21 Jan 2021 This week in tax
In our first TaxVine for the year, our General Manager of Tax Policy and Advocacy, Scott Treatt, CTA, suggests 2021 is a time to implement valuable learnings from 2020.
A new year brings opportunity
On behalf of The Tax Institute, I wish all our members a very happy new year and a warm welcome to 2021! While the year has commenced with some lingering challenges, a new year always brings new hope.
What makes us stronger for 2021 is our ability to have learned and evolved from 2020. We have seen and experienced unprecedented challenges and difficulties. This positions us well to anticipate changes and react faster than we did in 2020, to preserve and protect our families and loved ones, our businesses, our staff and our clients. By working together, we can stay strong and improve on what we have.
Can the same be said, however, of our tax system? Over the years, our government, irrespective of political persuasion, has prided itself on having a (self-proclaimed) world-leading tax system. While this has been debatable in the best of times, following the effects of the coronavirus pandemic and the broader economic ramifications of 2020, is this self-proclamation even more dubious?
Pre-Budget submissions ahead of the Federal Budget 2021–22 are due to Government this month. However, irrespective of those submissions, there will be a natural political tendency to focus on the bottom line of the Australian economy. It is all too easy to focus solely on the revenue and expense measures that will help Australia ease the burden of the significant debt incurred to fund the Government’s stimulus package. While there is indeed a need to prioritise revenue and expense measures to improve Australia’s financial position, is that the only legacy of 2020?
There is no need to continue to praise the Government for how it responded to the challenging economic conditions of 2020; this has been appropriately done on many occasions. Regardless of their political views, politicians worked well together to ensure the Australian people and the economy were swiftly and adequately supported. The ATO also became exceptionally agile to ensure funds flowed to the community as quickly as possible.
Nonetheless, what the events of 2020 highlighted, is that our tax laws and the mechanisms contained within our tax administration provisions are outdated and ineffective for the present day.
Disputes in Australia’s self-assessment system
We operate in a self-assessment system and the efficiency and effectiveness of such systems rely on the provision to participants in the tax system of certainty and confidence upfront.
Our self-assessment system has sequential phases:
- Audit/review (I include position papers and similar correspondence in this process);
- Amended Assessment (including self-amendment);
- Objection (including self-objection);
- Notice of decision (may be followed by a further amended assessment); and
- Appeal to the:
- Administrative Appeals Tribunal (AAT);
- Federal Court/Full Federal Court; and
- (with leave) High Court.
Acknowledging that Alternative Dispute Resolution (ADR) processes can be called on at various points, the transition through these phases can be a lengthy process before even taking into account the estimated (or even real) timelines against the activities.
The current drafting of our Taxation Administration Act 1953 provides little opportunity to short-cut the resolution of any dispute. Although it may be administratively acceptable in ‘normal’ times for certain issues to take a number of years to establish an appropriate precedent, given administrative workarounds can often be established, it is certainly not appropriate all the time, and most certainly not in the year that we endured in 2020.
Our country and our economy should not be in a position where the dispute resolution system prescribed by our laws provides certainty and confidence only some considerable time after the effective period of operation of an economic measure. Simply look at the stimulus measures as originally introduced. These were originally 6-month programs. On 21 December 2020, after the original date of expiration of one of those measures, the AAT handed down its decision in Apted and Federal Commissioner of Taxation  AATA 5139.
The facts, as set out in the decision, indicate that Mr Apted lodged an objection on 10 June 2020, various applications and submissions were then made to the AAT, the hearing was held on 3 November 2020 and a decision was made on 21 December 2020 by both the President and Deputy President of the AAT. Without delving into this decision (if you are interested, you can read our blog), appropriate credit is due to both the ATO and the AAT for the speed with which this matter has been dealt, and the necessary weight given by senior members not only to expedite this matter but also the subsequent appeal.
The matter remains unresolved as the Commissioner lodged an appeal against this decision on 15 January 2021. As this matter was heard by the President and Deputy President of the AAT, the decision could only be appealed directly to the Full Federal Court.
When time is of the essence
While law reform and better drafted laws can reduce the number and scope of disputes, there will always be some level of disputation in tax, particularly in relation to new provisions. The fact some may comment that the ATO should have done X differently, or the taxpayer should have done Y differently, is further evidence as to why disputes will always exist and why effective dispute resolution processes are crucial for the effective administration of our system.
However, herein lies the issue. In Apted, for example, a precedent is being sought for how the provisions are to be administered, yet, but for the extension of the JobKeeper program, the original end date of those measures has actually passed. Although the parties involved in this dispute did all they could within the powers of the law in a case of disputation of interpretation, we are in the position that a decision has been handed down and an appeal now filed; accordingly, the required precedent remains outstanding.
