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Content WindowStanding Committee on Tax and Revenue - 24/09/2014 - Tax disputes
HASHMAN, Mr Edmund Ian John, Director, Claireleigh Holdings Pty Ltd; and Director, Claireleigh (Gosford) Pty Ltd
SPNOVIC, Mr Andre, Partner, Indirect Taxes, BDO Australia
Evidence from Mr Spnovic was taken via teleconference—
Committee met at 16:09.
CHAIR ( Mr Alexander ): Good afternoon. Thank you for attending. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Is there anything you wish to add about the capacity in which you appear today?
Mr Spnovic : The capacity in which I appear today is to support Ian Hashman and the Claireleigh entities of which he is a director, having been retained and involved as a tax adviser and representative in Ian and Claireleigh's dealings with the Australian Taxation Office.
CHAIR: Do either or both of you have an opening statement?
Mr Hashman : Yes. Would it be useful if I briefly summarised where we are? I gave a fairly lengthy submission to the committee, but it might be useful if I outlined that as briefly as I can.
CHAIR: Very good.
Mr Hashman : Andre, you can talk to the BDO type matters, and I will just go through the issues as I saw them affecting me. Is that acceptable?
Mr Spnovic : Sure.
Mr Hashman : Okay. As briefly as I can put a matter with a 10-year history: essentially there was Claireleigh Holdings. There are two companies over here with two separate matters, both handled by the same auditor. Claireleigh Holdings was subject to an audit in 2006, and in 2008 the matter was settled with the ATO. The ATO concluded—and I have a copy of their advice over here—that, very importantly, 'This matter is settled, and there is no evidence of fraud or evasion.' Essentially, Claireleigh Holdings is entitled to a refund of tax. That is what we understood the position to be. We also had received a number of emails from the ATO telling us that that was exactly the position. One of the emails said that the four-year rule applies and it appears we will need to credit the taxpayer with the amounts rising from the audit and so on. That was the end of the matter. The advice also said that there was very little else that we could do. It was not within our power to go back and amend our BASes or do anything. So really the matter was done and settled at that point, and I think that would have been the end of it. Everything that comes thereafter is really a matter for the tax office.
About three years later, in about 2011, an auditor got hold of this matter. I do not know what advice he had, but he came to the conclusion that there was something very seriously amiss over here and decided to look at it. Very importantly, for whatever reason—I have heard the ATO's excuse and do not accept it—he did not go back and look at the files. So, approaching this matter afresh, he looked at the objection report. I have a copy of it over here. It simply says, 'We will revise your BASes, and you will adjust the income tax.' But he read this very differently. He misread what was being said over there and, instead of saying the matter is out of time, done and dealt, the approach that he has taken—and again I am reading from his file note of 12 July 2012. You have just heard what the report says, and I am happy to table the actual documents. But his take was completely different, and he misconstrued it. He says, 'As per the 2007 objection report, when informed Claireleigh Holdings and Ian Hashman that they were required to report the amounts under partnership, which subsequently was not done, is the act of not reporting an amount when you have been informed you are liable to a sufficiently blameworthy act to constitute tax evasion allowing an unlimited review as the four-year period has expired.' On one hand, the tax office was saying, 'Done and dealt'. Then there is this guy coming along, not reading the files and misunderstanding what had been said—remarkably—and saying, 'Well, we told you to amend your BASs and to make all these arrangements.' None of this was true. Based on this misconception, he launches off into a lengthy investigation.
In early 2011, he went and registered a partnership but, very importantly, he did not tell us about it. And this is where that tax office came apart. They were conducting this audit by stealth, trying not to let us know what it was about. They thought they had a lay-down case of tax evasion. So, 'Yes, talk to me, but do not let us know what it is about.' And I think this is crucial: after months of investigation, they came out with a finding of tax evasion, and that was the first we had heard of it. At that stage, of course, we thought, 'This is just ridiculous.' In order to get to that point, the auditor firstly, as I say, misread the report. The report does not say that at all. In misreading it, he understood that the four-year rule applied, that the tax office was very much out of time and that he would need to go back. So he invented the story that, 'We are out of time. The matter is time-barred, but back in 2003 you must have known this was the case. You must have known that this was a partnership and, therefore, you must have known that you were paying tax in the wrong entity.' And we say, 'That is just so far-fetched that it is absolute nonsense. It does not make sense to anyone. If you have done land law at university, you would know that that is just rubbish.'
I asked the land titles office: 'Is this what you would have thought when you issued titles of this sort?' And they said: 'No, it does not make any sense to us.' So, firstly, there is this concocted story. Then, to spice up matters a little bit, the auditor then says, 'There is evidence of this. Look, you took this money and you went away and you used this and the objection of the court to make a successful application to Bankwest for a new development.' I was just amazed at that. I thought, 'Well, the first part is nonsense and the second part is just remarkable. If there was such an application, if there was this evidence as you say, show it to me; produce it. I am the director, I would have signed this. Bankwest would have known about it. They have been through their files, and no-one knows about this, so you are really just making all of this up, aren't you? This is tax evasion. This is not to be inferred lightly. You have no evidence, and you have simply made this up.'
This matter went all the way through the auditor, his technical group, his manager, his director and to the tax commissioner's independent delegate. And his job is my bastion—he has to look at these things and form an opinion. He has a discretion to exercise, and exercise properly as an administrative lawyer would understand the term—revert to relevant considerations and ignore bias and all of that stuff. Remarkably, he does not seem to have read that either. He does not ask: 'What is the background to this? How come there is no reference to the last 10 years of history?' Secondly, he simply picks up whatever the auditor says, together with this nonsense about 'you must have known', and he then says, 'Well, there is all this evidence.' So, again, I am mystified. This is a finding of tax evasion. And when the commissioner's independent delegate signed off and said, 'I have made a finding of tax evasion,' this becomes established as a fact. This is about the first time we hear about it. So BDO went back to them and said, 'This is remarkable. Let's discuss this.' And they said, 'No, we do not need to discuss this. This is a matter of fact.'
