The Tax Office has opened itself to allegations of favouritism as it cuts deals with the top end of town but not with small companies, which lack the resources to effectively dispute claims, a new report has found.
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In the explosive report, the Inspector General of Taxation Ali Noroozi says the Australian Taxation Office had settled disputes worth more than $1 billion with large companies last financial year but at the same time gone after small business people who are less able to fight.
Mr Noroozi reached that conclusion after he was asked to review the ATO's handling of tax disputes. He found there may be "an imbalance of bargaining power and experience" when the ATO deals with smaller businesses.
"The ATO is one of the largest government agencies which, by necessity, has monopoly power and significant resources," he said.
"Accordingly, it is considered to have considerable advantage over the vast majority of taxpayers, particularly small businesses and individuals, when dealing with legal disputes."
Mr Noroozi's report, released by Assistant Treasurer Josh Frydenberg, suggests that "the cost of litigation may be prohibitive" for smaller taxpayers and so they often settle cases even if they have genuine grounds for appeal.
"In certain cases, the costs of disputes are such that they may be ruinous to the taxpayers who have to bear them," he said.
He said in one example brought to his attention, the small business individual did not agree with the ATO's position but decided to settle rather than face the prospect of further costs and "adverse negative health impacts".
"Costs are further compounded by the ability of the ATO to undertake debt recovery action while matters remain in dispute or demand payment of 50 per cent of the disputed debt before recovery action is suspended," Mr Noroozi said.
"This power gives the ATO considerable leverage over taxpayers and has resulted in some instances where the taxpayer was unable to pursue the appeal due to a lack of resources."
Statistics provided by the ATO in its annual report indicate that over the past financial year, it has settled on disputes with large business – typically those with over $250 million turnover – that amount to over $1.2 billion. The data shows settlements with large business worth hundreds of millions of dollars for each year over the past five financial years.
While large business settlement cases accounted for less than 10 per cent of the total number of settled cases, Mr Noroozi said "the quantum of variances" – the difference between the original tax bill and the final amount settled – was high for large businesses.
The ATO's annual report says that in 2013-14, of the 34 cases settled, the original assessment was for $2.7 billion, but then after the dispute they settled on $1.5 billion. This leaves a variance of $1.2 billion.
Mr Noroozi said while the large proportion of settlement variances, in relation to large businesses and high-wealth individuals, were partially to be expected given the generally higher levels of revenue in dispute, there could be other factors at play.
"The high levels of variance may give rise to perceptions of favouritism, especially in circumstances where third-party observers are not privy to the reasons for settlement," he said.
"Concerns and allegations of ATO favouritism are not new and were raised in the late 1990s through media reports which resulted in a Senate inquiry into the operation of the ATO."
He said the UK had recently appointed a "Tax Assurance Commissioner" to scrutinise significant tax settlements, oversee the process for all other settlements and provide a separate annual report on these matters.
Mr Noroozi said the solution for Australia was to create a completely separate independent appeals area for taxpayers at all levels. Currently the Tax Office has an "independent" review function, but there have been criticisms that this is not independent, and that it only currently exists for large taxpayers.
The Tax Office said it was working on having earlier dispute resolution options for small business.
"For small business and individuals we now offer in-house facilitation as a way to resolve disputes quicker and easier," a spokeswoman said.
She said there was also a test case litigation program available to taxpayers, offering financial assistance to "help establish legal precedence and provide clarification of the law".
Tax Institute tax counsel Thilini Wickramasuriya said the ATO's handling of disputes had not been uniform. "Smaller taxpayers, including individuals, have not been receiving the same opportunities in terms of early engagement and dispute resolution by an independent function within the ATO," she said.
Clayton Utz tax partner Niv Tadmore said the creation of a separate appeals group within the ATO made "good sense". "It would give long-term confidence and certainty to taxpayers," Mr Tadmore said.
National leader of Deloitte lawyers, Aldrin De Zilva, said a separate group would address taxpayer concerns about there not being objectivity during reviews.
Meanwhile Labor has unveiled a package said to be worth an extra $1.9 billion over four years in additional revenue, that aims to stop multinationals profit-shifting.
But it has been slammed by major business groups, including the Business Council of Australia and Australian Chamber of Commerce and Industry, as having the potential to slow economic growth.
Labor's plan centres on boosting existing laws that stop companies artificially loading debt in no-tax or low-tax jurisdictions to reduce their tax bills. The OECD is currently looking at this problem on behalf of G20 governments.
BCA chief executive Jennifer Westacott said the Labor plan would "further diminish Australia's competitiveness".
ACCI chief executive Kate Carnell said "Labor's tax changes could make Australia a less attractive place for international investment, thereby pushing new projects offshore and hurting jobs".
