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Standing Committee on Tax and Revenue
(House of Reps-Monday, 18 August 2014)
Mr VAN MANEN
CHAIR (Mr Alexander)
Mr VAN MANEN
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Content WindowStanding Committee on Tax and Revenue - 18/08/2014 - Tax disputes
BERSTEN, Mr Michael, Partner, PricewaterhouseCoopers
SULLIVAN, Mrs Judy, Partner, PricewaterhouseCoopers
CHAIR: Welcome. 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?
Mrs Sullivan : We are here today representing PricewaterhouseCoopers and both of us are tax partners. We are both also legal practitioners within that practice. We have provided some background in our submission which describes the work that we do to assist all types of clients against the spectrum of text disputes. We are engaged from initial inquiries and audits and reviews right through to objections and also AAT, Federal Court and High Court litigation. Very few tax disputes that we see progress through to litigation. Some reviews and audits result in no adjustments. Others are settled. We have conducted alternative dispute resolution such as mediations and early neutral evaluations with the Taxation Office, but the majority of settlements that we participate in occur as a result of direct negotiations without the need for third-party intervention.
The relationship between taxpayers, the ATO and their advisors is the key to early resolution of tax disputes. That involves two-way transparency and early engagement on what the dispute is about and what the ATO's concerns actually are. Taxpayers are ultimately after certainty. They are required to observe the law, but the tax law and its application can be complex. It is in everyone's interests for the ATO to put the cards on the table as to what the dispute is about so both sides can agree what additional information is both relevant and required and how to approach any areas of uncertainty. In most cases that we are involved in, taxpayers have sought external advice in relation to the transactions under review.
We work very closely with the senior levels of the ATO and with Treasury through various consultation groups. We are active participants in the ATO's Dispute Resolution Working Group. A lot has been done and achieved, and the messages from the commissioner and senior officers within the ATO regarding early engagement and resolution are clear and are welcomed.
But, at the coalface of tax disputes, while there are many examples of good relationships and effective audits, there is also an observed lack of consistency. We have tried to set out several key recommendations, which in fact echo the clear messages from the senior levels within the tax office.
We appreciate that the focus of today's discussion is likely to be around individuals and small business, given the inspector-general's separate report, but there are many generic aspects to tax disputes which cross over all areas. Further, we have made some recommendations regarding structural separation within the tax office. We are happy to discuss any aspect of our submission which would assist.
CHAIR: In paragraph 93 of your submission you reject the comments by the Commissioner of Taxation that tax advisers tell their clients not to cooperate with the ATO audits. Would you elaborate on that.
Mr Bersten : This is a statement that seems to have been repeatedly made over many years as if it is the truth by the tax office and different generations of taxpayers. It is simply not a well-founded or well-supported claim that, generically, that is what tax advisers or legal advisers do with their clients, so we continue to be surprised by that statement. It seems to us that, if it is put on a general basis, it is almost a form of cultural baggage or something that goes with the tax office that they ought to try and release from their grip and look to see what advisers generally do and really try to do. Most advisers are trying to help their taxpayers understand what their obligations are. If they are under investigation by the tax office or are involved in some dispute, the tax adviser is trying to explain to their clients what the issues are, get to the bottom of whether or not they have a good case and figure out how to get some certainty for their client and how the client can get out of their problems. It is not therefore in your clients' interests to aggravate the tax office to create further disputation or further inquiry; in fact, rather the opposite. It is actually in the best interests of your clients as an adviser to try to work out what the problem is and solve it rather than to aggravate the commissioner by the tactics that are sometimes alleged—like the ones you just mentioned and which we think have no foundation.
CHAIR: We did have comment last week that sometimes in these early stages with juniors that there is not an attempt to resolve the issue but more to gather more ammunition against the taxpayer. So there was some experience to that end.
Mrs Sullivan : I think it all comes down to the fact that the tax office has to understand what the case is and then also understand what the dispute is about. The problem stems from the fact that they are trying to make broad-ranging inquiries without actually trying to limit the potential areas of inquiry that they could have. The problem seems to stem from the fact that when they ask very broad-ranging, general inquiries in order to make sure that everything is still on the table, the taxpayer is very reluctant to provide a lot of information without actually hearing, 'What is the problem?' There is no harm in saying, 'This is the area we are interested in and reserve the right to come back and look at other things.' In the absence of saying, 'Why is this required?' then that becomes a problem, and there is intransigence because taxpayers do not want to voluntarily give a wide raft of information which could potentially open up other areas of inquiry which makes the dispute widen. As tax advisers, we are trying to narrow it down to figure out what it is we are fighting about and have a very small channel to deal with that issue.
