (2008) 26 ACLC 897

¶7-140

L Paragraph LVR (WA) Pty Ltd v Administrative Appeals Tribunal [2012] FCAFC 90 ¶6-030 Lanstel Pty Ltd; FC of T v 96 ATC 5213

¶7-090

Lui v FC of T (No 2) [2009] FCAFC 115

¶7-110

M Paragraph Mareva Compania Naviera SA v International Bulkcarriers SA [the Mareva] [1975] 2 Llyod’s Rep 509

¶7-130

May v DFC of T 99 ATC 4587

¶3-050

Melbourne Steamship Co Ltd v Moorehead [1912] HCA 69; (1912) 15 CLR 333

¶6-030

Middendorp Electric Co Pty Ltd v Law Institute of Victoria 93 ATC 5041

¶3-040

Minister for Immigration and Multicultural Affairs v Eshetu [1999] HCA 21

¶1-030

Mulherin v FC of T 2013 ATC ¶20-423

¶2-020

P Paragraph Packer & Ors v DFC of T 84 ATC 4666

¶3-050

Park Oh Ho v Minister for Immigration & Ethnic Affairs [1989] HCA 54; (1989) 167 CLR 637

¶6-040

Pescott and Inspector-General in Bankruptcy, Re [2013] AATA 680

¶1-030

R Paragraph Robinswood Pty Ltd v FC of T & Anor (1998) 39 ATR 305; 98 ATC 4442 ¶2-050 Rossi and C of T, Re [2015] AATA 601

¶7-090

S Paragraph Saunig; DFC of T [2002] NSWCA 390

¶7-100

Sharp v FC of T [2010] AATA 1023

¶4-060

Shell Co of Australia v FC of T [1931] AC 245

¶1-030

Simionato Holdings Pty Ltd v FC of T (No 2) 95 ATC 4720

¶3-020

Simms v Registrar of Probate (1900) AC 332

¶2-030

Stewart v DC of T [2010] FCA 402

¶3-010; ¶3-070

Stewart v DFC of T [2011] FCA 336

¶3-070

Sunrise Auto Ltd v DFC of T 94 ATC 4536; 95 ATC 4840

¶7-090

Superior IP International Pty Ltd v Ahearn Fox Patent and Trade Marks Attorneys [2012] FCA 282

¶9-090

T Paragraph Tanner v FC of T 90 ATC 4809

¶6-020

Taylor; DFC of T v 83 ATC 4539

¶2-020

W

Paragraph Watson v FC of T 99 ATC 5313

¶3-030

Weimann v Allphones Retail Pty Ltd (No 2) [2009] FCA 1230

¶9-130

Westpac Savings Banks Ltd & Ors; DFC of T v 87 ATC 4346

¶7-090

White Industries Australia v FC of T 2007 ATC 4441

¶3-070

Wingfoot Australia Partners Pty Ltd v Eyup Kocak [2013] HCA 43 ¶5-020 Woodroffe v DFC of T [2000] FCA 1379

¶7-090

X Paragraph XPLZ and C of T, Re [2016] AATA 466

¶7-060

Section Finding List Administrative Appeals Tribunal Act 1975 Section

Paragraph

2A

¶1-030

35

¶6-020

37

¶5-020

38

¶5-020

40

¶5-020

44(1)

¶1-040

Generally ¶1-030 Administrative Decisions (Judicial Review) Act 1977 Section

Paragraph

3(1)

¶6-040

3(4)

¶6-040

5–6

¶6-040

5

¶3-030; ¶4-020

10(1)(a)

¶6-040

10(2)(b)(i) ¶6-040 10(2)(b)(ii) ¶6-040 11(3)

¶6-040

13(1)

¶5-020; ¶6-040

15(1)

¶6-040

Sch 1

¶6-040

Civil Dispute Resolution Act 2011 Section

Paragraph

3

¶6-030

4(1)

¶9-090

4(1)(a)

¶6-030

4(1A)

¶6-030; ¶9090

5

¶6-030

6

¶6-030; ¶9090

7

¶6-030; ¶9090

9

¶6-030

11–12

¶9-090

12

¶6-030

12(1)(b)