But, as we know, having read the tax office's files—and I diligently went through with a number of FOI processes and I got all the internal records going all the way back to 2006—I found that this was absolute nonsense. A finding is made based on evidence that does not exist. Now, as a lawyer, one takes words like 'evidence' with a great seriousness. If the model litigant, which is the ATO, says they have evidence, then I think people take great notice of that. But when I pushed them around and said, 'Well, produce it for me,' they cannot seem to produce it.
This matter seems to have gone all the way through. Garnishee orders for over a couple million dollars are issued. In the circumstances, if you are a property developer and all of your assets are cross-collateralised, this is dynamite. On the one hand, the ATO, having made this finding, could start to wind you up and sell your assets. Or, alternatively, if this got out to my lenders that this was a review event, they could start to say, 'We're not happy with you; start repaying the money.' Either way, there I am absolutely petrified with all of my assets on the line, this finding of tax evasion and, for months, being terrified that this could get out, and thinking, 'How the hell do I deal with this?' It seems like an impossible task to deal with.
Eventually, we went to mediation and the tax office kind of collapsed on this matter. When I pushed them to have another look at it, they had an internal review. The internal review came back with a letter dated 30 December 2013, and when I looked at it it seemed to me that, again, the tax office just does not seem to learn very much. On the one hand, they had conducted this investigation keeping everything terribly close to their chests—and that is where they went wrong—and then they have done this internal review without referring to me. The guy who did the review said, 'I cannot find a flaw in anything you are saying'—in terms of lack of evidence and nonsensical stories—'but it is all your fault because we came to you and we asked you for information and you did not give it to us and you did not talk to us.' And we say, 'Well, I do not think that is correct at all'. The indications are, even from the auditor's own files, that we were trying to cooperate. Yes, they sent us letters and we were trying to arrange meetings. And, notwithstanding the rather self-serving account in his files, it is pretty clear that we were trying to arrange meetings all the way through to the end, when he decided that he really did not need to meet with us and he had enough to proceed.
Secondly, I think that it does not show that there were delays coming from that side. We were explaining that the partner handling this matter before Andre was very ill. I did not know how ill, but he was diagnosed with cancer and he passed away in February. So we were trying to juggle all of this around. The reality is—for heaven's sake, as I have shown you—we had emails from the ATO dated 2008; their own internal files over there are showing that this matter was settled years ago. If the ATO is saying, 'You wouldn't talk to us and you wouldn't do it', it begs the question: why wouldn't we do that? If we had understood what you were about—and we were being understandably cautious—why would we not try and terminate the matter? 'Here is what you are looking for. Here are your emails. The matter is settled; go away.' Why wouldn't we do that? Why would BDO stretch this matter out and put me in a position where I could be potentially bankrupted, when we had all the information there? And the answer is quite simple: they did not tell us what they were looking for; they did not advise us. That is where the matter rests.
Andre may want to address BDO's point on this—I think BDO feel equally concerned that their efforts to intervene and sort this matter out were not adequately handled—if you think that is appropriate at this stage.
CHAIR: Thank you, Ian. Andre, would you like to add?
Mr Spnovic : Yes, I would. As a professional adviser, I must say this case did concern me. If I were to be asked for a description of what I see as the major problem with the way in which Ian's case was dealt with, I would say it was a classic case of the double jeopardy rule not being applied.
As Ian has recounted, there was a dispute that was ultimately resolved entirely in Ian's favour. Then, some three years after the event, the Australian Taxation Office, through another of its officers, attempted to re-agitate the dispute. As an adviser, your initial reaction when that happens is to say the tax office have basically got their wires crossed here. It is just a matter of trying to tell them, 'This matter has already been dealt with; there is no need to look into this any further.'
But, despite that initial response, all we got was what I would describe as an overzealous ATO auditor who seemed to just ignore everything that had happened previously. I think that approach—I would describe it as there being an issue with the tax office in terms of the left hand knowing what the right hand is doing. There was clearly a failure on that part. It is very unfortunate that in the circumstances the outcome of that failure was, almost, the financial decimation of Ian and his Claireleigh entities.
As an adviser, one of my other observations on this case relates to the way in which the ATO acted in the lead-up to the issue of a fraud and evasion determination. My experience as an adviser is that whenever the ATO get quite serious about pursuing a particular taxpayer they will usually commit those views and express those views in writing. In Ian's case, the first notice we got of the ATO being extremely serious and concerned about what had happened was notification that garnishee notices had been issued.
As an adviser you learn to roll with the punches, but that one caught me totally by surprise because there was absolutely no warning of that—and, given that my assumption was that we were just dealing with a case of trying to convince this ATO officer that the matter had already been resolved and that there was no need for any further investigation because the commissioner had already decided on it, it threw me. It was a very difficult situation. I had to deal with Ian at the time, and Ian was quite emotional. As you can see, he is very passionate about what has happened. And I share his passion on this because I would hate to see this happen to any other taxpayer again.
There are a couple of things from my point of view as an adviser. Ian has dealt with the tax office now, and he has not really walked away with fond memories of his dealings. As a registered tax agent, I still have to deal with the tax office every day. I do not make it my business to be overly critical of the tax office, given that I still have to work with them, but I would say that in Ian's case there has clearly been a fundamental failure of the tax office's own internal information and record-keeping systems. That failure seems to us—or certainly to me—to be quite a simple thing. I know the ATO is a large organisation and it employs a lot of people, but it also spends a lot of money on information and retaining data. For the ATO not to know or understand that a matter has already been looked at and resolved is quite concerning. Really, in Ian's case, given that it was ultimately resolved in Ian's favour, you need to look at the cost of that. Ian has incurred significant financial and personal cost as a consequence of getting a second resolution on essentially the same issue.
Mr Hashman : Andre, I would actually go further than you. I know you have referred to the auditor, but I would say there were significant failures at just about every level of the organisation over here—not just the auditor but all the backup teams all the way to the independent delegate. And then I would say that, when the matter was brought to mediation, again that was quite disappointing in the way it was handled.
