Tax Office leads surplus cash drive
IF THE confidential settlement between the Australian Taxation Office and Paul Hogan wasn't evidence enough that the tax collector is reshaping itself into a body that works in the shadows, its latest score card on disputes shows a seismic shift from legal battles to alternative dispute resolution and private settlements.
The move is being driven by the federal government, which is pulling out all stops to achieve a budget surplus, partly by putting added pressure on the ATO to reduce costs and boost revenue.
But it isn't just the ATO; the federal government has made it clear it wants all federal agencies to shift towards a ''dispute resolution'' culture. These include the corporate regulator, the Australian Securities and Investments Commission, the financial services regulator, the Australian Prudential Regulation Authority and the competition regulator, the Australian Competition and Consumer Commission.
Court cases are costly, can take years to resolve and there is no guarantee of winning. In the High Court, statistics collated by the Inspector- General of Taxation show that since the ATO's most recent High Court victory in 2008, it has been involved in 10 other High Court battles for one victory. In sharp contrast, settlements are relatively quick, provide up-front cash and reduce legal bills.
With this in mind the ATO released a report on litigation, settlements and tribunals late last week, with a none-too-subtle message that resolving disputes before they get to the courts is a win-win for all parties.
The report, Your Case Matters, reveals that the number of court cases has nearly halved to 121 in 2011-12 and the number of appeals settled before a hearing more than tripled to 81 in 2011-12. While some of this is due to the finalisation of a number of mass-marketed scheme-related cases, it is also due to a concerted effort by the ATO to resolve matters before they get to messy legal action.
A perusal of the various market segments shows that on average the ATO claims twice what it ends up agreeing to settle. According to the report, the ATO settled 256 cases worth $920 million for $481 million in the last financial year.
In the case of big business, the ATO settled with 17 companies in the year to June 30. The ATO's original gain was $408.6 million, but it settled for $215 million.
When it comes to the country's wealthiest, the ATO seems prepared to play hardball, with the report stating that the ATO pinged 15 high net wealth individuals with a tax dispute of $240 million. It eventually settled for $150 million.
For small businesses and micro businesses the ATO is prepared to give the most ground, settling micro at $53 million, compared with an origina claim of $153 million, which is a 64 per cent backdown and a 66 per cent variance on the original claim for small to medium sized businesses.
The message is, settlement works, even for serious tax fraud cases. Indeed, of the many cases that fall into this category, 49 were settled with 23 resolved at an early stage and the remainder before the hearing. But in the other 14 cases that escalated to the Federal Court or the Administrative Appeals Tribunal, the ATO won 11 of them.
The move by the ATO to settle disputes comes as Inspector-General of Taxation Ali Noroozi released a report in May on the ATO's use of alternative dispute resolutions. It made 22 recommendations, all designed to improve the ATO's ability to settle disputes early. The ATO is implementing them at present.
Clayton Utz partner Niv Tadmore says he believes the intensity and rigour of ATO audits is much higher since the GFC. He says the shift to early settlement and alternative dispute resolution will improve its performance as a tax administrator, including in respect of collection of revenue. ''We will be operating in a different tax disputes environment in three to five years,'' he says. ''There will be more issues resolved within a shorter period of time.''
It comes against a backdrop of other changes at the ATO, the most notable being the introduction of a reportable tax position system, which requires companies to flag to the ATO any financial decisions made when doing their tax returns that they believe might be contestable. They must lodge this with their tax return.
In the past year, 56 big companies took part in a pilot RTP program, but this financial year the RTP system has been expanded to taxpayers that the ATO categorises in the ''high-risk'' basket.
A reportable tax position system is a gift to the ATO as it requires companies to effectively blow the whistle on themselves. The ATO can then send in an audit team to investigate. If they see a tax issue, they can then settle it quickly and grab the cash.
While the ATO is sending out the warm fuzzy message that it wants to settle, the reality is far different. The ATO is a cold-blooded arm of the government with a single-minded purpose to collect tax and the government is on a mission to boost tax revenues, particularly given recent company results show a fall in profits and therefore tax payable.
By beefing up alternative dispute resolutions and engaging in more intrusive audits, including the introduction of the RPT, the ATO is effectively widening the net and, to extend the metaphor, it will catch more fish, which ultimately means raising more tax revenue.