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Jan 8, 2013

The tax office and the expensive muzzle on complainants

A special investigation finds the tax office is aggressively pushing aggrieved taxpayers into settlements to protect its own people. One investor tells Crikey he's been ruined by fighting big firms hired by the ATO.

Taxpayers, tax lawyers and even a current senior tax office lawyer have criticised the Australian Taxation Office for forcing taxpayers into “confidentiality clauses” that seek to muzzle them by imposing “deeds of releases” to cover up errors and potential maladministration.

As new tax office chief Chris Jordan starts in the role this week, there is also criticism of the ATO’s use of top-tier law firms to intimidate taxpayers, and claims it may be breaching the government’s Legal Services Directions that set out requirements for the provision of legal services to the Commonwealth.

Crikey spoke with a number of taxpayers, accountants and tax lawyers — many wouldn’t go on the record fearing a potential backlash from the tax office but nearly all were united in the belief the ATO is aggressively pushing aggrieved taxpayers into settlements designed to protect particular ATO officers that erred rather than the Commonwealth. Clause 4.5 of the Legal Services Directions states the Commonwealth and its agencies should not enter into confidentiality clauses unless there is a need to protect the Commonwealth’s interests.

“The difficulty with releases and confidentiality provisions is that they are exclusively for the benefit of the [ATO] commissioner,” David Hughes, a tax partner in law firm SMH Tax Lawyers, told Crikey. “Aggrieved taxpayers are silenced and ATO errors … are not brought into the public domain. This allows ATO officers the latitude to continue working without accountability to the public.

“Confidentiality clauses in settlement deeds have their place in commercial settlements, but the Commissioner is at pains to emphasise that he negotiates on a ‘principled’ basis, not a commercial one. If that is so, then the principle by which they reach settlements must be transparent. He cannot have it both ways.”

But some lawyers see the benefit of commercial settlements. Andrew Robinson from Robinson Legal, who gained notoriety as the outspoken lawyer for Paul Hogan and John Cornell in their very public dispute with the tax office, believes early settlements are good.

“Whether it’s right or wrong, making sure settlement discussions and settlement agreements don’t see the light of day probably means that all parties can be more open in their discussions which can lead to earlier settlements. While discussions take place they can’t be disclosed because they are without prejudice and if a settlement deed happens it’s bound by confidentiality so all parties know that nothing they say should hit the public record.”

The case of Sydney architect Gary Kurzer shows how the ATO can try and force parties into a confidential settlement in an effort to protect its officers from future litigation. Kurzer and his partner sold two investment properties in 2006 under direct instructions from their bank. The taxpayers had cash losses from the sales, and were previously told by the ATO that GST did not apply to their circumstances. But the ATO launched an audit and handed them a tax bill of $207,000 in “GST and penalties” plus tax on “profits of $655,000” never earned.

After a five-year battle that Kurzer says ruined his health, relationship and finances, the ATO finally agreed to determine liability based on the information he had previously provided. This was communicated to Kurzer at the 11th hour at the doorstep of the Administrative Appeals Tribunal hearing room prior to a hearing before a senior member of the AAT.

Despite the matter settling, the ATO proceeded to issue another incorrect revised assessment of $120,000. Angered by the continued mistakes and mistreatment, Kurzer pursued the ATO for compensation under the Scheme for Compensation for Detriment caused by Defective Administration — established to help Commonwealth agencies compensate persons who have suffered detriment as a result of an agency’s “defective” actions or inaction, and who have no other avenues of redress — including the latest revised incorrect assessment.

The ATO has power to engage legal counsel under the Legal Services Directions, which is administered by the Attorney-General, when there is a legal claim. The Finance Circular 2009/9 is clear that the Legal Services Directions do not apply to a CDDA claim — it’s more a moral obligation to assist those who have suffered. Despite this, the ATO hired big law firm Minter Ellison to handle the CDDA claim. The ATO said in a statement:

“It is not unusual for us to obtain legal advice where there is no legal claim or litigation on foot. Our views on CDDA claims comply with the Department of Finance’s guidelines.”

The ATO advised Kurzer of its decision after receiving advice from Minter Ellison, that no defective administration arose and no compensation was payable. Kurzer continued to owe $120,000. Minter Ellison charged the ATO $128,000 for this advice, as documents obtained by Crikey under freedom of information laws show.

“I will continue to fight, not just because of my circumstances but also because the ATO are doing this to innocent people across the country every day, decimating families and small businesses.”

Kurzer was relentless, eventually pushing the ATO to review the CDDA claim for the second time where it was uncovered it made major mistakes in the revised assessment — Kurzer only owed $8554. The ATO continued to deny any liability for mistreatment during the audit and objection stages but now admitted it made mistakes in the revised assessment. Despite Minter Ellison being engaged to review Kurzer’s tax liability, it found no mistakes.