Firstly, I have to say that the tax officer handling the mediation was exceptionally good, and I have to give him full credit. He picked up on the issues very quickly and got his head around them. But what I found from the ATO officers there was that they had dug in. They would not believe anything that was not in their files. They had only got the brief shortly before that—I was taking them through their own documentation—and they simply could not understand it. There was a whiteboard and we were drawing pictures of how the development was done, and they were intransigent about this. It was just remarkable.
The model litigant, I think, should come to a mediation with an open mind and ready to settle these matters, and I certainly did not find that. Ultimately there was a long discussion with somebody outside the room by telephone, between the ATO, and the decision was made by someone not in the room. Again, with model litigants the idea is that you go to a meeting and you are fully empowered to negotiate and settle the matter over there. I think it was pretty much touch and go that it would be settled. And ultimately, having shown the ATO its failings in root and branch, it was settled on the basis of, 'Well, here are the heads of agreement. Two things: you can't tell anybody about this and, secondly, you can't sue us.' And you think, 'Goodness me, what do I do over here?'
So I am pretty furious about this. I have trashed a year of my life. I have put a lot of effort into this. I have got you absolutely cold turkey, and if I do not agree to this then I can just walk out of here with no agreement and the garnishee orders are still standing out there. Maybe they will find their way through to my lenders, and then I will be in all sorts of trouble. So it is an invidious position.
The mediation could have just said: 'Sorry, we're wrong; we apologise. We'll stop the matter over here.' But this was an important part of it for them. It seems to me that, if the tax office has got a laydown case, it will take you to court. If it does not, it will take you to mediation and do it on this basis: 'You can't tell anyone and we'll settle it over here; otherwise, we've got unlimited resources'—and that was made clear to me at the mediation—'and we'll just keep on going. We've got barristers on tap who'll act for a third of what it'll cost you.'
So I was unhappy with the heads of agreement. Andre will tell you. I looked at him and said, 'I've just read the six points over here, and I think this leaves me plenty of room to do something.' Then I received a more formal document which was not necessarily following the heads of agreement, and I objected to that. I talked to the ATO officer handling it and I said, 'I'm not happy with this; it goes beyond what has been agreed.' He said, 'If you don't sign it, the matter will just go on.' So again: sign this or the garnishee orders will perhaps find their way into the wrong hands. What do we do in an agreement that has been obtained by something short of free will?
Where we are at the moment is that the ATO seem to have accepted all the mechanisms of what I am telling you about the lack of evidence and so on, but they are saying, 'Ah, yes, but we have a signed agreement from you and we will rely on that signed agreement.' And you say: 'Is this what it comes down to? When the ATO is confronted with clear, documented evidence of wrongdoing, it runs for cover and says, "We'll use our power to hush this up, and we've got unlimited resources."' That, to me, is unsatisfactory.
I am conscious of the time over here, so let me turn very quickly to the other matter. There were two issues running here. One was a Claireleigh Holdings matter. With Claireleigh Holdings, as we say, the ATO suspected something very serious, so I think they thought they were justified in cutting corners and perhaps making requests without explaining themselves and feeling that they were on a bit of a sure winner over here. So the main thing was to get me into a room, on oath, and get a few admissions and they had a done case.
In the sister matter to this, handled by the same auditor, we had more of a technical issue. This was a joint venture arrangement between the St Vincent de Paul Society and my company, Claireleigh (Gosford). I think BDO say that the same auditor was so tainted by his conclusions on the Holdings matter that he turned to this technical issue and perhaps did not give it as fair a hearing as he might have. So here was a technical argument where the tax office was arguing: 'With this document you've got, called a joint venture, you didn't have it registered with us, so we can construe it according to first principles as we like. Yes, it's been drafted by a senior partner of a major law firm in Sydney, and it's been vetted by a senior partner of BDO, but really there are two parties, St Vinnies and Claireleigh. And, while you call it a joint venture, it's not a joint venture. While Claireleigh paid GST on millions of dollars of sales, it's not a joint venture because Claireleigh was only a project manager. So, in paying that, Claireleigh did not own the land and therefore could not use the margin scheme, so thanks for the GST, but you're about $110,000 short.'
Again, I would have thought that commercially you would look at this and say: 'Well, okay, so what? You're telling me that Claireleigh is not an owner of the land, and we paid you millions when we shouldn't have because we were a project manager. I tell you what: why don't you give us back that money? What's a project management contract worth—$100,000 or $200,000? Fine, we'll just go to Vinnies. You give us back the GST and we'll give it to Vinnies. They'll pay it to you. They own the land and the margin scheme applies. You're going to get no more tax. What is the point of this?'
BDO call this the 'wash transaction'. The substance was that there was a tax liability; it was paid; and the tax office were going to get no more. Maybe they would get a few dollars in penalty payments for the wrong party having made the payment, or something of that sort, but really this was a technical issue and it did not need to be handled in a heavy-handed way. But no, the ATO came in and they lumped it together with the fraud or evasion matter. They did not tell us what it was about. They wanted to talk to somebody—me—on oath. Of course, I have been through company hearings under the Corporations Act. You know how those sorts of things always go and how the safeguards that any other jurisdiction provides—which I do not think were going to be provided here, and certainly not by an auditor who could not even read the audit reports properly.
Claireleigh Holdings did not need to be handled like this, and yet the same attitude applied. BDO tried so desperately to talk to them, and I know that there was no shortage of information being tendered in this matter over here. Yet, at the end of it, the appeals were disallowed and BDO were just aghast—this was absolutely impossible. They were disallowed because the appeals officers just would not return phone calls. They would make submissions. We would get 40 or 50 turgid pages from the ATO. BDO would have to reply with 40 or 50. It cost me something like $60,000 in total for something that could not have made the ATO more than a few thousand dollars in penalties. It cost me $60,000-plus, Andre? It would have cost them the same sort of money. The ATO would not listen and would not engage in any discussion.
We went to the AAT and a year later, just before the matter came before the AAT, the ATO withdrew and said, 'Why don't we have a judgment in favour of Claireleigh Gosford,' and the appeals are loud and full. You think, 'Why couldn't you have done this on day one?' The tax commissioner talks about engaging earlier people to save costs, but is this really the way to do it? Is this how they are building trust in the integrity of the tax office? Referring to evidence that does not exist and going through spurious, made-up stories to come to a result just does not build confidence in anything the ATO is doing.
