ATO disputes

185 Pages·2017·1.633 MB·English

by  Andrew Johnston, CCH Australia Limited,

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First edition..................October 2017
ISBN 978-1-925554-57-1
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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) <www.irs.gov/uac/tax-quotes>.
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)
<www.ag.gov.au/About/Pages/Ruleoflaw.aspx>.
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)
<www.aat.gov.au/about-the-aat/engagement/speeches-and-papers>.
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