At a mediation meeting chaired by former royal commissioner Tony Fitzgerald and attended by Kurzer, ATO officers and Kurzer’s lawyers (appointed by the tax office), the deed of release shows the ATO offered $70,000 in compensation contingent on Kurzer releasing the ATO and every officer, employee and agent from any liability beyond the scope of the major calculation errors, and equally for all future claims, whether related or unrelated to the dispute.

The ATO also sought to silence Kurzer through a confidentiality clause. Kurzer accepted the $70,000 and agreed to release the ATO from any future liability on the basis the ATO does not stop him from pursuing his rights in relation to his mistreatment during the audit and objection processes and to delete a blanket ban on all future claims unrelated to the dispute. The ATO then refused to pay the $70,000 compensation.

In direct contradiction to this, the ATO told Crikey: “There is no compulsion for taxpayers to settle matters they do not want to settle. Settlements made in relation to a particular dispute do not affect future claims arising in relation to a completely unrelated dispute.”In addition to Minter Ellison’s inexorable fee of $128,000, Fitzgerald’s fee for conferences, preparation and the mediation was $12,650 — according to a tax invoice released under FOI — while ATO appointed lawyers for Kurzer, LAC Lawyers, were paid $19,992 for legal advice and attendance at the mediation. The ATO refused to pay LAC Lawyers for any assistance to Kurzer after the mediation. In addition, the ATO expended $47,599 in relation to the CDDA claim. In total, $208,241 was spent on a case with an offer of $70,000 in compensation that was ultimately rejected by Kurzer.

Kurzer is highly distressed. In five years of attempting to gain justice he says he has lost everything he has worked for over 40 years, and faces imminent foreclosure. “Each day is a battle to stay afloat,” he told Crikey.

“Minter Ellison was hired to check the ATO view and they came up with zero errors and zero compensation and I was intimidated by them in denying my rights. The ATO then attempted to silence me via an oppressive deed with a patronising offer of $70,000 to me as compensation for my losses and expenses over five years. Although that was a tiny fraction of my losses, to even accept this, they insisted on a massive legal gag on my rights.

“I will continue to fight, not just because of my circumstances but also because the ATO are doing this to innocent people across the country every day, decimating families and small businesses. In tough times it is heinous that the ATO can expend huge amounts of public money to bankrupt people. What is the net advantage? People are forced onto welfare, instead of being active taxpayers. I will now be seeking a realistic monetary claim that reflects my losses in the Federal Court for negligence, breach of statutory duty and misfeasance against the tax office.”

A senior Sydney tax lawyer who is involved in negotiating settlements with the ATO on a regular basis but did not want to be identified said: “Settlements are sometimes instituted by the ATO because they know they have done the wrong thing. Unfortunately, in these cases the wrong thing ends up being hidden from the public by the use of a confidentiality clause. They won’t talk about what they did wrong.”

Allegations about the ATO’s use of legal services coincide with the announcement last month by the Attorney-General’s Department that the ATO was the biggest user of legal services in the Commonwealth, spending $101 million dollars in 2012. The report shows a whopping 30% increase in the provision of external legal services (such as Minter Ellison and Clayton Utz) in just the last two years. At the same time the average rise in external legal costs across all government agencies was just 7%. External legal services accounted for $64.9 million of the total figure, while $46.1 million was spent internally.

Crikey reported in September the ATO had offered Serene Teffaha a $250,000 settlement to walk away from litigation she launched for bullying as a result of a whistleblower complaint. She was prepared to accept the offer and release the ATO commissioner from vicarious liability as long as she was not barred from pursuing the senior public officials personally for their misconduct against her. The ATO refused to settle on that basis.

“My motivation is not money – just accountability,” she said. “It is perplexing the lengths the Commonwealth will go to, to protect the wrongdoers. Unfortunately for the Commonwealth they are now risking a whole lot more than just money.” Teffaha says she has been told the Commonwealth will back the personal defences of the officials involved by funding Clayton Utz’s services.

The Attorney-General’s Department is the guardian of how Commonwealth agencies pursue litigation. Crikey put a list of questions to the department and was told:

“Questions regarding the ATO’s reasons for settling claims, legislative authority for engaging counsel, and its conduct in the handling of claims and litigation, should be directed to the ATO.”

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19 thoughts on “The tax office and the expensive muzzle on complainants

  1. Modus Ponens

    Moral hazard when the the money at stake is not yours. That the ATO spent $128k on legal fees to pursue $120k says it all.

  2. Suzanne Blake

    Hope the ATO are investigating the HSU payments for brothels that were claimed.