The net result was: incredible stress for me, having to basically continue my business but put everything else on hold—we are talking a quarter of a million dollars or thereabouts in advisers' fees—putting aside my time, which I do not think is exactly worth nothing—for a couple of years with this constant threat to not only my current development but also just about everything that I have. Everything I have got, that I have worked for for 45 years, is on the line.
The ATO's response was to say, 'It's all your fault,' even though it was their game—they called the shots, they had the power to compel people to produce evidence or information—and even though everything they were asking for was already on their files. It had been there since 2006. There was nothing new that they wanted, which again caused confusion. When the ATO comes to you and says, 'Give us all this information,' and you think, 'Geez, you've already got that' and then they come to you and say, 'We want you to give us information for the last 10 years,' you have to think: 'That's unusual; I'm only supposed to keep records for four or five. What game are they playing over here? Let's be very careful about this.'
It was not in the least a happy experience. It is one that the ATO ought to be made to explain; they ought not to be allowed to just walk away from this on the basis that they have rung out some sort of agreement that, in my opinion, was obtained under duress. They think that the matter has now been settled; I just do not think this is a reasonable outcome.
Mr Spnovic : Ian, could I just jump in there? I just want to try to summarise what you said there. One of the really concerning aspects of Ian's case for me is that there is a big question mark surrounding the bona fide motivation behind the ATO auditing question. I am not sure what that motivation was. All I know is that a reasonable person looking at what happened would be scratching their head as to whether the motivation was anything other than lacking—it was not done in good faith. I do not know why. I can speculate—we can all speculate—on the reasons for that.
The real issue then becomes one of accountability. As an adviser, this is the issue that we have—that is, if there is some sort of accountability, a real accountability, that all ATO officers have then, if that is appropriately formulated, it is unlikely that situations such as the one that Ian has had to experience will happen again. In Ian's particular case the lack of accountability of the individual concerned is a concern. I think it should be of concern to the committee that you can have officers of the Australian Taxation Office, which is a delegation of the executive, exercising powers in circumstances where there is no real accountability, where it can be shown that the exercise of those powers has not been ideal and where it has been probably been motivated by bad faith.
Mr Hashman : Andre has already mentioned—his position is slightly different to mine—that he has got to deal with the ATO on a day-to-day basis. Yet to my surprise—and I have been around this sort of correspondence for a long time—a major accounting firm is writing to the ATO and saying that it considers the auditor's conduct to have been 'inept', 'capricious' and 'motivated by malice'. These are strong words. That is the level of the anxiety and concern that we have over here. I would be pleased to go through the correspondence and the documentation with anyone. Indeed, I requested for the ATO to do this on numerous occasions. I am pleased to see that the Treasurer's office is equally concerned, and I acknowledge the great assistance his office have given in trying to bring this matter forward for a discussion. I am very happy with the level of support that they have given over here but, unfortunately, the ATO do not quite see being accountable as part of their role.
CHAIR: Ian and Andre, thank you for sharing your lament, but I think we should commence with some questions. Thank you so much for coming and sharing this story.
Ms O'NEIL: Thank you very much for telling us your story, Ian. I can see how frustrating this has been for you and for how long you have been dealing with it. You have my deep sympathies there.
Mr Hashman : Thank you.
Ms O'NEIL: We are looking at the systemic issues—basically, how does the tax system resolve disputes and whether there are any changes to the system that we should be looking at. Just thinking about your experience, can you zoom up a bit and tell us, looking at the whole story, are there two or three areas where you think the biggest problems are, in terms of your feeling of not being fairly treated by the tax office?
Mr Hashman : Yes, I think so. This was an unusual situation, where I think the ATO felt that it was justified in cutting corners. I have been through other audits. Very recently there was an audit of my super fund. The ATO came in—I have seen this before—they give you a list of questions, you answer them, you have a discussion, and they go away. That is how it is properly treated. I think transparency and openness and integrity are very important to this process and typically we do see this. Andre, is that right? But this was a very unusual situation. I think it should be made absolutely essential that the ATO does go to people and it does deal with them openly. This was the cornerstone—
Ms O'NEIL: What would have had to have changed for you to feel that the treatment was fair? I understand there is an aberrant element to this, but what would have had to be in place to have caught this at an appropriate time?
Mr Hashman : When the ATO formed these odd ideas back in early 2011 and went about registering this partnership without telling anyone—using BDO's address as the registered office for this partnership, by the way. Instead of doing that, why not just come to BDO and say, 'These are our concerns', and put them in writing. We would have addressed them as we have addressed the super fund and the 2006 audit. We would have addressed it at that time. Equally, we would have addressed the issues to do with this very technical argument of whether Claireleigh Gosford was a joint venture. It is as simple as that. It is as simple as people behaving with some integrity, consideration and respect for the people on this side.
Mr Spnovic : Could I answer from a systemic point of view. You ask whether there is anything that the committee should consider. I would suggest consideration should be given to whether there might be alternative mechanisms available that could be implemented so as to short-circuit any disputes and to facilitate them being resolved more quickly.
If you look at Ian's case, part of the problem was a function of the way the objections and appeals process worked. At the moment our taxation system has a formal objections and appeals infrastructure that provides the mechanism for, essentially, taking a dispute between taxpayer and tax office on an assessment through another process to try to resolve an issue. If you look at the objections and appeals process, the one issue that came out in this case was the fact that, as a process, it is not cost effective and it is certainly not effective in that, in this case, there was no independence applied at that objections and appeals process in looking at the issues that Ian and Claireleigh Gosford had to face.
From a systemic point of view, having an objections and appeals process is great, but if that process is not transparent and is not truly independent—particularly in Ian's case where the objections officer seemed to merely toe the party line, if I can put it that way—it really does call into question the value of the objections and appeals process itself. To the extent that additional independence and transparency can be introduced into that process, that would provide greater confidence to taxpayers to engage in that process, knowing that it is transparent and that there will be an independent set of eyes and minds that will apply themselves to looking at a dispute between a taxpayer and the tax office.