¶6-030

15–17

¶6-030

15(c)(i)

¶6-030

Generally ¶6-030; ¶9090 The Constitution Section Paragraph 72

¶1-030

75

¶6-040

75(iii)

¶6-040

75(v)

¶6-040

Crimes Act 1914 Section Paragraph 4B

¶7-040

Evidence Act 1995 Section Paragraph 131(1)

¶9-120

Federal Court of Australia Act 1976 Section Paragraph 23

¶1-050

Federal Court Rules 2011 Rule

Paragraph

36.03

¶1-040

Freedom of Information Act 1982 Section

Paragraph

3(1)

¶5-020; ¶5-080

3(1)(b)

¶5-020

3(3)

¶5-080

3(4)

¶5-080

4

¶5-020

11

¶5-030

15(2)

¶5-040

15(5)

¶5-040

15(6)

¶5-040

15AC

¶5-040

26

¶5-060

Pt IV (31A–47J) ¶5-050; ¶5-060 33

¶5-050

34

¶5-050

37

¶5-050

38

¶5-050

42

¶5-050

45

¶5-050

47

¶5-050

47B–47J

¶5-050

48

¶5-040

48(c)

¶5-040

48(d)

¶5-040

49

¶5-040

50

¶5-040

51DA

¶5-040

52

¶5-060

53A

¶5-060

53B

¶5-060

53C

¶5-070

54C

¶5-060

54L

¶5-040

54S(2)

¶5-070

54T

¶5-070

54W

¶5-070

54W(b)

¶5-070

55A

¶5-070

55B

¶5-070

55C

¶5-070

55E

¶5-070

55K

¶5-070

55K(1)

¶5-070

55L

¶5-070

Div 8

¶5-070

56

¶5-070

57

¶5-070

57A

¶5-070

Fringe Benefits Tax Assessment Act 1986 Section

Paragraph

Generally ¶1-040 Income Tax Assessment Act 1936 Section

Paragraph

8

¶2-050; ¶5-100; ¶8030

166

¶2-020; ¶2-030

166A

¶2-020

167

¶2-020

168

¶2-020

170

¶2-030

170A

¶2-030

170(1)

¶2-030

170(3)

¶2-030

170(6)

¶2-030

170(7)

¶2-030

171(1)

¶2-020

171(2)

¶2-020

174

¶2-020

175A

¶1-020

264A

¶3-030

Income Tax Assessment Act 1997 Section Paragraph 5-5

¶7-020

5-5(4)

¶2-020

5-5(7)

¶4-070

5-15

¶4-070

995-1

¶4-030

Inspector-General of Taxation Act 2003 Section Paragraph 7

¶1-060

High Court Rules 2004

Rule

Paragraph

41.02

¶1-040

Judiciary Act 1903 Section Paragraph 35A

¶1-040

39B

¶6-040

55ZF

¶1-010

Jurisdiction of Courts (Miscellaneous Amendments) Act 1987 Section

Paragraph

Generally ¶1-030 Public Governance, Performance and Accountability Act 2013 Section

Paragraph

5(c)(iii)

¶6-030

8

¶8-030

63

¶7-050

Generally

¶3-050; ¶6-030; ¶9090

Public Governance, Performance and Accountability Rule 2014 Rule

Paragraph

11

¶7-050; ¶8130

Public Service Act 1999 Section Paragraph 10

¶9-090

13

¶9-090

Public Service Performance and Accountability Act 2015 Section

Paragraph

Generally ¶1-010 Taxation Administration Act 1953 Section

Paragraph

Pt II (4–8)

¶4-040

8AAB

¶4-040

8AAE

¶4-040

8AAC

¶4-040

8AAD

¶4-050

8AAZF

¶4-040

8AAG(1)–(5)

¶4-060

8C

¶2-050; ¶3-030

8C(1)(a)

¶6-050

8D

¶3-030

8E

¶3-030

8ZE

¶6-050

8ZH

¶6-050

Pt IV

¶4-060

Pt IVA (14Q–14ZA)

¶7-110; ¶7-140; ¶8-120

14S(1)

