In an explosive report, the Inspector-General of Taxation has slammed the Australian Taxation Office for the way it treats small business people in dispute with the ATO. The report confirms our experience, where people have brought their cases to us and which we detailed in this submission.
Here’s the Inspector-General’s report.
Here’s what the Fairfax media said: Ali Noroozi report points to perception of ATO favouritism for top end of town and ATO ramps up data matching for self-employed tax.
Below are relevant excerpts from the Inspector-General’s report
Ken Phillips’ blog comment is here.
The Inspector-General’s report follows on from the Board of Taxation report last month which is also critical of the ATO.
Relevant Excerpts from Inspector-General of Taxation’s Report
The Management of Tax Disputes
Released March 2015
Summary: The ATO has an unfair process
The underlying cause of the concerns raised, with respect to the ATO’s management of tax disputes, is a lack of independence between its original decision makers and its officers reviewing such decisions upon the taxpayer’s request.
Arguably, the ATO has had the least amount of separation between these functions when assessed against revenue authorities of comparable jurisdictions. It is, therefore, not surprising that many taxpayers felt that their cases were not being independently reviewed and that the system was not treating them fairly and equitably.
Matters not objectively considered by ATO
… some taxpayers are of the view that they cannot have their matter objectively reconsidered until they reach the Administrative Appeals Tribunal (AAT) or the Federal Court of Australia. Such view is supported by the ATO’s statistics.
…small business and individual taxpayers…are the least likely to be in a position to take a dispute upfront and progressively throughout disputes.
Needs a new independent process
… recommended the creation of a separate and dedicated Appeals Group, led by a new Second Commissioner, to embed the improvements within the ATO structure and provide a framework that is less dependent on the views and ideals of the ATO leadership of the day. It will also bring the ATO more in line with comparable international revenue authorities.
The new Appeals Group would manage and resolve tax disputes for all taxpayers including the conduct of pre-assessment reviews, objections and litigation as well as championing the use of ADR throughout the dispute cycle.
| Reform failure. (ICA comment)
The report details a long list of criticisms of ATO and reform |
Comparison to the USA & UK: Independent process
2.106 (USA) The Office of Appeals (USA) is an ‘independent organisation’ within the IRS whose mission is to ‘help taxpayers and the government resolve tax disagreements’ without litigation. The Office was established administratively in 1927 and was codified by the Internal Revenue Service Restructuring and Reform Act of 1998 (IRS Reform Act). It is headed by the Chief of Appeals who reports directly to the IRS Commissioner. The fact that the head of Appeals reports directly to the Commissioner is considered important to uphold the independence of the Office of Appeals. It should also be noted that employees of the Office of Appeals generally work in office space that is physically separate from the rest of the IRS.
2.137 (UK) Following the reform of tribunals in the UK, taxpayers dissatisfied with certain HMRC decisions, such as those that amend a taxpayer’s self assessment, may appeal directly to an external review body.
CHAPTER 3—THE CURRENT SYSTEM AND THE CASE FOR REFORM
3.2 The costs of disputes, for taxpayers, may manifest themselves at any stage of the tax disputes process and may take the form of financial, emotional and/or reputational costs. As such costs increase or take hold, taxpayers may become unable or unwilling to maintain a position they may rightfully believe is correct. Such an outcome can have a regressive effect with greater impact on small businesses and individuals. The community expects the ATO to minimise this regressive effect through a sustainable framework that provides robust checks and balances, including effective pre-assessment reviews, to prevent or expeditiously resolve disputes.
AUDIT DECISIONS AND CONDUCT
3.9 Submissions to this review suggest a number of reasons for unsustainability of initial audit decisions. These include: • lack of opportunities or willingness for ATO officers to engage; • auditors lacking necessary commercial knowledge of the industries or entities they are examining; • auditors lacking technical capability leading to unclear risk hypotheses; • ATO requests for excessive information to be provided within short timeframes; • allegations of tax avoidance pursuant to Part IVA of the Income Tax Assessment Act 1936 (Part IVA), fraud and evasion are made without strong bases; and • perceptions that auditors have adopted an overzealous approach to compliance with a ‘guilty until proven innocent’ mindset.
3.14 The above issue is particularly pronounced for non-High-WealthIndividuals (HWI) and small business taxpayers who may not have dedicated client relationship managers or senior ATO personnel contacts whose assistance may be sought. Where these taxpayers are unable to engage directly with the ATO and have few avenues to reach ATO senior staff, they have little choice but to seek external review by, for example, applications to the AAT as a means of bringing the matter to the ATO’s attention.
