Should the ATO stop fighting its test battles in court?

It’s time the Australian Taxation Office stopped being so litigious. In a nutshell, that was the outcome of a recent review handed down by the Inspector-General of Taxation, Ali Noroozi, pictured.

His review into the ATO’s use of alternative dispute resolution released last month found that about 90 per cent of cases that ended up before the Administrative Appeals Tribunal were resolved without formal hearing. That means they shouldn’t have landed there in the first place.

Noroozi believes all disputes should be resolved without going to court, except where there’s a public interest benefit or serious fraud or evasion at play.

The ATO has been running a program since the 1990s that in theory provides financial assistance to taxpayers whose litigation is in the public interest.

It’s quite simply called the “test case litigation program” and it’s one of the areas Noroozi last week identified as an area up for review this year.

The program aims to alleviate the cost burden for some taxpayers and develop a legal precedent. In other words, these decisions help dictate how tax law can be applied more broadly across the community.

The decision on funding such cases is now decided by a test case litigation panel made up of members of the accounting and legal professions (see “Who sits on the panel”).

In his report, Noroozi points out the regulator may want to “consider and identify whether a case has wider ramifications and involves a public benefit that may be better served by having the courts decide the case”.

Noroozi suggests that the way cases are identified for the test case litigation program needs “greater transparency and openness in respect of the ATO’s identification of public benefit issues” and that clarifying the law would “assist taxpayers and their representatives to better understand the ATO’s position in respect of litigation and any responses to offers of settlement”.

He also notes how in some cases, such as one against Qantas, arguably in the public interest, the company still didn’t get its legal costs paid.

While he stresses that taxpayers should not view the program as a way to fund personal litigation goals that do not satisfy clear public benefit, he wants more public interest cases settled under the program and also wants the ATO to provide litigation funding irrespective of the taxpayer’s resources.

What’s telling is that the Tax Office has only partially agreed to the first recommendation and rejected the recommendation to fund litigation regardless of the taxpayer’s resources.

In its response, the ATO points out that it gets only a set amount of funding under the program and there’s a risk that Noroozi’s recommendation “would extend test-case funding to cases that do not meet the community’s expectations about which cases should receive public funding”.

“This could include, for example, cases involving tax avoidance schemes, instances where the taxpayer has not been willing to co-operate with the ATO to achieve an early hearing, or cases where the taxpayer has the financial capacity to pursue litigation without test case funding,” the ATO says in it’s response.

“There is also a risk that such an approach may encourage a more litigious approach to dispute resolution rather than ADR.”

The ATO also says that under existing court processes, taxpayers who are proven right may be reimbursed for their legal costs through court orders on costs.

Test-case litigation aside, the reality is it’s going to be hard to change the ATO’s culture of taking its issues to court.

Deloitte tax controversy leader Ashley King says that while people at the top may agree that alternative dispute resolution is the way to go, this is not trickling down to staff.

“The challenge for the ATO is . . . to get down to the front line,” he says. “If you talk to senior people in the ATO, they say we agree with what the Inspector- General says and accept his recommendations. But they aren’t the people that do the case work. It’s run by people outside of Canberra and they’re the ones that need to change.”

King, who spent much of his previous working life at the ATO, says it’s about “re-skilling, re-educating and getting some fresh approaches and fresh thinking”.

“It will be a very long and hard process to get people to change,” he says. “Some of these people have been doing the same job and approaching it the same way for the past 10 to 15 years.”

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