Mr Bersten : When we speak to the senior levels at the tax office, they will agree with us and say: 'Resources are only allocated to undertake reviews and audits with a specific purpose. We only want those reviewers or auditors to actually go after what they are meant to go after. We have done all this work to identify what the risk is.' There is some hypothesis that they are trying to test. They would agree with us: 'Yes, we want to focus this.' So we are surprised when we see our clients having the exact opposite experience, sometimes; I would not say all the time.
A key theme of what we are putting to this committee is inconsistency: we see the good and we see the not so good. But when it is done well by the tax office, they are very focused, they know what they are after, they explain why they are after it and then there is a very adult and constructive dialogue between the tax office and taxpayers about what they need. That does sometimes happen. The issue which I think your question goes to is when that does not happen and that is probably contrary to what we think the expectations are at the senior level of the tax office.
Mr TAYLOR: This is a terrific document that you have submitted. I think it is absolutely fantastic and I really appreciate the hard work you put into it. Is your recommendation that there should be a formal process of laying out what that hypothesis is, that the ATO should formally say, 'This is our hypothesis and this is the information that we are gathering to test that hypothesis'?
Mr Bersten : When we are dealing with what the ATO used to call the large business and international area or now PGI—it is hard to keep up with all their abbreviations—the normal process is that when an audit commences, the tax office does give the taxpayer a plan and some idea of what it is that is actually being investigated. That is the theory. The reality is that you actually do not have much idea of what the real hypothesis is at the beginning. But that is what the intent of that process is said to be.
We think that that is probably the high-water mark of when the ATO do this well, that at least they give you a plan and some idea of what they are going after. We would encourage that to go further to be much more specific. We do not understand what it is that could be negative to the interests of the community or the tax office by being more detailed and explicit, and saying, 'What we're after are A, B and C, and if we know that we can then work out whether or not this is a problem and about this kind of problem.' We would like to see that broad logic at all levels of interaction with taxpayers in terms of small business and individuals as much as for large business. A formal process could be desirable.
Mr TAYLOR: The risk is of course that they just lay out 100 hypotheses and then go fishing.
Mrs Sullivan : Yes and see if one sticks, possibly.
Mr Bersten : That would be a theoretical risk but really the ATO ought to know even before it starts the process what it is looking for. I would have thought they would be wasting resources and exposed to massive criticism if they had a scattergun approach which they documented. I think this would have the opposite impact, which would make them focus on stuff they are really interested in and they have a legitimate reason to inquire about.
Mrs Sullivan : When you are talking about a formal process, one of the issues that comes through during the audits is that nothing gets decided until it is put in writing and then presented to the taxpayer. So you do not get the chance to talk through the issues. And there is a risk, if you are putting in a formal process, that that would be interpreted as putting something in writing and again you have the issue that maybe you do not know what you are fighting about until that has been communicated in writing. By that stage, they almost have a view on what it is. So what you need to do is not formalise the process with a paper war; you need to formalise an engagement requirement so that at a stage after the audit has commenced there is a very clear understanding of stage 1, this is what we are looking at, engage on that, describe the information that might be required and then go from there as a staged process. The more formal the processes the more risk there is that things have to go into writing and that becomes a bit more of an intransigence problem.
Mr TAYLOR: But we still have to go to those hypotheses out there, right?
Mrs Sullivan : It would be very welcome, yes.
Mr TAYLOR: To turn to another part of your proposal, which is your proposed change to the internal ATO structure, which I think is fundamental to what you are putting forward here, I am a little puzzled by—maybe it is in there but I could not find it—where the review and dispute resolution activities reside now, under which commissioners. I am looking at your chart in appendix 1.
Mrs Sullivan : At the moment, if you have a look at the chart in appendix 1, currently the review and dispute resolution sits under the law design and practice group, so under the green box. That currently also has the Tax Counsel Network and RDR. That part of the review and dispute resolution therefore sits on both sides of the fence, if you like.
Mr Bersten : We are not always that clear ourselves. I think it is because the ATO is in transition in building its capacity. You will find that different business lines of the tax office might have different arrangements, with the ultimate sense, as Judy says, that they are reporting in the law area, but they may be co-located with a compliance area—that is, the people who do the audit. We do not walk into the tax office and know who is sitting next to whom at their workstations, but there is not a very clear sense of practical delineation, although I think an ultimate sense we understand the law area is the reporting line. If you are dealing with the large PGI area, it is much clearer now that that is reporting through to their really creative review and dispute resolution team. Sorry that is cloudy. I think it is because it is a bit transitional in some parts and it is not all that clear to us, when you get down to exact examples in different business lines, exactly how it works.
