ATO turns to mediation to avoid costly court battles

THE Australian Taxation Office is stepping up its push to avoid costly court actions with big businesses and wealthy people.

The ATO has told a landmark Productivity Commission review that it is increasingly using alternative dispute resolution — which uses methods such as mediation by retired High Court and Federal Court judges to avoid resorting to litigation — in the early stages of tax disputes considered to be “high risk” involving large businesses, high net-worth individuals and their private groups.

The ATO has also revealed that a review of alternative dispute resolution in these types of disputes is under way, with former judges, lawyers and senior ATO officials being consulted.

There is $7 billion worth of tax in dispute, according to the midyear budget update that Joe Hockey released in December.

The ATO is under pressure to boost its revenue collections and is trying to shed about 900 staff by June to bring down its wages bill as it searches for budget savings.

“Our aim is to resolve disputes earlier, to reduce legal costs for taxpayers and the ATO, and reduce the resources devoted to management of disputes in the ATO and in the community,” the ATO’s submission to the PC says.

“We recognise that inevitably there will be some of these tax disputes that will go through to hearing; however, to the extent possible, we want to free up the courts to review the most strategically important issues. We also recognise that the earlier disputes are resolved the lower the expenditure on legal costs and resources by both parties.”

The submission also says the ATO prefers to exhaust direct negotiations with taxpayers before considering alternative dispute resolution and that hiring an external person “will not be a proportionate response to most smaller high-volume disputes prior to litigation commencing”.

The new submission is in line with comments by tax commissioner Chris Jordan since he was appointed at the start of last year.

Last year, Mr Jordan warned that disputes “occupy much court time”. He said the “timely resolution of tax disputes is an important ingredient of an effective tax system and we should be able to do more of this without the need for courts”.

In 2012-13, the ATO spent $106.1 million in legal services, of which $65.8m was for external legal services.

Yesterday an ATO spokesperson said: “We want to resolve disputes early on by working together with taxpayers to improve the system and provide more certainty. By resolving more disputes at the audit stage, litigation will be reduced.”

Corporate Tax Association executive director Frank Drenth said the courts were “being a lot more demanding than they used to be”. “The tax office seems serious about wanting to avoid litigation if it’s possible,” Mr Drenth said. “But by the same token, we’re not seeing them walking away from issues that are important to them.”

Last Friday, Mr Jordan told a parliamentary committee on tax and revenue that 10 independent reviews — where big businesses could have a “fresh set of eyes” look at a disputed income tax audit — had been done since July, when the system started. He said this would be expanded to large GST matters.

On alternative dispute resolution, Mr Jordan said greater use of it was being made. “But . . . if we cannot sensibly work through the dispute, we just have to draw the line and let it go to court.”