Alternative Dispute Resolution in Tax Disputes
Tax Bar Association Seminar - In dispute with the ATO: What to expect
Alternative Dispute Resolution (ADR) is an important part of the ATO’s approach to dispute management and dispute resolution.
Most interactions with the ATO do not end up in dispute. Where disputes do occur, our objective is to resolve disputes as early as possible, while ensuring we treat taxpayers fairly and in a consistent way.
The ATO Corporate Plan 2014-18 features a section on resolving disputes. We want to work with taxpayers and advisors to -
- reduce the time to resolve disputes,
- reduce the number of disputes,
- lower the costs for both taxpayers and the ATO, and
- making interactions with the ATO easier.
While ADR is being increasingly used to resolve tax disputes, litigation remains an important element in our approach to dispute management.
There will always be cases where litigation is the most appropriate dispute resolution strategy. Litigation is appropriate where it is in the public interest to obtain law clarification and also in instances where the community would expect the ATO to take a case to court.
Consistent with our commitment to litigation we are currently reviewing and updating the Test Case Litigation Funding Program. The program has been in operation for twenty years, so it is timely to review and refresh it in line with our Corporate Plan. We are working in collaboration with the professional associations, including the Law Council of Australia, to actively consider how we can identify potential cases much earlier in the dispute process.
Since July 2013 the ATO has a separate area that focuses on the Law, namely -
- law development and new measures,
- law interpretation and
- review and dispute resolution.
I lead the Review and Dispute Resolution (RDR) area of the ATO. This doesn’t mean disputes only arise in my area. Disputes do arise in other areas in the ATO and are resolved there, such as during an audit or on objection.
RDR is responsible for –
- Independent Review of large market audits at position paper stage (taxpayers with turnover in excess of $250m).
- All income tax and indirect tax objections for taxpayers with turnover in excess of $100m.
- Part IVC and debt litigation.
- Champion role across the ATO for ADR.
What is ADR?
ADR is a process, other than judicial or tribunal determination, where an impartial person assists those in dispute to resolve or narrow the issues between them.
The most common forms of ADR are either “facilitative ADR” or “advisory ADR”.
In facilitative ADR the ADR practitioner assists the participants to identify the disputed issues, develop options, consider alternatives and endeavour to reach agreement about all or parts of the dispute. Facilitation and mediation are examples of this approach.
In advisory ADR, the ADR practitioner appraises the elements of the dispute and provides advice on a factual or legal point or the outcomes. Early neutral evaluation (ENE) and case appraisal fall within this category.
To raise the awareness of ADR, the ATO has issued a Plain English Guide, which is available on our website. It outlines the most common forms of ADR in tax disputes and provides examples of where the different types of ADR can be used in tax disputes.
When is ADR appropriate or suitable?
The point at which a specific ADR approach will be most effective in a particular case depends on the nature and circumstances of the dispute, although in theory ADR approaches can be used at different points throughout the dispute. Our people are expected to identify opportunities for ADR and to also respond to taxpayer requests for ADR as and when made.
Increasingly ADR is being used well before the litigation stage, during audit or at objection.
However, ADR approaches are still available after an appeal has been filed with the Federal Court or the AAT. This is consistent with the ATO’s obligations as a model litigant, to endeavour wherever possible to avoid, prevent and limit the scope of legal proceedings by considering and participating in ADR where appropriate.
ADR can be effective at the litigation stage to resolve, or at least narrow the issues in dispute that proceed to hearing. The Federal Court may appoint a mediator in an attempt to resolve all or part of the matter before going to a hearing.
The use of ADR in large market disputes
In complex large market tax disputes the ATO and taxpayers are increasingly using independent third party ADR practitioners to try and achieve breakthroughs.
The most common form of ADR in highly complex matters tends to be “advisory” ADR, particularly early neutral evaluation.
In some large market disputes we have used facilitative ADR, such as mediation. In some disputes we have used a blend of both mediation and ENE.
Clearly the type of ADR which is most effective will depend upon the facts and circumstances of the dispute. There is not a “one size fits all” preferred type of ADR.
When the ADR process does not succeed in resolving the whole dispute, it will often narrow the issues that go to hearing.
The use of ADR in small business and individual disputes
With small business and individuals, the preferred approach of the ATO is to resolve disputes through direct contact and discussion with taxpayers. However, there will be instances where ADR is appropriate.
