The Inspector-General of Taxation and Taxation Ombudsman (IGTO), Ms Karen Payne, has today released her latest report, “Improving the operation of the Small Business Litigation Funding Program”.
Her report provides a review of the Small Business Litigation Program with the broader aim of delivering better understanding of and access to justice for Australia’s small business taxpayers. It shares insights and observations from IGTO investigations of disputes (unresolved complaints) commencing in October 2020 to present (and ongoing). The complaints were lodged by small businesses and legal practitioners about the Australian Taxation Office’s (ATO) administration of the Small Business Litigation Funding Program (the Program).
The Program itself was an administrative measure announced (by the former Government) in February 2019. Its key aim is to level the playing field for small businesses in litigious disputes with the ATO in the Small Business Tax Division (SBTD) of the Administrative Appeals Tribunal (AAT). Notably, where the ATO elects to engage external legal representation in the SBTD of the AAT, the Program allows taxpayer applicants to claim sufficient litigation funding (i.e., reimbursement of costs) to cover the reasonable costs of equivalent legal representation.
Dispute investigations
The report is principally based on two initial dispute investigations by the IGTO which have now been completed. Three (3) further dispute investigations are currently in progress with the IGTO and, without the adoption of the IGTO’s suggested improvements, further dispute investigations should be expected.
Karen Payne said: “In the two completed disputes, concerns were expressed that the ATO had attempted to cap the funding to levels below that necessary to run their matter. They had calculated reimbursements on a basis which the small business taxpayers had not been made aware of when entering the arrangement. The ATO had sent numerous emails to the taxpayers’ legal representatives questioning the bills which imposed considerable administration and unbillable time in responding to them and detracted from case preparation.”
“In investigations, carried out by my office, we observed that the ATO relied on its own costs in order to discourage rising costs (as a form of ‘soft cap’) when the costs of the litigants began to exceed those initially estimated.”
She said that this misunderstanding itself became an additional source of dispute and frustration in case preparations – because it was not clear what costs the small business would need to fund itself.
With the agreement of each of the small business taxpayers, the IGTO engaged an expert costs assessor to assist with the investigation and resolution of the disputes. A key objective was to distil guiding principles for future dispute resolution. The costs assessor’s external advice helped to ensure that the IGTO’s recommendations were based on an expert understanding of the practice of assessing costs in the Federal jurisdiction.
Ms Payne also emphasised that: “It is important to understand that the IGTO has no role to formally assess the funding provided under the Program. In other words, the IGTO does not perform the role of a costs assessor. However, it does have a role in observing the fairness of the process and making recommendations to ensure justice, and, where possible, improving the Program for the benefit of both complainants and the tax system overall.”
Litigation Costs
The quantum of litigation costs claimed – and in dispute – can be significant (at least from the perspective of the individual small business). In a recent complaint received by the IGTO regarding the Program, it was estimated by the complainants’ legal representatives that more than $1 million would be claimed in respect of a single dispute. At least two (2) of the four (4) other cases being investigated by the IGTO involve amounts somewhere in the vicinity of $500,000 and these amounts have been claimed by the small business applicants. Documents before the IGTO suggest that these costs vastly exceed ATO estimates of costs likely to be payable per dispute, prior to implementation of the Program.
Karen Payne said: “Small businesses are at a disadvantage when disputing tax issues with the ATO. The ATO is one of the largest Commonwealth agencies and it has years of taxation experience and expertise. The ATO is a well-resourced and experienced litigant. Small business taxpayers are not, and their legal costs will likely be more than the ATO’s costs.
The reasons for this include:
- The taxpayer carries the burden and onus of proof (not the ATO);
- The evidential requirement to discharge the burden of proof is therefore greater for the small business taxpayer (and their representatives);
- Small businesses do not have access to the [reduced] government rates for barristers that the ATO has.”
Over the two financial years, 2020-21 and 2021-22, a total of 869 applications to appeal ATO decisions were lodged by small businesses in the SBTD of the AAT.
“I observed that considerable time, expense, and effort was expended by small business representatives and the ATO (and the IGTO) in clarifying the claimed costs, the supporting evidence, the calculation of reimbursement and the limit applied to the total funding made available,” said Ms Payne.
The ATO’s funding agreement provides insufficient certainty regarding:
- the costs that will be covered by the Program,
- their calculation,
- their substantiation, and
- the related processes for claiming and verifying those costs.
