When it comes to tax controversy, Australia’s dispute resolution systems are among the world’s most advanced. But these systems are being put to the test as a confluence of fragile economic conditions, flagging tax revenues and urgent revenue needs propels tax dispute levels to record heights. With a new Commissioner in place, the Australian Tax Office is set to renew its focus on alternative dispute resolution mechanisms. Jeremy Geale explains.
The survey found that levels of tax disputes in Australia, and worldwide for that matter, are quite high. Currently, 62 per cent of Australian-based respondents are involved in some form of tax controversy, and reported levels of disputes in most tax areas are rising. For example:
- 30 percent of respondents in Australia say they are currently involved in corporate income tax controversy (up from 23 percent in the 2009 survey)
- 30 percent are involved in indirect tax (sales/use or VAT/GST) controversy (down from 35 percent)
- 28 percent are involved in disputes over transfer pricing (up from 13 percent)
- 26 percent are involved in local (state) income tax disputes (up from 23 percent).
Australia’s recent and extensive tax reforms have heightened the complexity of the tax system. New rules that require the disclosure of reportable tax positions has put contentious issues in the spotlight, attracting greater audit scrutiny and creating more disputes.
Further, in addition to the need to raise revenues, cost pressures within the government is contributing to rising tax controversy. As the Australian Tax Office has reallocated resources from education to enforcement, taxpayers have less guidance and fewer rulings to rely, increasing the chances of taxpayer errors and interpretive differences.
That’s correct. Chris Jordan, a former partner with KPMG in Australia, was appointed to the role at the start of 2013. In a speech on 14 March 2013, Mr. Jordan said he would work to decrease the number of tax disputes and increase the speed of their resolution.
One issue that he wants to address is the perception of independence in the audit review process. Unlike most jurisdictions (for example the United States and United Kingdom), ATO audit decisions are not subject to any form of external, independent review. It means taxpayers seeking independent review must appeal adverse tax decisions to a Court or Tribunal.
Last year following a recommendation of Australia’s Inspector General of Taxation, the ATO implemented a new internal review process for large businesses, where a taxpayer did not agree with the ATO's final audit position, before amended assessments and objections. While Mr. Jordan supports this initiative, he does not think it goes far enough and he intends to take steps to ensure a review process that is genuinely independent.
One change is to have the large business pre-assessment review undertaken by a senior technical person in the ATO’s legal area rather than their large business area. The intention for both the ATO and taxpayer is to be clear on the areas of disagreement, and aim for a timely resolution of issues. The ATO also plans to consult with representatives from the large business sector to see what else can be done to ensure its reviews are independent and achieve effective resolution.
The ATO recognizes that resolving disputes is a significant investment for the ATO and for taxpayers: it can be costly, time and resource consuming, and a potential risk to the ATO’s reputation if not well handled. The ATO supports the taxpayer's right to have ATO decisions independently reviewed by the courts and tribunals. But the ATO also is working on ways to resolve disputes before they get to the litigation stage.
Following another recommendation of the Inspector General of Taxation, the ATO is pilot-testing the use of specially trained ATO facilitation officers to conduct and process smaller, less complex disputes. The current pilot uses smaller and less complex indirect tax objections such as substantiation and penalty disputes. The goal is to use the alternative dispute resolution process as early in the dispute as possible and to promote continuous engagement throughout the process. In the future, an alternative dispute resolution process may be required before a tax case can proceed to a federal court.
Indeed, this more collaborative spirit will require a tremendous cultural shift for the ATO’s 24,000 staff. Many in the organization still maintain that, as matter of public policy, the ATO’s role is to enforce the tax law and raise revenue. They believe that resolving tax disputes through negotiation and settlement runs counter to its enforcement mandate.
The new thinking is that the ATO’s role is to administer that tax system in an accountable and efficient manner. By this view, the ATO should weigh potential litigation costs and risk in making decisions about disputes and work to reduce these costs and risks where possible.
Alternative dispute resolution is one way to do so. Most cases going through alternative dispute resolution are being resolved without litigation. Interestingly, the majority of these cases are being resolved in the taxpayer’s favor, while reported court decisions tend to favor the tax authority.
Budget cuts have affected Australia’s court system as well, and the courts are attempting to increase their efficiency as a result. A positive outcome is a new “fast-track” system for tax court proceedings, which aim to have all tax cases heard within 12 months of filing. Additionally, a tight statute of limitations and new guidelines for the drafting of submissions have been introduced, both of which could serve to reduce the length of time it takes to bring the case to completion.
When it comes to their tax planning, businesses should invest in high-quality advice to ensure their positions are supportable. They should also bear in mind that the majority of tax disputes are not over technical issues involving the interpretation of tax law. Rather, tax disputes tend to hinge on the taxpayer’s motive for entering a transaction and evidence supporting the underlying factual assumptions. I strongly recommend that businesses keep a “transaction bible” to document and support the business purpose underlying their transactions in real time and collating essential evidence. This puts the business in the best position to defend their motives quickly and comprehensively so they can resolve potential disputes before they can escalate further.
Use of external advisers with dedicated tax dispute resolution teams, like KPMG’s, is also advised. Tax dispute resolution specialists have the depth of knowledge, strategic experience and tax authority relationships that can help avoid the potential for tax disputes or bring them to a speedier and more favorable outcome.
As a Partner with KPMG Tax Law, and a partner with KPMG, Jeremy brings extensive commercial tax and legal experience. He previously worked as a barrister specializing in tax law, a solicitor in a large national firm, and GST Manager at Qantas Airways Limited. The combination of his negotiation skills, legal skills and advocacy, and commercial experience represents a unique skill set in the tax and legal field.
Jeremy acted as counsel in a range of tax cases involving income tax, CGT, superannuation, GST, excise and R&D. Jeremy is an external member to the Australian Taxation Office’s public ruling panel and a member of the Taxation Institute of Australia’s GST committee and the Tax Committee of the Law Council of Australia.
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