Mr Hashman : I have seen suggestions about splitting the tax office between the administrative functions and the investigatory functions. I would say, 'That is not going to fix that'. To add to what Andre is saying, there ought to be a proper separation between the auditors and the appeals officers, because I have been to their files back to 2006 and I know—I have seen this—that in 2006 there was an audit report and when the auditor was told, 'Sorry, you've assessed the wrong party. You've got it wrong,' we then saw the appeals officer going to the auditors and saying, 'But what if you try this? What if we change this? What if you go and look at that?' It looks like they are having about six bites at the cherry and they are not coming back to us. Therefore, you do need the separation.
Mr TAYLOR: I am interested in pursuing this a little more. You said you need accountability, which makes sense. I have seen many examples of what you have just described, so I do not think you are on your own.
Mr Hashman : I am sure you are right.
Mr TAYLOR: My question is: what does separation and independence really mean? You say it would not work if it was just another division of the ATO. Can you expand on what you think independence has to be?
Mr Hashman : Again, this is not necessarily my area of expertise. I am just giving my ruminations based on my experience in business and investment banking and having looked at these files. I think what you really need is not just ATO officers who are one day wearing an auditor's hat and the next day wearing an appeal officer's hat, all in the same cosy team over there. I do not know about a physical separation, but perhaps you need other people with different perspectives coming in and taking a fresh look at what the auditors have done—people from outside, perhaps people from the professions who cast an eye over this, so you have a genuine—
Mr TAYLOR: Some kind of mediation?
Mr Hashman : As long as it is not the sort of mediation that I went through, which, thank God, turned out all right, but it had to turn out all right because it was so overwhelming. I think it should be mediation conducted more along open lines, perhaps with an independent, non-ATO mediator. Having said that, the tax office mediator was great. But I would have had a lot more confidence if it was somebody else who did not have to face these guys across the tea urn the next morning.
Mr TAYLOR: Yes. I have seen good mediators resolve this sort of dispute very quickly, so maybe that is part of it. I guess the follow-up question is: how much of what you saw do you think was driven by malice versus incompetence?
Mr Hashman : Certainly the Gosford matter, which was very technical, was tainted by the earlier approach. So I think there was malice in the sense that there was a preconception over here and it was not a positive one. But I think 'zealotry' may be a better term. I had the feeling that this was a great part of it: 'You got away with something and it's our job to make this stick. If we have to cut a few corners, that is us working for all taxpayers, buddy.'
Mr TAYLOR: And incompetence?
Mr Hashman : The model litigant rules do not really talk about the fundamental ability to read English, do they? If somebody looks at a document and comes up with something that is totally different and has no relationship to the words in it, 'incompetence' is a word that would spring to mind, yes. 'Ineptitude' is the word that BDO used. It is in just about every aspect of this that you look at—being unable to go back and look at your own jolly files and then telling me, 'Well, the auditor is excused because he couldn't get his hands on the files.' I thought, 'That's no excuse, for heaven's sake.'
I used to be a company inspector with the CAC years ago. The first thing you did was pull all the relevant information out and put it on the table. I could get it. I went to the FOI section and when they said, 'There's no information here,' I said, 'That's wrong—go and look again,' and they produced 178 pages. For the auditor not to be able to get that, for the auditor to come up with something so wrong for every step in the process between him and the independent delegates who failed, is this maladministration? There must be a stronger word for it than that.
CHAIR: Thank you for coming here today and giving evidence. I hope you feel you have had a good hearing. It has been instructive and instructional for us as we continue our work of refining the process. Have you got anything further you would like to add?
Mr Hashman : Yes. I appreciate that this committee has fairly broad terms of reference and you will be looking at this on a fairly macro level, but in any case I would be aghast if the ATO thought it was appropriate to sweep this matter under the carpet and say it has been dealt with on some basis or another. It is ongoing for me. As I think you can see, I have a number of other things going on, and yet this will continue to be central to my life.
I would like to think that it is not just a matter of driving down from Sydney to come and tattle on the ATO today but that this committee will find it possible to do something about this, to make reference to this matter and request that matters like this are specifically attended to, not just in a broad sense. I am surely not alone in this matter, and I appreciate what Angus over there says. There is a mechanism for dealing with matters of this sort, because this is not just a matter of a difference of opinion settled by mediation where both parties walk away thinking that they have had a bit of a win.
CHAIR: I absolutely appreciate where you are coming from and we will take that into consideration and see what can be done. Andre, do you have something else to add?
Mr Spnovic : I would like to thank you for the opportunity to assist and provide my thoughts as an adviser specifically on Ian's case. Ultimately, what I would commend to the committee is to really look that whatever mechanisms might be available to short-circuit disputes and resolve them early. Mediation is obviously one possibility, but I think there are probably a number of other possibilities as well. At the end of the day, I would like to think, given we live in a democratic Westminster system of government, that we are ultimately going to ensure that there is accountability. There must be an appropriate level of accountability by individuals who work for the tax office in extreme cases such as this, where something clearly has gone majorly wrong.
CHAIR: Accountability and recourse.
Mr Spnovic : Yes, I think recourse must go with accountability. But whether that recourse is in the form of compensation to taxpayers or in the form of some sort of sanction or other, I am not sure. I am very reluctant to see individuals or public servants penalised for simply doing their jobs, but ultimately I would like to think that they are accountable. If they do have a bee in their bonnet about something, in the back of their head they must always think: 'I have to approach this from the point of view that I'm doing a job. My job is to collect revenue that is owed to the taxpayer and I need to do that in a human way and in a way that exercises powers in good faith. If I don't do that, I need to know that there's going to be a sanction for me.' I would like to think that that is the case. As to what that sanction is, as I said, I have an open mind. I think that goes with the whole notion of accountability. There must be some sort of appropriate recourse or sanction.
Mr Hashman : Are you saying 'name and shame'? Is that what you are suggesting?
Mr Spnovic : I must say I am reluctant, personally, to name and shame. I really do not think public humiliation is the way to go here. I think we need to be professional about this. Most of the people who work for the tax office have tertiary educations and they are obviously intelligent people. I think there needs to be some accountability, but personally I am not in the name and shame camp.