Mr TAYLOR: If I understand it correctly, though, you are proposing that that review and dispute resolution group would conduct independent reviews prior to the objection phase and that would be done independent of the law design and practice group.
Mrs Sullivan : Yes.
Mr Bersten : Yes and that is prior to assessment. So we would see that the right of a taxpayer where they would have to seek an independent review after a position paper is issued and before assessment, those independent reviews would be conducted by a separate area, that is correct.
Mrs Sullivan : What we are suggesting here is that the review and dispute resolution area currently does conduct the independent reviews, but it is reporting through a line which is the same sort of line where Tax Counsel Network and the senior technical officers are concerned. So there is a bit of an unclear delineation between the two. The one thing we are really looking at doing is having a strong appeals review area which is quite forward-looking, to have a look at the rule of law—is this how it should be done?—with a view to saying, is this a matter which ultimately has a litigation prospect, versus is this is the way that the tax office wants to administer the law? It is a slightly different point.
Mr TAYLOR: I understand. So that new second commissioner then, how would you measure their performance?
Mr Bersten : Their performance would be differently measured from other parts of the tax office. We see the role of the second commissioner ultimately to be the guardian of the rule of law in respect of disputes and reviews.
Mr TAYLOR: Justice and fairness?
Mr Bersten : Justice and fairness, those kinds of values. Ultimately that can be measured in a number of ways. One might be what happens in terms of their procedures and outcomes which contribute to that, but I think there is also a sense of community confidence in the tax office, in the fairness of how the tax office deals with disputes and reviews. That is probably the ultimate criteria.
Mr TAYLOR: But you would not propose having that commissioner—I do not know whether you would still call them 'commissioner' if you do this—reporting direct to the minister, that is, separate from the ATO?
Mr Bersten : We are not recommending that kind of change, no. We see logic in there being a single commissioner who is independent and accountable in the current methods that are prescribed by law.
Mrs Sullivan : To be clear, this is not a separate agency; it is the creation of a new second commissioner role to take out the review and dispute resolution area from where it currently sits, but those four, now, second commissioners would still be reporting to the single Commissioner of Taxation.
Mr TAYLOR: How confident are you that that move, along with some of your other recommendations will go a long way to addressing the problems you see?
Mr Bersten : We are confident that the best solution—we have had regard to the structural arrangements in other countries. We did not outline our research, knowledge and experience for that but we see similar arrangements in a number of other countries and we have consulted with colleagues in those countries, such as the United States, to see an arrangement such as the IRS has with its appeals division. We are confident that based on the feedback we have received, that is the strength of the US system where they have the balance right by having a separate legally defined repeals area but with in the IRS. We think that gets the balance right in terms of taxpayers and the community.
Mr TAYLOR: You do not worry that having responsibility the litigation also means that they become a defective collection agency themselves?
Mr Bersten : That has not been the experience we have seen. So we are comfortable that the practical experience over many years has been one of accomplishing the objectives and principles which we think ought to be adopted. We think that that provides a good basis for that model. The alternative of the separate agency is not one we could find anywhere in any credible comparative situation and we can see a lot of downsides and risks that it would be doomed to almost immediate failure. We could go into why but essentially it would not have the critical mass and it would not have the influence and the ability to engage within the ATO to get everybody focused on trying to get the rule of law and the best outcomes in a balanced way. We think if it is a separate agency it will fail very quickly. Despite we understand the good intent behind that suggestion, we just do not think it could practically work.
Mr VAN MANEN: A key component of that would be the experience of the people you put into that, would it not? And would it also be firewalled from the other sections of the ATO, so you genuinely try to obtain an independent review of the facts as they are put before them?
Mr Bersten : Judy, you may want to comment on the IRS and how it works. We do think that some form of structural firewall is appropriate. We also absolutely support the need for high-calibre people to be in that area. To be honest, in the whole of the tax office you want high-calibre people.
Mr VAN MANEN: We heard in previous testimony today, particularly for the small to medium sector that big business are getting the benefit of highly qualified and highly experienced ATO officers but at the small to medium end that is much more hit and miss in terms of the experience and consequently some of the issues which arise in the small to medium sector are a direct result of the lack of experience of those ATO officers.