The most effective form of ADR in these types of disputes is “facilitative” ADR.
Consistently, approximately 85% of all Part IVC litigation is commenced in the AAT, not the Federal Court. Interestingly, over 80% of all AAT appeals do not end up at a hearing. Most are resolved without the need for a hearing.
In April this year the ATO introduced in-house facilitation for small business and individual disputes, mainly at audit or objection.
This was introduced following a successful pilot of in-house facilitation recommended by the IGT.
We have trained facilitators in each state and across all areas of the ATO. These facilitators are independent of the audit or objection. They have had no prior involvement in the dispute.
Either the taxpayer or the ATO can request in-house facilitation.
This is an important strategy for the ATO, which is aimed at reducing the number of small business and individual appeals to the AAT. In the first 3 months, there were 19 referrals for facilitation; seven at audit, ten at objection and two at litigation.
What you can expect when dealing with the ATO in an ADR process?
The ATO has updated its main practice statement dealing with ADR. Practice Statement (PS LA 2013/3) was developed in consultation with the professional associations, registrars from the AAT and Federal Court and the Law Council of Australia. It sets out such things as:
- The circumstances where ADR may be appropriate
- The mutual expectations of taxpayers and the ATO when preparing for and engaging in ADR
- Matters to be considered in selecting the appropriate ADR process and engaging an ADR practitioner
- Processes for documenting the agreement or outcomes arising from ADR
- The roles and responsibilities of the various ATO stakeholders in the course of ADR.
Specifically, when engaging in ADR, the ATO representatives will:
- be prepared
- participate fully, effectively and in good faith
- ensure the taxpayer has been provided with all relevant documents prior to the ADR process
- be willing to negotiate and attempt to resolve all aspects of the dispute (if appropriate)
- listen to the taxpayer and remain courteous at all times, and
- ensure a decision maker is present.
It is important to note that these are mutual expectations – we expect taxpayers and their representatives to approach ADR in the same way.
Whatever form of ADR is adopted, the outcome of the process must be recorded in writing.
ATO staff who participate in ADR are expected to ensure that documentation of any settlement deed or agreement is clear, unambiguous and fully reflects the outcomes agreed between the participants.
The ATO has a model formal settlement deed as part of its materials supporting the Code of Settlement Practice.
In less complex matters, a simpler form of agreement may be an appropriate way of recording and evidencing the final agreed position.
Finalised settlement agreements would only be varied in exceptional circumstances.
The ATO’s ongoing commitment to ADR and dispute resolution
In response to a recommendation of the Inspector general of Tax in the Report on the Review of The ATO’s approach to early and alternative dispute resolution, the ATO implement an independent system to assess feedback from participants in ADR. The ATO commissioned the Australian Centre for Justice Innovation (ACJI) at Monash University to survey all participants involved in finalised taxation and superannuation ADR processes with the ATO during the year 1 July 2013 to 30 June 2014.
An interim report by the ACJI indicated that participants were generally positive about the ADR processes and outcomes in terms of fairness, cost savings and resolution or clarification of facts and issues.
The feedback also suggested particular factors which made ADR more likely to be successful, such as:
- ADR should be considered earlier in the dispute process
- Decision makers should be present at the process
- Preparation for ADR is very important
The final report is expected in October. We will use the report for further consultation with our key stakeholder group, the Dispute Resolution Working Group (DRWG). The DRWG comprises representatives from the key professional associations, leading ADR academics, registrars from the AAT and Federal Court and the Law Council of Australia
We will also seek feedback at our Annual Roundtable with the Legal Profession in February 2015. All the State and Territory Law Societies and Bar Associations are represented at the Roundtable, along with the Law Council of Australia and the Law Institute of Victoria.
In conclusion, promoting the earlier resolution of disputes is an important objective for the ATO. Resolving disputes earlier saves time and money for taxpayers and the ATO, and also provides certainty for taxpayers. It contributes to the ATO Mission – to contribute to the economic and social wellbeing of Australians by fostering willing participation in our tax and superannuation systems. The ATO uses a number of strategies and approaches to achieve this, including the use of ADR where appropriate. This is an important journey for the ATO, and for it to be successful it is a journey that we need to make co-operatively with taxpayers, their advisors, the legal profession and other stakeholders in the tax and superannuation system.