CHAIR: Thank you both for your evidence today.
GLENN, Mr Richard, Deputy Ombudsman, Office of the Commonwealth Ombudsman
NEAVE, Mr Colin, Commonwealth Ombudsman, Office of the Commonwealth Ombudsman
SIARKIEWICZ, Ms Dorota, Director, Treasury and Postal Industry, Office of the Commonwealth Ombudsman
CHAIR: Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. Do you have an opening statement for the committee?
Mr Neave : Yes I do. Thank you very much for the opportunity to appear before you today. Further to our submission I would like to make some additional comments and to provide an overview of what my office is doing to improve complaint handling in government agencies. The ATO is a substantial source of complaints to my office. It remains the third most complained about agency behind Centrelink and Australia Post. This is not surprising given the size of the agency, the nature of its function, and the frequency of its contact with members of the public. My perspective on disputes is primarily based on complaints received by my office. Complainants are mostly individual taxpayers or small businesses who encounter a dispute with the ATO somewhere along the taxation journey—whether it be at the lodgement, audit, objection, review, debt collection and/or mitigation stages.
I think most people would agree that compelling anybody to pay more money—whether it is tax, superannuation, a parking ticket, or a speeding fine—can lead to disagreement. A disagreement only becomes a dispute when one party cannot live with the consequences of the disagreement and insists on a different outcome. The reason a dispute arises usually holds the key to the resolution. So, how do disagreements end up in disputes? Taxpayers and their agents have said these sorts of things to us:
The audit personnel keeps changing, which means I have to explain my situation each time. In one example staff changed three times.
Again, a quote:
T he auditor treats me like a tax cheat and trying to hide something. I do not kn ow what the ATO is looking for. I t is like a fishing trip, even though nothing is found , and the audit will continue until something is found. I lodged an objection which still has not been finalised. When the ATO asked for information , I had a short period in which to respond but it took them an unequal period of time to review my documents . M y tax agent told the ATO he would respond to the audit on my behalf , but the auditor keeps ringing me up insisting I provide information. Even though I have provided information to substantiate my position, the auditor will not change his view and seems intent on continuing on the same path. Regardless, I need someone to intervene.
So there are a series of quotes which are, incidentally, very much in line with what the previous witness said.
I note that others who appeared before the committee offered similar observations as well. The ATO's submission to the inquiry explains that
…a tax dispute occurs where a taxpayer disagrees with an opinion or decision of the ATO.
The comments that we receive from taxpayers tend to suggest that the seeds of dispute are often sown well before the audit decision is made. This seems to be supported by the ATO's complaint statistics provided in its submission, which show that in 2013-14 almost 57 per cent of complaints it received about audit decisions related to the conduct of the audit, rather than the outcome of the audit—43 per cent complained about the outcome. I note from the Hansard of your hearing in Melbourne, Mr Greco from the Institute of Public Accountants said:
In an ideal world tax disputes should not happen. The biggest problem is getting the right people to look at it early in the process. Once it progresses, generally more skilled people are involved and the matters are dealt with in a reasonable fashion.
This is also our experience.
Complainants tell us that whilst they can seek a review of the ATO's decision, the need for review could have been avoided if someone more senior had intervened allowing for a fair and reasonable consideration of the facts. Whilst it is pleasing to read in the ATO submission and dispute management plans that it has instigated strategies to achieving improved skills of auditors and objection case officers—including using a communication style that encourages open communication—I cannot emphasise enough that auditors need to listen to the issues because the disagreement may be a call for help, rather than an attempt to hide. Our experience with complaints management tells us that when communication breaks down, objectivity evaporates and generally terms like bullying and intimidation become part of the taxpayer's complaint. As reported in the ATO's 2012 and 2013 annual report, from 16.2 million returns lodged with the ATO, only 26,500 objections were received. Of the 675 cases actually lodged with a court or tribunal, only around 115 proceeded to a decision. Clearly, the ATO does get it right most of the time.
Complainants, particularly individuals and small business owners, who find themselves at the pointy end of the dispute process at the litigation and settlement stage have expressed concerns about what they perceive as a power imbalance or a heavy handed approach by the ATO. With limited resources and time, small business owners told us they felt pressured to agree to an offer of settlement during the proceedings and in some cases on the steps of the court or tribunal. Complainants sometimes tell us that they made attempts to resolve the dispute before it got to the court or the tribunal but found it difficult to negotiate with the ATO. They complained that the ATO did not respond to their offer of settlement, did not provide a suitable point of contact or did not respond to requests for a meeting. In short, complainants say that, once the dispute progresses to the litigation stage, the lines of communication seem to close.
In recent times the ATO has demonstrated a commitment to continuing to get it right more often. It has made much ground on integrating learning from complaints into its quality assurance mechanisms and product design, as demonstrated by the reduction in complaints and increase in compliments to the ATO. Right now on social media the ATO has received significant positive feedback and some not-so-positive feedback. I think the challenge remaining for the ATO then is to engage with taxpayers early before issues become disagreements and then disputes. Engage with taxpayers often, learn from the exchange, from the feedback and from complaints and, when a dispute arises, be prepared to identify opportunities to engage earlier in alternative dispute resolution and keep the lines of communication open.
My office is in the process of finalising an own-motion investigation into complaint handling in Australian government agencies, and I will have more to say about the ATO and other agencies in that report in the near future. Since the last time I met with the committee as part of the portfolio budget statements, the government announced the transfer of the tax complaint handling role from the Taxation Ombudsman, which is us, to the Inspector General of Taxation. The transfer requires changes to legislation of both agencies and, until such legislation is passed by parliament, the Taxation Ombudsman will continue to deal with complaints about the Australian Taxation Office. Thank you for the opportunity to appear today.
CHAIR: Thank you. I will kick it off. Does your office recommend that complainants seek compensation under the CDDA scheme? Does your office provide any comment to the ATO on the merits of an application?
Mr Neave : We certainly refer complainants who make contact with us with a claim which is not legally or otherwise compensable to the CDDA scheme. I think that, if asked by the ATO, we would be prepared to make a comment about any particular offer that the ATO made in order to compensate a person who made a claim under that process. We have a general monitoring role of the whole CDDA scheme for the public sector.