Mr Bersten : For this committee I think it will be an ongoing issue to focus on the capability of the ATO and building its capability in many different areas. This will not just be for this inquiry; I think it will be from many inquiries. As an issue, I am sure the commissioner himself would have high aspirations for getting the right capability to match the needs of the organisation and the community. In the review and dispute resolution area there would be high minimum standards required—I will put it that way—just as there would be within other parts of the tax office. You would need the people leading it to have very strong credentials in law and other relevant disciplines to be able to perform their jobs.
Mrs Sullivan : Can I just go back to your point in relation to the technical expertise area. One of the main things that you would probably be hearing through this inquiry is the inability to engage on technical issues, particularly during the course of smaller-area audits. That is because the ATO auditors effectively have a very unthankful job of trying to understand a whole lot of areas. So they necessarily need to call on the technical input from the Tax Council Network or other technical experts within the tax office.
A lot of the problems that you have, especially in those smaller areas is because of the lack of transparency or engagement with the people who are making the technical decisions. A lot of our submission goes to that. We need to have those people brought within the conversation so that you do not have Chinese whispers type of approach to an audit, which gets incredibly frustrating. That actually steers a lot of the audits into lengthy disputes or emotional problems because there is that lack of engagement.
Mr VAN MANEN: Isn't that also made worse by the fact that a lot of the audits consist of the backward and forward of letters and requests for information rather than actually sitting down and having a face-to-face meeting in the first place to try and work the issue out?
Mr Bersten : I think it is important to keep several ideas in one's mind at the same time. It is important that there be early engagement with taxpayers by the tax office, because that relationship, as Judy mentioned in her opening remarks, will probably be the gross determinant of success or failure in terms of the taxpayer experience. If there is early engagement, where there is open and honest discussion of what the issues are and what the tax office needs, and the tax office understands the taxpayer's perspective, this will shorten audits and confine the areas of information required and will help the ATO get to the right answers and the evidence it needs much more quickly. We are great supporters of early engagement.
The second idea to keep in our heads, as Judy says, is to ensure that there is appropriate transparency for taxpayers of the internal discussions within the tax office so that taxpayers can be confident that when they are dealing with people they understand exactly what is being said to them, who is saying it and why it is being said. Equally, the third thing to keep in one's mind is that there are times in the system where taxpayers really do need to deal with someone who comes to the situation independently and with an objective mindset.
Those three concepts of early engagement, transparency and independence are three principles we hold very dear and we think are important parts of the success of this area in the system.
Mr VAN MANEN: Is there any particular reason why—if an audit officer is seeking additional information from a technical perspective for somebody higher up in the tax office with more technical expertise—when that technical officer provides the information back to the audit officer, the taxpayer's advisors or accountants cannot be copied into that correspondence for information-flow purposes?
Mrs Sullivan : I am not sure that that would assist anything, because it is going to become a question of not wanting to write things down for fear that they are then going to be provided to a taxpayer. I think it is all about line of sight on decision makers and being able to present the case—understanding what the issue is about—to those decision makers. There is, as I said before, a bit of Chinese whispers which tends to happen. An information request will be made for the purpose of satisfying somebody without the rest of the—
Mr VAN MANEN: Isn't the best outcome for everybody to fully understand what each party's position is by having it documented in writing? Going back to Angus's earlier question, you are lodging a tax return. That is processed electronically. So that is what will trip the various risk measures that have been set up to identify a certain type of business in a certain category et cetera. So the tax office should have, from the outset, based on the information that has been provided, a very clear picture of what has resulted in that business stepping outside of their risk-management parameters.
Mrs Sullivan : Yes. There are two aspects to that. The first one is that it could be as wide as 'We don't like this particular transaction, we don't like the deduction, we don't like something else,' but you need to then properly engage and say, 'What are the technical issues which you need to actually work through?' because that flavours what you need to provide by way of the evidence.
Mr VAN MANEN: I think the ATO are going back to a taxpayer or taxpayer adviser and saying, 'We don't like this particular transaction.' That is not a very broad request. Our concern is about this transaction—
Mrs Sullivan : Yes, and it would be nice if that were actually what happened.
Mr VAN MANEN: so what additional information do we need to clarify that issue in relation to that particular transaction? You do not need this much information; what you need is what is specific to that.
Mr Bersten : I think we would agree with you that focus is key and getting that clearly documented and communicated to the taxpayer would be of great assistance. So we definitely support that. I think where we would be a little cautious is not making the requirements of the tax office overly bureaucratic and draining on their resources or doing it in a way that would discourage them from being open and honest in their discussions. One of the things we as taxpayers also need to know is the ATO view of the technical issue in a transaction. The difficulty is sometimes about timing; the taxpayer may not know that until the very end of the audit process, whereas it may be to the great advantage of everybody to get that on the table much more quickly.
