In Dispute with the ATO: What to Expect
Tax Bar Association Seminar
When it comes to managing tax disputes, I am sure that your clients are telling you the same thing that mine are - we want to spend more time growing our business, and less time managing tax disputes.
While this can have a flow on impact for us as advisors, in our role as trusted advisors, we all like to get the best results for our clients – particularly in terms of minimising the time and cost our client’s spend managing tax disputes. We also want to ensure a positive working relationship between the taxpayer and the ATO into the future.
A number of us have been doing this for a long time, and given past experiences, may be sceptical about the possibility of achieving efficiency in the tax dispute process. So, today, I would like to share some of KPMG Legal's experiences to assist you better understand what to expect when in a tax dispute with the ATO.
To help facilitate today's presentation, I have prepared a handout, which hopefully you all have in front of you. It is by no means definitive, and I'm sure with the collective knowledge of those here today, a lot more detail could be added. However, what it does provide is a framework for today’s session.
I do not intend to cover all the topics listed in the handout. Instead, I will highlight our key learnings from our practical experience which you can share with your clients when in dispute with the ATO.
The first issue in the handout I would like to focus on is the first long blue arrow which references “Ongoing engagement between taxpayer, advisor, Counsel and ATO”.
The second issue in the handout is the importance of an advisor being able to stand back and look at the lifecycle as a whole – and being able to communicate this and its key pressure points from a time and cost perspective, with clients.
You will notice that the handout refers to sections 263, 264 and 264A notices, as well as ADR. I will leave those topics to the subject matter specialists here today - Brind Woinarski QC and Debbie Hastings.
As I mentioned, the first issue in the handout I would like to focus on, is the first long blue arrow which references “Ongoing engagement” and specifically, the importance of regular dialogue between the ATO, the taxpayer and advisors. I use the term advisors to include lawyers and Counsel.
There are two parts to this regular dialogue that we think are important.
The first part of regular dialogue that is important is ongoing, regular and constructive dialogue between the ATO, the taxpayer and their advisor.
An example of where this dialogue has been particularly beneficial was during our involvement in the ATO’s new Independent Review process last year. Our client’s representative, based Overseas, with English as a second language, and little knowledge of Australian tax law, let alone the Commissioner’s tax dispute lifecycle, found himself part of this new ATO process - shown in the purple box in your handout under the heading “Review & Finalisation.”
As this matter was one of the first for which the new Independent Review process could be requested, Debbie Hastings attended the Independent Review case conference as an observer, and to understand how the process worked in practice. Following the case conference, there were some points around process which our client wanted to clarify, and we were able to speak to Debbie, and members of her team, about this.
I know that our client was pleased that Debbie herself, a key stakeholder in the introduction of the Independent Review process, was able to observe the case conference and provide support during it, as well as afterwards, when questions around process were raised. Particularly given the time and costs our client had already incurred in the audit process up to this point (a concept I will return to shortly), Debbie’s “hands on” involvement and willingness to engage with the taxpayer and its advisors on issues of process was invaluable, and appreciated by our client and ourselves. It also provided assurance to our client that the new process was operating as intended, or if it was not, that the right ATO decision maker was involved and could address the issues on a timely basis.
Of course, there are also examples where, despite best intentions, the dialogue between the ATO, the taxpayer and the advisor is not as constructive as anticipated. Like many of you, we have experienced this, including relatively recently.
Broadly, the dialogue I am referring to involved a meeting to discuss an ongoing Audit. Present at this meeting were representatives of the ATO, us (as the client’s legal advisor) and an independent expert the client had engaged. The meeting was also intended to incorporate potential settlement discussions.
In short, and despite best efforts in terms of preparation, and ensuring the right people were in the room (from both sides), a settlement was unable to be reached. Both KPMG Legal and the taxpayer considered this a disappointing outcome, particularly given the apparent reluctance of the ATO representatives to come to the meeting with an open mind, and to take on board the submissions being made on the taxpayer’s behalf.
Upon reflecting on why some dialogue between the ATO, the taxpayer and advisors is successful (however you define it) and other dialogue is not, we think that a key reason is the cultural change within the ATO.
Let me explain what I mean by this.
I am sure that most of you have heard the Commissioner, Chris Jordan, speak about the need to finalise audits more quickly, and only conduct “strategic litigation” – generally matters of particular interest to the Commissioner and the community, including where significant revenue is at risk, there is a significant compliance risk, the issue is likely to attract media interest or the issue raises a contentious question of law or involves the general anti-avoidance provisions.
As part of this, the Commissioner has also spoken about the need to settle more matters during the Audit process. A key aspect of this is that it is incumbent on the ATO risk review and audit teams to get across the facts quickly, understand what the key threats to revenue are and present these in a well-reasoned and evidenced risk hypothesis or position paper.