Mr VAN MANEN: Thank you for your opening statement and also for your submission. It has been an interesting inquiry, but I think there are some fairly common themes arising. My concern centres around the fact that there has been plenty of testimony that, on numerous occasions, the taxpayer in their dispute with the ATO finishes up on the doorstep of the Administrative Appeals Tribunal and the ATO concedes its case. Is the ATO just being pigheaded in pursuing the process to that point and then folding, for want of a better word? Doesn't that add enormous cost to the administration of the ATO—and we have had plenty of testimony that it comes at enormous cost to the taxpayer not just financially but through stress and other matters?
Mr Neave : We do not necessarily have a lot of exposure to those who find themselves in a situation where a settlement is offered at the last moment, but I really think some of the things I just said in the opening statement are relevant. It is really important in all organisations, whether or not it is the ATO or a government department, to have senior involvement very early in the process for decisions about how matters are handled. I had, in a way, the misfortune to be handling financial services complaints for about 15 years, and the same sort of problem arose constantly in relation to complaints about the provision of financial services, in particular in relation to banks: there was insufficient attention given by the most senior people to whatever the dispute might be early in the process.
In other words, in relation to these sorts of matters there needs to be what I would call a triage system. Very early in the piece, the cases which should receive the most attention with the objective of getting them settled quickly should be identified, and those within an organisation having the power to make a decision should be involved in the decision about whether or not that particular case should be dealt with in a particular way. At one level it is a matter of internal organisation for an office such as the tax office or a large financial institution to make sure that cases are brought to the attention of those who have the power to make a decision and that that decision is made promptly. It is, as you quite rightly point out, a cost saving in the end, because the amount of time which is spent once one gets into the realm of the AAT or any court process is just enormous. Summarising the case takes some very skilled minds, and that can be a very lengthy process as well. I think the point you make by implication or directly is a very important one, and we would be very supportive of that.
I think the other point, made by the previous witness about mediation, is a very important one too. There should be a flock of mediators who are directly involved in dealing with cases and who are available to deal with some of the more difficult cases fairly early in the process.
CHAIR: If you will excuse us, we have to suspend to attend a division. We will return as quickly as we are permitted.
Proceedings suspended from 17 : 08 to 17 : 12
CHAIR: We will resume—sorry about that.
Mr TAYLOR: Let me put a hypothesis to you. Here is a big organisation with deep pockets that has a general interest charge that is very high, so delay is a weapon that can be used and misused very easily, and generally to the advantage of the ATO. The improvements you have seen seem to me to be mechanisms that start to address that, like mediation with experts—and I have personally seen that work extremely well—but do they go far enough? Are we actually going to resolve this without perhaps looking at general interest charges when the ATO is causing the delay? Perhaps we could be thinking about a much more independent dispute mechanism within the ATO—and perhaps a number of other initiatives; I do not know what they are. My ultimate question is: are the initiatives that have been put in place by the ATO really going to address the underlying power imbalance problem that you identified?
Mr Neave : I have been the Ombudsman for the last two years only. The feeling that I have around the office talking to people who have been with the office a lot longer and have been dealing with tax disputes for a lot longer is that considerable improvements have been made. But, frankly, especially under the current leadership of the office, I think there is a cultural change program there which, in a way, I identify with. Most of my working life has been in the private sector, not the public sector; so the way in which the current leadership there is tackling some of these issues is very much in line with a 'customer service focus' series of cultural change programs which I think are very significant. The last time I gave evidence to this committee, I said that I thought that within an organisation like the ATO it is possible to build in review processes without setting up what could be quite an expensive external mechanism in addition to the rights of appeal to the AAT and to courts in due course as well.
My general feeling is to recommend that the ATO look at empowering those who are given a review process within the organisation in such a way as to make sure that they understand that they should be looking at things independently, rather than potentially picking up a position which they happen to know is the general ATO position. There may well be a possibility of exploring something along those lines. Whenever one develops different levels within organisations in order to deal with review processes, one has to do that with a certain amount of care and make sure there is a very clear understanding by those who are reviewing that they are there to review and that they are there to be able to act independently, with the support of the most senior membership of the organisation—that is, the commissioners, in the case of the ATO. That is how I would respond at this stage because I think adding at the moment external levels certainly may be something that could be examined, but I am not at all convinced about that.
Mr TAYLOR: What about internal? What about having a more independent internal dispute resolution capability?
Mr Neave : That was really what I was trying to say: that the people who are exercising those powers need to understand that they have the support of the commissioners in doing what they are doing and that they need to understand that they are to act independently of the rest of the organisation.
Mr TAYLOR: And how do you measure their performance?
Mr Neave : I think you can look at decisions which are made. In somewhat simplistic terms, in my previous position at the financial ombudsman we had a series of ombudsmen who were making decisions. We monitored their performance as to how many were made in favour of general insurers and how many were made in favour of complainants. It was really quite an interesting exercise to see how that worked out. You could fairly quickly over about a 12-month period understand who was coming from it from a totally independent, 'in the middle' position. So, there are management and other mechanisms which could be set up to achieve that. That is what I am saying.
Mr TAYLOR: Do you think the way that current general interest charge works gives too much of an incentive to the ATO just to keep procrastinating and asking for information?
Mr Neave : I would not have a particular view on that one. Anything that I said would be purely speculative, so I would prefer to let that one pass, thank you.
CHAIR: From an administrative law perspective, do you have any comment to make on officers from the Tax Council Network being involved in an initial decision and then also being involved in the review process?
Mr Neave : I am not absolutely aware of the practice of the office in that respect, and I do not think any of us would be, but as a matter of general principle it is very important to separate functions to ensure that procedural fairness is being afforded. I am not really sure about how that works in practice, but quite properly the general administrative law principle is that people need to be treated fairly, and if there is a general review process it then should be quite separate and independent.
Ms O'NEIL: Your submission is very judicious and raises a lot of really interesting points. I do not come away with a really clear sense of how fair or unfair you think the tax office system model for resolving disputes is as a whole. Given your vast experience and other government agencies you have observed, can you provide a comment on how serious you think the situation is?