CHAIR: A previous witness today talked about handling a client's audit on GST and the GST auditor seeing something with regard to income tax. There were two concerns. One was that this same group, which may not have had technical expertise in income tax, started to audit the income tax. It showed that an incident like that breeds in the taxpaying community, when these stories spread, an idea why you would not go in with full information and would only give what is necessary, at the same time asking the ATO to be more targeted and specific rather than going on fishing expeditions. That would make it a better direction for the ATO and have a greater level of trust in knowing we only have to deal with this. It is perception of the taxpayer that leads us here to whether we should be having a fully independent review process or a hybrid.
Mrs Sullivan : I think the bottom line is that no taxpayer likes being audited and they want to get it done as quickly as possible; so, as part of that process, you only provide what you absolutely have to provide. That is the general mindset of all taxpayers, so you do need to get that level of confidence that it will not be extended into a whole lot of other areas. I think that sort of approach is also escalated when the formal powers are being used—264 notices and things like that—because they have sanctions for non-compliance. Individual and small business taxpayers especially are treated extremely seriously in what is effectively a breach of normal powers; it is a statutory right to overcome what is otherwise not possible. With those sorts of things, if you are getting hit with a formal notice, you are not going to be feeling very generous in relation to providing additional information. What is more, you must comply formally with the terms of the notice. It almost has a reverse effect of trying to close down the actual information flow because of the formality of the powers being used.
CHAIR: One interesting piece of evidence earlier today was about the event where a taxpayer has to bear the burden of penalty interest during the process. There was often a demand by the ATO to produce records within 30 or 60 days, and yet they would be another six to nine months getting back, which is running the clock on the meter. Has any thought ever been given to stopping the clock while the tax department is getting back to you?
Mr Bersten : Part of our submission relates to this topic. It could be extended to the situation you have just talked about. In the submission we talk about the point that, if the taxpayer's position is seen as reasonable, the commissioner ought to stop the clock pending the determination of any dispute. It seems to us that that is very reasonable. The situation you are talking about would currently be dealt with on the basis of them saying, 'If we've taken an unduly process, we'll remit interest at the end.'
Mrs Sullivan : Like a 30-day nothing-happening period or something like that.
Mr Bersten : They would look at the overall term of the review. Has their been undue delay by the tax office? That would be under their normal policy. The doubt and ambiguity in this is how long is too long on the ATO's side. From a taxpayer point of view, it seems to be a discretion that resides with the commissioner; there is no clear standard. How long is appropriate? I would think that, at least for individuals and small business, it would be within the wit of the tax office to think about publishing some standards of the expected rules of thumb—at least in those markets, because you are probably dealing with more routine and less complicated situations—for how long it would be reasonable for the commissioner to consider, for example, documentation provided by a taxpayer, at leas for the purposes of interest charges. So there is some sense that the taxpayer knows they are not waiting for nine months or some uncertain period, knowing that interest is racking up and not knowing what is going to happen until it is all over.
Mrs Sullivan : As a general comment, it is a huge pressure point for taxpayers especially when you are talking about your SIC rate being three per cent above your bank bill rate and compounding daily. That is the generous one. The penalty one—the GIC—rate is seven per cent above, and that is the one that kicks in once you get an assessment and do not pay it by the due date. It does come down a bit if you pay 50 per cent, but the actual cost of holding the line for a taxpayer, because of those interest amounts, is absolutely enormous, especially as you get toward the large end of town. But this is something for any taxpayer. It has an extraordinary effect as you go forward.
Mr Bersten : The policy behind the imposition of interest in the law, which is actually reflected in many countries—it is not just Australia—is designed to put a price on taxpayers and their cooperation with revenue authorities. It is to say, 'The longer you take, the longer it's going to cost you.' The problem we have here is that it is very general. The 95 per cent of taxpayers are trying to do the right thing, and that is the statement the current commissioner has been making. For the five per cent who are not doing the right thing, we are getting a rule which is defined around the five per cent, not the 95 per cent. I think the administration of this could benefit from being a lot clearer with much better standards for how long is long enough, too long and so forth—probably on both sides. Right now there are not any real standards on the time and how the remission of interests will be applied. All you know is up to assessment you pay bank bill plus three per cent; after assessment you pay bank bill plus seven per cent.
