The IGT’s Review into the ATO’s use of early and Alternative Dispute Resolution highlighted taxpayers’ views that the vast majority of disputes could be resolved without resorting to objection and litigation procedures.
The review found that taxpayers are concerned about inconsistent treatment received when trying to engage with the ATO to resolve disputes.
“A common theme seems to be a perceived lack of independence in the objection process, particularly in relation to larger more complex matters,” said the IGT.
“I have sought to address this, in line with my submission to the 2011 Federal Government’s Tax Forum, by proposing that the ATO pilot a separation of its objection and litigation functions from its audit function in the management of its most complex disputes,” he added.
Of the 21 recommendations made in the review, the ATO fully or partly agreed with 20.
However, the ATO disagreed with the recommendation that it should establish a pilot Appeals Section in working towards a fully functioning independent appeals area to be headed by a new Second Commissioner.
In its response, the ATO said it agreed that in most dispute cases, the best use of taxpayer and ATO resources is achieved by minimising and resolving disputes as early as possible by direct communication with taxpayers, before considering whether it is necessary to engage a third party ADR practitioner to assist.
“Your review has identified some opportunities for us to improve our processes, reporting, and publications. It also provides us with an opportunity to remind our staff of the importance of ongoing communication with taxpayers, particularly those who have disputed their tax liability, and the importance of ensuring such taxpayers remain engaged in the tax and superannuation system,” the ATO said in its responding letter.
Mark Friezer, of Clayton Utz, said although the ATO's formal policy has been that it supports ADR as a cost effective, informal, consensual and speedy means of resolving disputes, in reality, it has taken the ATO some time to implement the policy.
“We have seen a preference on the ATO's part on employing ADR during litigation, that is, after taxpayers have challenged decisions through formal channels,” said Friezer.
“ADR is a top-down process that requires cultural change within the ATO but the IGT report should, at the very least, improve awareness and commitment to ADR at the ATO's audit and operational levels,” he added.
ADR is often favoured by large companies because it avoids the financial costs and time demands on the tax team that come with litigation.
ADR also provides an opportunity for taxpayers to settle matters on a confidential basis to facilitate a more frank discussion between the ATO and the taxpayer.
However, ADR is not always the best option for dispute cases and may be ineffective if a settlement is not likely, such as where the dispute turns only on issues of law and the parties are in agreement as to the facts.
Friezer said ATO agreement with all the recommendations in the IGT’s report would go a long way to improving the ADR process.
“In addition, senior ATO technical experts should be engaged in matters earlier in the compliance process to allow for matters to be settled earlier and to identify opportunities to engage in ADR at an earlier point,” said Friezer.
“We often see disputes arise with the ATO because its auditors have failed to appreciate the nature of a taxpayer's business or particular transaction. Direct discussions with the ATO early in the compliance process may assist to properly explain and clarify the facts and bring to the ATO's attention the information which is most relevant to the issues,” he added.
One of the IGT’s recommendations proposes that the ATO amend its compliance procedures to require ATO officers to consider, and if appropriate engage in, direct conferences with taxpayers at certain points in time.
The ATO has agreed to this recommendation in relation to large and complex cases in the large business and small and medium enterprises markets.
The IGT’s report has undoubtedly given renewed impetus in driving improvement of the ADR process and taxpayers will certainly be hopeful the continued focus will achieve some tangible results.
Though Judy Sullivan, of King & Wood Mallesons, said while the ATO is trying to say the right things publically, in its publications and internally to its staff, it now needs to walk the walk.
“There are still many examples of the ATO not accepting they have litigation risk and refusing to settle cases,” said Sullivan.