“Most of the disputation could have been avoided if the ATO’s guidance and proforma materials had been consistent with the original policy intent, had been more clearly expressed, and had specified the key administrative requirements so that both parties had the same understanding of them,” Karen Payne said.
“I have made four detailed recommendations to the ATO to improve its administration of this Program. These include that the ATO more clearly communicate how it will administer the Program in accordance with the original policy intent, and more clearly define the costs that the ATO will reimburse and the supporting documentation that litigants will be required to provide. Recommendations have also been made to preserve the integrity of the Program.”
The recommendations go to:
- establishing effective and clearly communicated parameters of the Program in funding agreements;
- ensuring clarity and transparency in the ATO’s guidance material;
- implementing integrity measures to avoid abuse of the program (for example, where parties and legal representatives are related entities); and
- establishing protocols where the necessary substantiating documentation is the subject of privilege or confidentiality claims.
The ATO response is included in the IGTO’s report. The IGTO understands that the ATO intends to consult with stakeholders before committing to any improvements and that the IGTO recommendations will be considered as part of this process. The IGTO considers the report and the following factors are relevant in this respect:
- The underlying Budget Measure for the Program, which provided the ATO with $29.6m over five years (2018–19 to 2022– 23 inclusive), ended on 30 June 2023.
- The IGTO encourages stakeholders to consider the issues raised in this report as part of any future ATO consultations.
- A key IGTO recommendation was for the ATO to improve the up-front certainty on the funding’s costs basis, type of costs, their calculation and substantiation. Without this certainty, there is an ongoing risk of disputation about such funding matters.
- It remains important for such matters to be clarified as part of the ATO consultations.
- The ATO is not legally required to respond directly to IGTO recommendations, with the exception of private reports sent to the Commissioner (and the Minister) regarding unremedied maladministration (see section 15 Ombudsman Act 1976).
With respect to factor 1 above, the IGTO understands that the ATO considers itself no longer bound by the policy intent for this Program which was set in 2019.
With respect to factors 2 – 4, the IGTO understands that the ATO continues to confine the findings of this report to the initial two cases investigated, notwithstanding similar ATO actions and decisions that have been the subject of further complaints raised with IGTO and disputes raised in the Federal Court (see Commissioner of Taxation v Complete Success Solutions Pty Ltd ATF Complete Success Solutions Trust [2023] FCAFC 19, [126] – [130]).
Irrespective of the policy basis for which the ATO offers litigation funding into the future, the IGTO’s recommendations continue to have relevance. They highlight opportunities for the ATO to mitigate the risks of unnecessary costs and avoidable disputation.
New Administrative Review body
In December 2022, the Government announced that the AAT will be abolished and replaced with a new administrative review body. At the time of writing, it is not clear whether the Small Business Litigation Funding Program will feature as part of that new body.
Ms Karen Payne said, “In the event that the Program is to be replicated in some form in the new administrative review body, the observations that are surfaced in my report may assist in shaping future reforms.”
“In the interim, implementation of the recommendations will improve the fairness of the existing Program’s administration and better realise its aim: to level the playing field for unrepresented small businesses who challenge the ATO’s decision in the AAT SBTD,” she said.
SYDNEY
21 August 2023
For further information – Contact
Marjorie Johnston – Wordmakers
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About the IGTO
The Inspector-General of Taxation and Taxation Ombudsman (IGTO) is an independent, Commonwealth statutory agency, established in 2003. The Taxation Ombudsman function was transferred to the IGTO in 2015. The IGTO is an integrity agency and provides an important safety net service in the tax system. We independently investigate taxation administration decisions, actions and systems for the purpose of ensuring and assuring that there is fair, accountable and improved administration and integrity of the taxation and superannuation systems, for the benefit of the Australian community.
This helps to enhance voluntary compliance. The IGTO also provides independent advice and assurance to Government on the taxation administration laws and systems. Since 2015, the IGTO has performed dual roles, which complement each other:
- The Taxation Ombudsman provides independent assistance and assurance directly to taxpayers and tax professionals and investigates taxation disputes (unresolved complaints) about the actions and decisions of the Australian Taxation Office (ATO) or the Tax Practitioners Board (TPB). The Taxation Ombudsman also conducts investigations of actions that have broader community impact or are commonly observed in a number of complaints to identify wider system improvements that address the causal issues.
- The Inspector-General of Taxation undertakes investigations of actions, systems, and taxation laws (to the extent they deal with tax administration matters).