Mr TAYLOR: Are there any countries you are aware of that have stop-the-clock provisions?
Mr Bersten : Off the top of my head I cannot give you an answer to that question. Sorry.
Mr VAN MANEN: In relation to fixing time frames for dealing with objections or disputes, why do you think private tax practitioners see the need to do that yet the ATO seems to be resistant to doing that and has also made the comment that it could support that through the alternative dispute resolution process? Do you see the ATO at this point making any effort to try to reduce those times to get disputes more readily resolved? Or is it hit and miss?
Mr Bersten : I think our experience is probably reflective of the kind of client base we have. It is dealing with larger disputes which involve the big end of town and high-wealth individuals. We are not dealing with what I would call many of the large number of smaller cases that may be out there. To some degree we recognise that we do not want the tax office to hurry too much if it is going to result in them making a poor decision which would be negative to our clients based on a complex situation. So we do not wish to rush them; we would like them to take a good amount of time to come to a good decision.
Mr VAN MANEN: That would be more relevant to the big end of town. For a small business in a small industrial estate somewhere in Beenleigh, that is going to be less of an issue. And then you want that resolved in a timely manner.
Mr Bersten : That is what I wanted to get to. When you are dealing with the class of case where it might be a more routine type of situation, I think there is much more scope for setting some standards with appropriate time frames. That is not to say the commissioner is without standards; the commissioner does have standards. I just do not have those with me now. I think they may be associated with the taxpayer's charter of how long things take and this kind of thing. So it is not as if the commissioner is not attempting to set standards. I think perhaps the question is whether things just do take too long and whether there is adequate communication with taxpayers as to why they are taking so long. Certainly refreshing the community's understanding of existing standards and strengthening communication about them would at least be a good start.
Mrs Sullivan : And I think there are certain matters which take a lot longer than they should in that small area. There are things like residency questions and small business concessions which can go for a number of years, and these sorts of things should really be able to be resolved a lot quicker, but it seems to be they want more and more information. A lot of these things are based on the facts, but there must be a point at which you need to make a decision and then move on, and those are the sorts of things where there is no clear answer. Employee contractors is a minefield. As you know, there are a whole lot of areas where these sorts of issues do not have the bright-line test. Capital revenue is another. There seems to be an approach whereby it is information gathering versus making a decision on what the actual outcome is going to be, which takes quite a bit of time.
Mr VAN MANEN: And in some of those cases is the ATO somewhat trigger happy with issuing assessment notices to trigger the higher interest charge?
Mrs Sullivan : I would not necessarily say trigger happy, but I think they come with the view that there is a problem and you have to convince them there is not a problem. I think that is pretty much the way it goes.
Mr Bersten : It is not my belief that tax officers abuse the assessment process just to trigger the higher interest charge.
Mrs Sullivan : Oh, no, sorry. If that was the suggestion, then no.
Mr Bersten : I think there is an associated question which you may come to which is the imposition of culpability penalties, and that is a topic we do have some comments on. We have been concerned about the inappropriate application of those penalties in some cases and have observed that the Inspector General of Taxation has recently put out a very detailed report on that topic as well. For us it is not only the interest but also the culpability penalty that are issues. Often the pressure is really applied through the penalty. The interest is definitely 25, 50 or whatever.
Mrs Sullivan : And it goes to the point about fair treatment and respect. A penalty can be a very serious matter, and the range of penalties available to the commission is quite high. One other thing I wanted to mention is that, as I said to start with, taxpayers really want certainty in relation to their position, so we are observing from time to time that a clearance letter may be provided to a taxpayer who has been under an audit or review and then has subsequently been overturned. Those sorts of things come with an explanation that they made a mistake and need to look into it again, but taxpayers should be entitled to certainty following a review or an audit.
Mr VAN MANEN: Part of the difficulty with that is that, in the event that the taxpayer is in the right and the ATO is in the wrong, there is no recompense for the taxpayer. The taxpayer is always the one out of pocket. They either get the culpability loading or they get the interest charge or whatever. There is very little back the other way with the tax office refunding money if they are in the wrong in the first place.
Mr Bersten : That is a very astute observation. We did not cover this in our submission, but I will mention this quickly. If the taxpayer does succeed through the process and after an assessment there is a refund, the rates of interest which are paid to taxpayers under the overpayments act are not generous. Did we cover that?
Mrs Sullivan : We did cover that.