Therefore, as the 20,000 or so ATO employees, particularly those conducting risk review and audits, become familiar with this approach, there are inevitably going to be situations where they are unable to critically identify opportunities for ADR, and how a possible settlement might be achieved.
In terms of ADR, and Debbie, I promise not to steal your thunder here, we think there are still some steps to be taken in familiarising taxpayers, advisors and ATO personnel on exactly what ADR means and how and when ADR works in a Tax context. A number of people here would have experience with forms of ADR in a commercial context, but, ADR is relatively new to Tax disputes, and how it looks and feels, in a Tax context, is still being demystified.
In an effort to better understand the ATO’s approach to ADR in tax disputes, we will be hosting a mock ADR workshop, with my KPMG Legal colleagues Maria Lui and Mark Poole acting as taxpayer and advisor respectively, and ATO representatives taking the role of ADR facilitator and audit team/key decision maker. We will also be involving Counsel as observers so that they can provide feedback, and ask questions, about the process as the mock ADR progresses. Hopefully this is something the respective parties will find valuable and will go some way towards developing the thinking around how ADR works in a tax dispute, and can help our clients better understand what to expect during the ADR process.
The second part of regular dialogue I want to talk about today is that between the advisor and Counsel. We have involved a number of you here tonight at various stages in our matters, and have found the strategic and technical input Counsel offers to be invaluable. The nature of the tax dispute lifecycle is that Counsel is often not involved at every stage in the process, typically being more heavily involved in the litigation phase – the green box in your handout.
However, in our experience, accessing the powerful network of knowledge offered by the Tax Bar, and the strategic and technical input that Counsel can offer throughout the lifecycle of a dispute, should be included as part of offering clients the best possible strategic thinking and advice – at all stages in the dispute lifecycle.
In practice, and thinking of one particular engagement that Daniel McInerney has been involved with, he initially assisted in providing advice, together with John de Wijn. The issue that the Advice addressed was ultimately the subject of an Audit by the Commissioner and Daniel became involved in each aspect under ATO audit and Review and Finalisation boxes in your handout.
While we ultimately settled the matter before the Objection phase, Daniel’s strategic input around technical arguments for responses to Position Papers, and particularly the evidence gathering process, was invaluable. I know that our client felt that Counsel’s input contributed to the strongest possible position being put to the Commissioner at each stage in the process.
Another more discrete example arose in the same matter, but on the particular aspect of potential prosecution for failure to comply with a section 264 notice. Again, I do not want to steal Brind’s thunder here, so I will not say much more, but his input and advice on the potential prosecution issue, together with an appreciation for how it interplayed with the broader audit process, and the taxpayer’s dialogue with the Commissioner, was invaluable.
The second issue in the handout I want to talk about is the importance of an advisor being able to stand back and look at the lifecycle as a whole – and being able to communicate this lifecycle and its key pressure points from a time and cost perspective, to clients so that they have an idea of what the ATO’s next steps could be.
Of course, this aspect of a tax dispute is one of the most challenging as the steps involved vary with every matter, and are typically driven by the ATO. However, if our experience is anything to go by, the ability to be able to give clients a snapshot of the process, identify where they may be able to drive the process and influence ATO thinking, and an understanding that there may well be two years between the matter (the blue box on your handout) and the review and finalisation (the purple box) phases is fundamental. Such conversations can also be important so that the client understands where the pressure points, from a time and cost perspective, are likely to be.
In terms of being able to drive the process and influence ATO thinking, an approach that we have found worthwhile, both from a time and cost saving perspective, has been to treat matters as being litigious from the outset. In doing this, we have proactively approached the ATO early on in the risk review or audit process, agreed on the key issues in dispute, and offered a detailed submission or presentation incorporating all the relevant facts and evidence (often with the assistance of an electronic evidence gathering exercise). While there is an initial investment by the taxpayer of time and cost upfront, it means that a comprehensive submission is made up front, which in our experience, will streamline the audit process.
As I mentioned earlier, hopefully the time taken to resolve a dispute (and therefore the costs involved for taxpayers) becomes less as the Commissioner’s new streamlined approach to managing a tax dispute comes into operation across the board. However, until then, our experience suggests that regular updates with clients, together with Counsel as required, about the status of the process, costs incurred to date, and likely future costs, is fundamentally important.
By way of summary, my key message about what to expect when involved in a tax dispute with the ATO is one of ongoing, regular and constructive dialogue – between all parties involved. By encouraging this communication, and particularly as the ATO’s approach to managing disputes is adapted, each party should have an understanding of what to expect, and the opportunities for surprises should be limited, and hopefully they become the exception rather than the rule.
On that note, I will hand over to Brind. Thank you.