OBJECTIONS PROCESS
3.43 Submissions to the IGT characterise the objections process as a ‘frustrating step to the doors of the Court.’
Challenging the ATO precedential view
3.64 Stakeholder submissions to the IGT note that objections officers’ independence is further reduced due to the ATO policy that all ATO officers, including objections officers are bound to follow the ATO precedential view of the law. For example, the ATO’s interpretation of a particular legislative provision may be established in a public ruling.189 Where the original compliance decision hinges on the ATO’s interpretation and the taxpayer’s dispute primarily relates to such interpretation, the objection outcome is unlikely to be different since objection officers are bound to follow it. In these circumstances ‘the lodgment of an objection is necessarily futile if the reviewing officer is also necessarily bound by the same public ruling.
By-passing mandatory objections
3.76 Unlike the US and the UK (and to an extent, New Zealand), in Australia, taxpayers require an objection decision to be made (or deemed to have been made) before external review rights in the AAT or Federal Court are enlivened. In the US and UK, taxpayers may by-pass the internal processes and have their matter externally an assessment decision, as formal internal review takes place before the assessment decision.
3.85 The above international comparisons as well as difficulties faced by taxpayers in Australia, highlight the need for an effective review of the ATO’s original audit decisions before assessments are issued. …In fact, small business and individual taxpayers are in greater need of such reviews as they are the least likely to be in a position to take the matter to the next stage and ultimately to the AAT and the courts.
3.92 Certain stakeholders have raised a more fundamental concern regarding the fairness of the IR process being made available only to approximately 1,250 large businesses with annual turnover exceeding $250 million out of the total taxpayer population of more than 16 million including individuals, small businesses, trusts and self-managed superannuation funds
3.93 As a fundamental matter of fairness and equity, effective dispute resolution should be available to all taxpayers regardless of resources.
3.94 Furthermore, as the ATO’s statistics indicate, 96.8 per cent (21,756 out of 22,455) of all objections arising from audits are attributable to small businesses and individual taxpayers.
BARRIERS TO ACCESS TO JUSTICE
Costs
3.101 Stakeholders have also noted that the cost of litigation may be prohibitive, especially for smaller taxpayers. Submissions have also indicated that, in certain cases, the costs of disputes are such that they may be ruinous to the taxpayers who have to bear them.
3.102 In the AAT, litigants bear their own costs and cannot recover them from the other party. A 2012 study estimated that personal costs incurred by represented taxpayers in the AAT were between $5,634 and $6,684 in the Taxation Appeals Division. For represented taxpayers using the Small Taxation Claims Tribunal (STCT), the costs were more likely to be between $4,094 and $4,794.219 As the limit for the amount of tax in dispute to access the STCT is $5,000, taxpayers who wish to use the STCT may find it uneconomical to do so if they also wish to obtain professional advice.
3.104 As discussed earlier, costs are further compounded by the ability of the ATO to undertake debt recovery action while matters remain in dispute or demand payment of 50 per cent of the disputed debt before recovery action is suspended. This power gives the ATO considerable leverage over taxpayers and has resulted in some instances where the taxpayer was unable to pursue the appeal due to a lack of resources
3.107 The ATO is one of the largest Government agencies which, by necessity, has monopoly power and significant resources. Accordingly, it is considered to have considerable advantage over the vast majority of taxpayers, particularly small businesses and individuals, when dealing with legal disputes.
3.108 Secondly, the taxation and superannuation system is extremely complex and may operate as a barrier to access justice. This is especially true of taxpayers who are self-represented and who may not be able to articulate their positions to sufficiently raise concerns in relation to ATO decisions.
THE NEED FOR REFORM
3.143 As noted earlier, the ATO, by necessity, is a monopoly service provider with considerable power. These powers need appropriate checks and balances.
Whilst recognising that there have been substantial improvements made in more recent years, stakeholders have also observed that the present system is too dependent on the views and ideals of ATO senior executives of the day.
3.147 The extent of the influence of a few individuals on the ATO approach and culture has been likened to a benevolent dictatorship whereby such individuals are afforded discretion to act in the best interests of the community. However, such an approach is untenable in the long term as there is no safeguard or framework within which desirable approaches and processes may be embedded. The views of the current senior executives may change or they may be replaced by others with different views.
Based on this experience, the IGT supports the need for structural reform and a key governance framework.
FAIR TREATMENT AND RESPECT OF TAXPAYERS
5.18 The fair and respectful treatment of taxpayers is an important aspect of tax administration. It has been judicially recognised as being in the interest of both individual taxpayers and the revenue.349 The OECD has observed that taxpayers ‘who are aware of their rights and expect, and in fact receive, a fair and efficient treatment are more willing to comply.’
5.19 However, notwithstanding its importance, there is presently no specific right of fair treatment and respect of taxpayers in the Australian tax system. Research in this area has noted that, unlike jurisdictions such as the US, which have legal provisions promoting fair treatment, the Australian position is that fair treatment and respect is aspirational.