Mr Bersten : My apologies. There are not generous and there is some question about equality of treatment in that regard to get a level playing field. I do not think we would go as far as perhaps we sometimes hear around the place, that there should be some high levels of accountability on tax auditors. If they are wrong, personally, because they are government officials trying to do their job, we are not trying to say that it should be something like that. At least there should be some fair play. Interest rates on refunds would be important. Taxpayers are out of the money for a long time. I really do not know why in principle, if the community expects to be compensated through the interest charge for being out of the money on a tax liability when a taxpayer has actually paid money across, the same logic does not apply. They are members of the community too.
CHAIR: Especially in consideration of the duress and costs to the taxpayer. A punitive interest in return would be fair.
Mrs Sullivan : Yes, and that is in addition to the cost of having to deal with professional fees as well.
Mr VAN MANEN: And the professional fees for lawyers and advisers.
Mrs Sullivan : Even if matters go through to litigation or even if you have a costs order to at the end of the day you never get your money back. It is an ongoing pressure for all sorts of taxpayers taking on any dispute for extended periods of time. That is one of the ultimate cost-benefit analyses of whether you try to settle or walk away, whatever you do with the case, because it is quite prohibitive.
Mr VAN MANEN: Surely that should also be a cost-benefit analysis for the tax office as well.
Mrs Sullivan : Absolutely and the messages are that that is the case.
CHAIR: On pages 19 and 20 of your submission you state that the ATO in court proceedings generally expects taxpayers to prove facts not in dispute and that this is in breach of the model litigant rules. Could you please elaborate and have the courts or other parties commented on this?
Mrs Sullivan : I think this is also part of the process when something is actually going through to litigation. There is an onus of proof. All taxpayers accept that they have the burden of proof in tax proceedings but there is this statement which we have put in paragraph 70, which is the standard statement that the commissioner himself puts into the appeal statements which he files in proceedings. So unless you have actually agreed a procedure for aggrieved facts there, which can be difficult for a taxpayer as well, that is the default position, that the taxpayer must prove every fact necessary to grant a deduction—for example, that it was paid, for all sorts of things. What we were suggesting in this is that the commissioner should be under an obligation to clean out any things which do not need to be approved by way of factual evidence to say that this is the issue in dispute and we should just deal with that one and we will actually concede that you do not need to prove every fact in order to support something. So it does have the effect of cleaning up the case and making it easier for taxpayers to file less evidence in the proceedings versus every single fact being required to be proved by way of affidavit or documentary evidence.
Mr Bersten : A few years ago, not many years ago the Federal Court sought to revise its rules to try to get tax litigation cases heard much more quickly. One of the things they do through their supervision of the court process is to try to get the taxpayers as quickly as possible to agree on what facts are really in dispute in the hope that all the other facts and matters which are not in dispute can be agreed and admitted. It seems the courts want it. We think that that is no detriment to the commissioner, representing the community, to simply concede matters which are not in dispute in a litigation sense. Indeed, we know that the commissioner, through policies and other discussions would normally encourage that in other dispute contexts. What they would say is that they were just wanting to see that practice across the board implemented and we just do not seem to be seeing it in the actual litigation context.
Mr VAN MANEN: Are you aware of what their resistance is in that space or are they just hoping they will find something else in the process?
Mr Bersten : It is probably driven by a sense that, when a case is going in front of a court and the taxpayer bears the burden of proof under the law, they want absolutely everything to be proven by the taxpayer. I think that is a sensible policy. Now whether that would reflect the thinking of the current commissioner I do not know. I doubt it would, but I think it has been a longstanding policy position. Maybe it is a wider question of how governments undertake litigation when you are in court; albeit often now where we are going to put our opponents to proof—I am not quite sure—it does not seem appropriate where there is no real dispute about a fact.
Mrs Sullivan : I think it is possibly something which will make its way onto the agenda for the actual working group that the practitioners have with the Dispute Resolution Working Group at the ATO as well. There are a number of things and that is probably one which is a good discussion point for that group too.
Mr VAN MANEN: So effectively it is a policy under the tax act.
Mrs Sullivan : It is a legislative requirement.
Mr VAN MANEN: It is a legislative requirement at the moment.
Mrs Sullivan : It is what the tax administration act says is required, and then there is the question of the overlay of model litigant obligations to do efficient, effective conduct of disputes. So it is the overlay of one over the other.
CHAIR: In your experience, to what extent are initial allegations of fraud or evasion by the ATO sustained, and has this proportion changed over recent times?
