The Report of the Inspector-General of Taxation, David Vos, on the Review of Tax Office Management of Part IVC Litigation (the Report), released on 7 August 2006, provides a rare occasion to test the fairness and efficiency of the tax litigation process.
The Report examines the Australian Taxation Office’s (ATO) administration of tax litigation arising from the appeal procedures of Part IVC of the Taxation Administration Act 1953 (which deals with taxation objections, reviews and appeals) and evaluates the test case funding program.
The investigation follows concerns raised in relation to the ATO’s administration of tax litigation and alleged breaches of its obligation to be a model litigant. The Report was issued after a review examining the ATO’s approach to litigation, including the policies and procedures applied. It also examines the ATO’s test case program and the ATO’s application of outcomes of finalised Court and tribunal decisions.
The Report is based on consultation and sub-missions received, and concludes that a number of deficiencies exist and recommends improvements.
Although, as the Report notes, tax litigation is not common, it is in the background at all times and plays a significant role in influencing ATO and taxpayer behaviour. This is reflected, for example, in decisions as to tax positions to be taken, tax risk assessment and in dealing with ATO reviews and audits.
How well the ATO responds to the key recommendations and findings of the Report will have an important bearing on community confidence in the tax system.
The key recommendations
The key recommendations of the Report are outlined below, together with the ATO and Government response. The Inspector-General also made 26 subsidiary recommendations to the ATO, to which the Commissioner has responded favourably.
The Report's key recommendations to the ATO included:
- developing a published policy or a set of guidelines on tax litigation
- giving a single area of the ATO overall responsibility and authority for the management of all aspects of litigated cases
- introducing risk management techniques to its management of litigation issues
- recommending new arrangements for the management of the test case funding program, which is designed to fund cases that will clarify the law by establishing new legal principles, and
- introducing a standard communication product to communicate the application of finished Court and tribunal decisions.
The ATO and Government responses to the Inspector-General’s key recommendations, together with our comments, are as follows:
- The ATO plans to issue a practice statement on its approach to, and conduct of, litigation. However, the Inspector-General has commented that a Charter-like document or a document of higher status than a practice statement is needed to promote community confidence in the ATO’s policy on litigation.
| PwC comment
We strongly agree. There may be a need to involve the Attorney-General, given his role of over-sighting all Commonwealth legal matters. The practice statement or Charter-like document should clearly articulate the ATO’s approach to litigation in terms of upholding the rule of law. The document should set as a principal expectation the public interest in the resolution of disputes in a fair, timely and cost effective manner. Based on these statements it should then be appropriate to set out, as with other areas of the ATO’s Taxpayers Charter, measurable expectations on the ATO, its legal representatives and taxpayers which will be reported publicly. |
ATO’s Taxpayers Charter, measurable expectations on the ATO, its legal representatives and taxpayers which will be reported publicly.
- The ATO has indicated that it is reviewing the efficiency and quality of its end-to-end processes and will arrange for all decisions regarding litigated cases to be managed by the Office of the Chief Tax Counsel (OCTC) or the Tax Counsel Network.
| PwC comment
In significant cases, this already represents current practice and its extension is welcomed. |
- The ATO has indicated that it will review its practices to ensure that its proposed litigation practice statement clearly states how the ATO approaches litigation, including a better articulation of the factors that underlie its risk management approach.
- The Government has indicated that it will establish a new body, to be headed by Treasury, to review the submissions of unsuccessful applicants for test case funding.
| PwC comment
Such an approach would involve establishing a precedent for interference with the normal independence of the Commissioner. It may be better to strengthen and formalise internal review procedures, including involvement of a senior Australian Government Solicitor lawyer to provide external advice on the application of public interest criteria. |
- The ATO indicated that it will communicate to taxpayers the implications of adverse Court and Administrative Appeals Tribunal decisions, and significant Court decisions.
| PwC comment
In relation to making public the ATO’s decision to seek legislative amendments in particular circumstances, there are differing opinions as to whether this will create uncertainty about the law or whether it will give guidance to the public on the particular implications of a finalised Court or tribunal decision. It is important that the ATO communicate to the public if it is seeking legislative change, or whether the matter is with Government. This will promote transparency in tax administration by providing guidance on the implications of a finalised Court or tribunal decision. |
For further information, please complete the following form, or contact:
Michael Bersten, Partner
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 2 8266 6858
Edwina McLachlan, Director
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 2 8266 4930
Daniel McInerney, Senior Associate
PricewaterhouseCoopers Legal
Tax Controversy
Phone: +61 3 8603 5625
