Managing Tax Disputes

This is a very interesting article fro AAR about the new Federal Court Practice Note on Tax Disputes.

How does it affect you?

* The new Federal Court practice will require taxpayers to set out the detail of their case, and how they will run it, within 45 days of an appeal being commenced.
* This means that the taxpayer, and their advisers who will be guiding the taxpayer through the appeal process, will need to be intimately acquainted with the taxpayer’s case at the time an appeal is commenced.
* Many taxpayers do not involve the advisers who will be guiding them in any appeal until after the assessment/objection/determination process.
* This new court practice makes it desirable to involve advisers who will be involved in any appeal early in the pre-appeal process.

Introduction

The new Federal Court Practice Note is intended to streamline the process in tax appeals before the court by:

* ensuring that the key issues in the case, and the facts and issues in dispute are identified at a very early stage, enabling the court process to be focused on the substantive facts and issues in dispute without unnecessary time and cost being spent on other issues; and
* establishing a timetable for all the steps necessary to bring a matter to trial while placing a much greater burden on the parties to ensure that the timetable set by the court is met.

The practice note will require taxpayers to bring significant effort to bear early in the proceedings to ensure that they have a clear understanding of their case, the issues that arise and the means by which they would prove the key facts. Taxpayers will generally be expected to be in a position to have a detailed discussion with the court about these matters within 45 days of their appeal being lodged.

While this timetable may be attainable in disputes involving narrow issues and limited facts, it will present a very significant challenge in more complex litigation. The procedures outlined in the practice note (discussed below) provide taxpayers who are properly prepared with a real opportunity to significantly reduce the time, cost and expense involved in tax litigation. At the same time, however, taxpayers will find it difficult to raise new issues or areas of enquiry late in the proceedings. If taxpayers are to take full advantage of the new procedures and avoid being caught off-guard, they will need to begin the work of making an assessment of the legal issues with their solicitors before their objection is disallowed by the Tax Commissioner.

In the past, taxpayers, who bore the onus of proving that an assessment was excessive, were generally required to adduce sufficient evidence to prove all the facts relevant to their case and any arguments that might be put against them by the Australian Tax Office (the ATO), even if some or all of those facts were not really in dispute. Little, if any, effort was made to narrow the issues in dispute.

At the same time the timetable for progressing an appeal was commonly left largely to the parties, although supervised by the court. This meant that taxpayers could usually make decisions progressively about how to put their case as the matter progressed.

The key initiatives adopted by the practice note are the appointment of a Tax List Co-ordinating Judge in each state to manage tax cases and the establishment of a scheduling conference for all tax appeals within 45 days of the appeal being lodged. The objective is for a trial date to be set as soon as possible, but, in any event, no later than 12 months from the date of the scheduling conference.

Parties at the scheduling conference will be expected to address the following:

* narrowing of the issues – the parties will be expected to clearly identify the issues and facts that appear to be in dispute. Obviously a taxpayer may arrive at the scheduling conference without a clear understanding of precisely what it is that the ATO is going to dispute. It is expected that the scheduling conference will result in a clarification and narrowing of the issues in dispute. Taxpayers may decide to hold preliminary discussions with the ATO in an effort to narrow the issues, in advance of the scheduling conference;
* initial witness lists – the parties will be required to provide an initial witness list, including a summary of each witness’ expected evidence and the relevance of that evidence. This list can be updated if the party’s witness list later changes;
* pre-trial schedule – a schedule will be set by the court after discussion with counsel for the parties for all interlocutory steps needed to bring the proceedings to trial; and
* the time of trial – while the court may not set a trial date at the scheduling conference, the Practice Note indicates that the trial date should generally be no later than 12 months from the date of the Scheduling Conference.

While in the past, the court may have been quite willing to extend the timetable for the various steps to be taken as part of the preparation of a case, the court has indicated that it will not look kindly on requests for extensions of time, where those requests arise from matters within the control of the taxpayer or the ATO.

By taking steps to narrow the issues in dispute early in the proceedings, it is expected that the amount of work required to prepare a matter for trial will be reduced. There should be no need for wide sweeping discovery. Rather, any order for discovery will generally be limited to documents on which a party intends to rely, or documents which materially affect either party’s case. The scope of enquiry required to locate documents will be based on a ‘good-faith proportionate search’, being a search, undertaken by a party making a good-faith effort to locate discoverable documents, while bearing in mind the cost of the search having regard to the nature and complexity of the issues raised by the case and the quantum of the claim.

The practice note contains a number of other initiatives, including:

* a requirement that the applicant’s appeal statement be filed within 40 days of the commencement of the appeal, being only 12 days after the Commissioner has filed an appeal statement;
* any interlocutory applications that remain necessary after the scheduling conference will generally be dealt with in writing, avoiding the need for the parties to attend court; and
* a requirement for a pre-trial conference to be held approximately three weeks before to the scheduled trial date at which an effort will be made to further refine the facts that are agreed and those in dispute, any objections to evidence will be dealt with and a joint numbered list of exhibits settled.

There are a number of practical implications for taxpayers that are likely to flow from this new practice note.

First, the Commissioner is likely to dedicate greater resources to disputes in the pre-litigation phase. The need for the Commissioner to clearly articulate what he is really arguing about at the scheduling conference, and not simply to put the taxpayer to proof of all relevant facts, is likely to increase the Commissioner’s focus on the gathering of information as part of the audit and objection process. The Commissioner will expect the information received during that process to be reflective of the evidence that the taxpayer will eventually give.

Second, the new court practice means that, within six to seven weeks of commencing an appeal, the taxpayer and its advisers need to have a thorough understanding of both its case and that of the Commissioner, and inform the court of how they will progress the matter. Tax disputes often involve complex legal and factual issues, many of which involve voluminous documentation and concern events that occurred some time ago. It can take a considerable period of time to brief the advisers who will deal with the appeal, and for them to form a detailed understanding of the facts and relevant issues. The obvious risk to taxpayers who do not engage their lawyers in plenty of time before the appeal is to commence is that they may not have a sufficient understanding of their case, with the risk that the presentation of the case may be adversely affected by decisions made at that conference without a full appreciation of all of the facts and issues.

To ameliorate the above risks, we recommend that taxpayers involve their advisers before any objection is determined adversely against them. This will ensure that the taxpayer’s appeal advisers are familiar with all the legal and factual issues, and will be able to formulate an appropriate strategy for dealing with any appeal in advance of being required to meet the deadlines imposed by the new court practice. It will also ensure that the material provided to the ATO as part of the objection and audit process is properly framed having regard to the nature and type of evidence that might be relied on in any appeal.

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