The Inspector-General of Taxation and Taxation Ombudsman (IGTO) also made similar observations in her recent report, ‘A report on aspects of the Australian Taxation Office’s Administration of JobKeeper and Boosting Cash Flow Payments for new businesses’:
C.7.6 … generally, taxpayers who dispute ATO tax liability decisions cannot appeal to the AAT or Federal Court until they have first lodged an application for and received an ATO objection decision via the process set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953).
C.7.7 The IGTO has previously observed that the objection process may add unnecessary delay in resolving disputes with the ATO's precedential view of the law, if the decision is based on a precedential view and the material facts in the case are agreed. Such cases would benefit from the use of declaratory proceedings to quickly obtain judicial clarification, without the associated delays of the objection process. This was recommended by the IGTO in previous reviews, including the Review into the Australian Taxation Office’s use of early and Alternative Dispute Resolution.
C.7.8 During the IGTO's complaint investigations, the IGTO observed that some of the disputes concerning the ATO's decisions on new entities’ eligibility for [JobKeeper and cash flow boost] support measures may have benefited from independent review of the ATO’s interpretation of the relevant provisions, such as declaratory proceedings in the Federal Court. This is because the material facts that the ATO relied upon in many of the ATO decisions that the IGTO saw were undisputed and the sole issue in dispute was an interpretative one. However, a fast-tracked process to by-pass the delays inherent in the objections process would be needed. Such a process could be effected via legislative amendment or ATO agreement (for example, agreement to obtain a Federal Court declaration on a matter of contention before the statutory rights under Part IVC of the TAA 1953 are triggered).
C.7.9 Furthermore, such a fast-tracked process in this case may also have reduced the ATO's administrative costs in dealing with a portion of the disputation that resulted from the ATO's [JobKeeper and cash flow boost] eligibility compliance activities. It can also be costly for a taxpayer to obtain judicial clarification of an ATO precedential view. However, there may be a public benefit in promptly obtaining this clarification.
Solutions are needed
As noted above, IGTO has suggested the use of declaratory proceedings to achieve the objective of having matters reach the courts faster, particularly on precedential questions of law where the material facts are not disputed. However, after considering publicly available opinions provided to the Commissioner, this process appears to have various shortcomings and will not be appropriate in all instances.
Given some of the views of the limitations of declaratory proceedings, if we cannot promptly resolve these shortcomings, then it is time to consider amending our administrative provisions. Rather than introducing a regime to replace such proceedings, we could institute an alternative, clear process for establishing precedential guidance on matters of critical importance and urgency.
One solution could be to simply provide the taxpayer with the right to elect a court appeal prior to the current objections process. Such an election process would need to be carefully considered and designed to ensure all endeavours are made to prevent unnecessary disputes making their way to court.
An alternate solution could be to establish an independent panel of our brightest legal minds to make determinations on such matters and for those determinations to hold an appropriate level of precedential value. Again, and importantly, this would not replace the current dispute resolution process. Rather applications would need to have the appropriate level of importance/urgency to justify why it could not go through the usual pathways or why it is of public interest to expedite it.
To appropriately vet matters, an applications process could be utilised where applicants must demonstrate why the matter is a question of law and why it is of public importance. With these criteria, one could then potentially tie the funding of such matters back to the ATO’s Test Case Litigation Program.
This is not a call for the ATO or taxpayers to be provided with further powers in a dispute. Rather, it is a call for alternative solutions for the benefit of the tax system as a whole. This will ensure greater certainty can be achieved upfront on key issues, which will provide greater confidence in our self-assessment system.
If we want a world-leading tax system, we need to lead the world in tax administration. We must stay ahead of the game and implement learnings as promptly as possible and not sweep issues under the carpet.
It is acknowledged that there is no immediate or direct revenue gain from amending any of the necessary provisions to give effect to something similar to the above, so it may be politically difficult to justify the investment of resources to address these issues. Change, however, is never easy, and there is never a ‘right time’ to fix certain administrative issues.
The status quo is not good enough when these issues impact hundreds of thousands, if not millions, of individuals and small businesses, where delays and uncertainty directly impact their livelihood, and at times determine whether they go bankrupt or liquidate. If it turns out they had access to a deduction or benefit, it may be too late to save them by the time our current system gets around to addressing the issue. So it can be seen that, indirectly, there is in fact a significant revenue impact of these provisions — without these taxpayers continuing to participate in the system, government revenues will be down, and I would suggest by more than the cost of any possible changes.
It will be interesting to observe in the upcoming Federal Budget 2021–22 whether the Government is prepared to learn and improve from 2020, and whether it has the courage to invest in fixing those parts of our tax system which are broken.
As always, we welcome your views and thoughts, which you can provide here.
Scott Treatt, CTA