¶7-110

14S(1)(b)(i)

¶7-110

14S(4)

¶7-110

14T(1)

¶7-110

14U(1)(a)

¶7-110

14V(1)

¶7-110

14Y

¶7-110

Pt IVC (14ZL–14ZZS)

¶1-010; ¶1-020; ¶1-030; ¶1-040; ¶1-050; ¶1-080; ¶4-020; ¶4070; ¶4-130; ¶4-140; ¶5-010; ¶5-020; ¶5-090; ¶6-020; ¶6040; ¶7-090; ¶7-120; ¶9-090

Div 1

¶1-040

14ZL–14ZP

¶1-040

14ZL

¶1-040; ¶1-080

Div 2

¶1-040

14ZQ–14ZT

¶1-040

14ZQ

¶1-040; ¶1-080; ¶5-090

Div 3

¶1-040; ¶5-090

14ZU–14ZZ

¶1-040

14ZU

¶1-040

14ZW

¶1-040; ¶2-020

14ZX

¶1-040

14ZX(4)

¶1-040

14ZY

¶1-040; ¶6-020; ¶6-040

14ZYA

¶1-040; ¶1-050

14ZYA(3)

¶1-050

14ZYB

¶1-040

14ZZ

¶1-040; ¶1-050

Div 4

¶1-040; ¶5-090

14ZZA–14ZZM

¶1-040

14ZZA

¶1-050

14ZZE

¶6-020

14ZZK

¶4-020; ¶4-130; ¶4-140; ¶6-020

14ZZK(a)

¶1-040

14ZZK(b)

¶1-040

Div 5

¶1-040; ¶5-090

14ZZN–14ZZS

¶1-040

14ZZN

¶1-050

14ZZO

¶4-020; ¶4-140

Sch 1 — Pt 4-25

¶4-020; ¶4-080

— 255-1(1)

¶7-080

— 255-10

¶7-030

— 255-15

¶7-100

— 255-10(1)

¶7-030

— 255-15(1)

¶7-030

— 255-20

¶7-020

— 255-100(1)–(3)

¶7-040

— 255-105(1)

¶7-040

— 255-105(2)

¶7-040

— 255-105(5)

¶7-040

— 255-110

¶7-040

— 260-5

¶7-090

— 260-15

¶7-090

— 265-20

¶7-100

— Div 268

¶7-100

— 268-15

¶7-100

— 268-15(1)

¶7-100

— 268-40(1)

¶7-100

— 268-75

¶7-100

— 268-90

¶7-100

— Div 269

¶7-100

— 269-15

¶7-100

— 269-20

¶7-100

— 269-35

¶7-100

— Div 280

¶4-050

— 280-50

¶4-050

— 280-105

¶4-050

— 280-160

¶4-070

— 280-160(1)

¶4-070

— 280-160(2)

¶4-070

— 280-165

¶4-070

— 280-170

¶4-070

— Subdiv 284-B

¶4-020

— 284-75

¶4-090

— 286-75(1A)

¶4-130

— 284-75(3)

¶4-090

— 284-75(5)

¶4-090

— 284-75(6)

¶4-090; ¶4-130

— 284-75(6)(a)–(d)

¶4-130

— 284-90(1)

¶4-090

— 284-90(3)

¶4-090

— Subdiv 284-C

¶4-020

— 284-145

¶4-100

— 284-160

¶4-100

— 284-220

¶4-090

— Div 286

¶4-020; ¶4-110

— Div 288

¶4-020

— 288-25

¶4-080

— Subdiv 290-B

¶4-100

— 298-20

¶4-130

— 298-20(3)

¶4-140

— 340-5

¶7-060

— 340-5(2)

¶7-060

— 340-5(5)

¶7-060

— 340-10

¶7-060

— 353-10

¶3-030

— 353-10(1)

¶3-030; ¶7-120

— 353-15

¶3-020

— 353-15(1)

¶3-020

— 353-15(3)

¶3-020

— Div 355

¶9-120

Taxation Administration Regulations 1976 Regulation Paragraph 12F(1)

¶2-020