Mr Bersten : Reflecting over the last say 10 years, a number—I cannot give you the statistics because I just cannot think what the number is—of fraud or evasion allegations have been made but not one of them has been sustained. Every single one of them, when we have dealt with the ATO through representing our client, the ATO has withdrawn, as best I can recall. That was very much the basis for our concern. When you take that into account, with that often not being articulated until the end of an audit, you are putting taxpayers through massive duress and cost on an issue that you may give up on—and history has shown they do give up, in the cases we have dealt with—where maybe there would have been no audit at all because the fraud or evasion point is, as you know, all about getting beyond the four-year time limit. These cases just would not happen. So that is why we have recommended that, if you are going to say fraud or evasion applies, say it as soon as possible so it can be tested as quickly as possible. If you are right, you are right; if you are wrong, let the taxpayer go home and not incur further costs or stress.
Mrs Sullivan : I should add that when we are saying 'withdrawn', some of those would be subject to settlement arrangements. So it is not as if there would be a full concession by the tax office on that. Fraud or evasion is such an important area to be careful of because of the potential prosecution to the DPP. This is something which is highly, highly problematic for individual taxpayers. The stress on them from something like that is enormous and some of these audits can go back to—we had one recently which was back in the 1990s, trying to say 'We think there was some fraud or evasion which happened in the 1990s.' To hear that many years down the track and to try to find documents, which I do not think anybody at this table would have from that long ago, is the problem. You are then on the back foot, trying to defend something with imperfect information. To say that it is a case of tax avoidance or something like that is very different from saying that it is fraud or evasion. There really is a distinct difference there. It needs to really be borne in mind that fraud or evasion has massive consequences for a taxpayer when it is being alleged. There has to be a factual basis for alleging that, rather than saying, 'We think we'd like to go back a bit longer. We don't like something, we think you were being naughty'. That is not enough to ground something like that.
Mr Bersten : If I could, in a sense, correct my earlier evidence: very occasionally it may be that a matter has been dealt with by settlement where there is a fraud or evasion allegation and that may have kept the time limit running. But in the large majority of cases I stand by what I said, that they are often not followed through. Indeed, in terms of upsetting taxpayers, it is common for the tax office to allege it in writing, and the language 'fraud or evasion' is an alternative under the law. It is almost never the case that the tax office is alleging fraud, but I have had taxpayers very upset when an allegation of fraud has been made, when in fact the real allegation is evasion. So the choice of words itself can actually be very distressing.
Mr VAN MANEN: So they are using that to get outside—
Mr Bersten : Yes, but you can say it is evasion without saying it is fraud. There is a difference. An ordinary person would know the difference between the two. Fraud is something that is much more serious in a criminal sense for most people.
Mrs Sullivan : We do not see this all the time; we see it occasionally. I do not want to suggest that all the people at the tax office are hitting fraud or evasion charges on all of the taxpayers for this particular purpose. Again the message from the top is very clear: we do not use that in order to just open up the time frame. The message is coming through loud and clear to the tax community. It is the coal face that has to make sure that that is actually the way it is being done in practice.
Mr VAN MANEN: Has that change in sentiment occurred since the current commissioner has taken up his post?
Mr Bersten : A few years ago the tax office updated its guidelines in a practice statement about fraud or evasion. My recollection is that was under the previous commissioner. That does set a rigorous process of sign offs at senior levels before fraud or evasion findings are made, so we understand. So that has been around for a while. I think our two principal difficulties are that you find out about the allegation and the commissioner's finding on it only at the end of an audit, which means being dragged through the process, and the other is that in many cases the commissioner may ultimately not stand by that position or you find that you can resolve the case by settlement on a reasonable basis but you would have to go through a hell of a lot to get there.
Mrs Sullivan : We will often be brought in when things escalate to that stage for individuals. Once a fraud or evasion allegation is made we will often see things coming through to us.
Mr VAN MANEN: Whereas a face-to-face process right at the outset, where you have a properly defined understanding of what the query is in relation to a particular item in dispute, could probably solve a lot of that very early on in the piece with a lot less cost, angst and stress to everybody involved.
Mrs Sullivan : Yes. I am sure you will be hearing from a number of taxpayers about the emotional toll of these sorts of things. I have had clients in the past who have committed suicide after coming out the other end of an audit for a very serious allegation that was in fact settled. There is stress on families because of the length of time and things like that. You see a lot of marriage break-ups and emotional stress from these sorts of allegations.
CHAIR: Thank you for your evidence. Do you have anything further to add?
Mr Bersten : No.
Mrs Sullivan : Thank you very much for having us along today.
CHAIR: Thank you very much.