Mr Neave : It is fair to say that fairness is our mantra. That is what I talk about within the office—that the job of the Ombudsman is to ensure that those who come to government departments and agencies in various capacities are treated fairly. As I was saying before, particularly over the last couple of years—which is my period of involvement as Ombudsman—I have formed the impression that, generally speaking, the tax office treats those who come to it fairly. There are notable examples, which we have referred to, where things have gone off the rails, but, generally speaking, when one considers the 16.5 million returns, which I have referred to before, and 25,000 cases which are subject to some sort of view, that is not a bad record overall. So the overall impression that we have in the office—and Dorota, who is directly involved with complaints, might have something to add on this—is that overall the tax office treats people fairly. They are certainly very responsive to us. If we are alerted to something going wrong, then we find that they respond very quickly to the Ombudsman. If you would like to add anything, Dorota, please feel free.
Ms Siarkiewicz : No, I think that is exactly right. You sometimes hear of individual cases—and individual stories can be quite persuasive—where cases have gone wrong, and sometimes relationships, which are ongoing relationships, between individuals and the tax office can go wrong. It becomes quite an adversarial situation, and they are the most difficult cases. We see the complaints. So people do not come to us with praise for the ATO or any other agency specifically. It was interesting to hear the previous witness actually praise an ATO officer. So you get that side sometimes. But what we see is when things do go wrong and some of those cases can be quite difficult. I do not know that it would be fair to judge the entire ATO on the basis of some of those most difficult cases. I think that happens with any agency, really. But I would echo the comment that our experience with the ATO—over the time, also not very long, that I have been involved with that role—has been that they are quite responsive and they are willing to take on feedback that we provide.
Ms O'NEIL: Part of the committee's review is considering whether the ATO should separate out its dispute resolution—in other words, to have a de novo hearing element to it for a fresh review that genuinely sits outside the ATO. Do you think that that is necessary, given what you see of dispute resolution in the office?
Mr Neave : I think there is always a good reason to make sure, as I was saying before, that those who are conducting the review are properly empowered. They need to understand that they can act independently and they need to understand that they will be backed by the most senior management within the office if they come up with a view that is different to a view which has been expressed by somebody else. That is going back to first principles of dispute resolution. There is training involved, too. It is a question of ethics which needs to come from the top of the organisation as well. If all that is done, then I think one could accommodate a review process, which already exists, but one could perhaps enhance it in such a way as to ensure that those taxpayers who are involved in that process get the very clear message that this person is acting independently. I am sure that could be done with the right mixture of cultural change and—
Ms O'NEIL: And maybe new processes.
Mr Neave : and training for the people. There are some people in the world and in organisations who are not actually suited to that sort of job. You really need to get those who can approach problems with an open mind and are prepared to listen to both sides and are seen to be acting fairly.
Mr VAN MANEN: That is great segue to my question about the level of experience of those people at the first point of contact is lower today.
Mr Neave : This is the problem with complaint handling which I have been wrestling with for the last 20 years. You really have to have that triage system in place. The most experienced people in an organisation are often the people who should be involved in dealing with complaints, but quite often it is the most junior people who are involved in complaints. I have been talking about this for a long time, and it would be really nice to achieve it, but there are all sorts of problems with things like pay rates, levels and all the rest of it in both the public sector and the private sector. It is experience with life. If you have very fine young people with terrific education and all the rest of it, but, unless they have seen both sides of the real world, they come up with a slant on something which is not particularly helpful for either party—the complainant or the institution.
CHAIR: One of the problems following on from that is that we have heard time and again that during a process the staff change and the taxpayer has to go back to square 1 and incur added costs that come from all sorts of areas.
Mr Neave : That is all about systems.
CHAIR: Isn't the case manager obliged, when there is a change that the incoming person is fully brought up to pace with the case they are taking over, so that the taxpayer does not have to pay for a delay that they did not cause? That would be central to fairness.
Mr Neave : That is right, but sometimes it is not possible to get that direct briefing but it is the records that are kept in the case management system which are essential. The way in which training is given to those who are case managers as how to summarise what might have been said previously or what might be in the paperwork is essential for a good case management system. I agree with you entirely that there is nothing more frustrating. Like all of us, my personal banker changes on a regular basis and disappears and they have no idea what I am there for the next time you go.
CHAIR: Could we talk about this later?
Mr TAYLOR: I am really interested in the idea of senior people handling disputes. I have seen it work. I note that they are using former judges—right through to High Court judges—to resolve disputes. That is a new development. When you look at traditional dispute resolution within the ATO, I assume very senior people are not used. Is that right?
Mr Neave : Not that I am aware of. No.
Mr TAYLOR: Do you think that would make a big difference?
Mr Neave : I think having people with the right skills and experience involved early in getting to the bottom of what the dispute is really all about is essential. The people who have more experience with life are the ones who are going to be able to get on top of that quicker.
CHAIR: I have one more issue regarding fairness: during the course of an audit, if mistakes are discovered—where a taxpayer has paid too much tax—are they taken into account?
Mr Neave : They certainly should be, but I am not really aware of—
CHAIR: I have asked a number of people this question, but I have not got an answer yet.
Mr Neave : The commissioner is probably the only one who knows.
CHAIR: We have heard time and again that when they don't find something, they go onto something else or go back further and they seem intent on getting the taxpayer. There would be any number of cases where a taxpayer had not made their full claim for deductions but discovers them on examination and to be fair we are wanting taxpayers to pay the right amount of tax. To me it should be that if a mistake has been made in favour of the ATO that should be addressed at that time. That would also place the ATO in a position of being able to advertise that it is concerned with fairness.
Mr Neave : I agree entirely. I would be very disappointed if that did not happen already, because from the fairness point of view and an ethical point of view it would seem to me to be good for the government not to benefit from an error which involves a taxpayer paying too much tax. That is effectively what it is. I would be very supportive of that recommendation.
CHAIR: Thank you very much for giving of your time and your evidence. I will declare this meeting closed.
Committee adjourned at 17:31.