  3. Gavin R. Putland

    The Australian Thuggery Office may be prepared to spend $208,241 over a $8554 tax bill. But it probably won’t want to risk having the whole PAYG/GST system declared unconstitutional over a $8554 tax bill. So, if the ATO starts treating me like it treated Mr Kurzer, I shall warn the ATO that as soon as I see the inside of a federal courtroom, I shall raise this and this.

  4. Serenatopia

    Hi All—Serene Teffaha (ATO Whistleblower with you)—

    An excellent piece of investigative journalism Chris—more pieces like this one Crikey!

    Wow! Oppressive deeds of settlement, wastage of public monies, serious maladministration cover-up and some very very expensive parrots!

    So we have proof that Minter Ellison and potentially other top-tier law firms are hired to ‘tick and flick’ the ATO approach, intimidating complainants into submission, rather than actually doing their job! The critical difference between following instructions and giving advice.

    The reality is that only $3.5million of the $101million in these legal costs has been clawed back. Yes—they are really failing miserably—all at taxpayer expense!

    A 30% blowout in external legal expenses and cries from the tax community for something to be done about oppressive and illegal agreements justifies a complete audit of the ATO’s use of deeds of settlements and their engagement of external law firms by the federal auditor-general.

  5. Mav M

    Hiring expensive private law firms seems standard practise in all of these so-called independent agencies.

    * On the note printing bribery scandal, RBA hired Freehills instead of going to AFP. Freehills produced a nice CYA report at taxpayers expense.

    * A recent one, due to a clerical error, Industry Ministry released more info than it thought prudent on a FOI request from AFR. Then they went on to hire private legal guns to gag AFR.

  6. Simon w

    The ATO did a confidential settlement with David Walsh (Founder of MONA) too. So no one knows if organized gambling is taxable or not, or if there was more to the case. The lack of transparency makes it difficult for accountants and lawyers to provide advice.

  7. Geoff Dunstan

    I can only say, that if the position as put in this article is true – and it would be interesting to note any defence ! – then the procedures,judgements, apparent oppression and quetionable morals and ethics of the ATO are appalling and there should be a judicial investigation. How do these affairs proceed so far without proper protocols ?

  8. RortyDog

    Chris Seage – you are a brave man You obviously have all your assets under the mattress, no income, live in Nauru and compromising photos of most ATO officials. Otherwise you’re toast, and so are your children and your children’s children…

  9. AR

    Quel bloody surprise! It certainly shows the pointlessness of the recommendations of Mark Dreyfus’ whistleblower committe to be worse than useless given that the only one to be discussed was the brilliant shiney new innovation of passing complaints to ones senior officer.
    HA! And there was I thinking that one of the conditions adhered to by the Commonwealth is that “it should always be the ideal litigant” though not sure of which planet this should be.

  10. Davies Steve

    An excellent piece of investigative journalism. Well done to Chris and everyone concerned.

    The practices described contain within them some very serious questions. Questions that should be of concern to the Australian Public Service, Legal firms and the community as a whole. The corollary of this is that these practices and the questions that flow from it should be of concern to Government.

    The first point to note is that the issues revealed in the Crikey article are clearly systemic. If this were not the case then they would not be being defended by the ATO and, however tacitly, the Attorney General’s Department. The other point to note is that because these practices are systemic anyone can be subjected to them.

    The ATO, like the Australian Public Service as a whole, says it values transparency. Covering up errors and potential maladministration is not consistent with that value. Why are we allowing that value to be degraded through the use of confidentiality clauses?

    The Australian Government issued the Declaration of Open Government. Why is the conduct of Australian Public service agencies not being monitored to ensure the way they deal with citizens is consistent with the spirit and intent of that declaration? Given the fact that the taxation system touches the lives of all Australians the ATO should be leading the way in this area. They are not and they are spending a large amount of taxpayers dollars not doing so.

    Citizens in this country accept that everyone should pay their fair share of tax. However, this clearly should not extend to engaging in practices that amount to little more than vexatiously digging in their heals, muzzling individual taxpayers and destroying lives. This raises a very serious question. The community rightly expects decency in public administration. Why is the ATO engaging in practises that do not reflect decency in public administration?

    It is the role of the ATO to maintain the integrity of the taxation system. How do the practises outlined in the being engaged in contribute to that objective? The use of confidentiality clauses to muzzle taxpayers smacks more of the ATO protecting itself than maintaining the integrity of the taxation system. If that is the case then what the Crikey article reveals is that the ATO is perverting a key aspect of its own role (at great expense to the taxpayer), for little more than bureaucratic expediency.

    Back in 2008 Dr Ken Henry gave his speech Towards a tax and transfer system of human scale. At the end of that speech Ken commented as follows in relation to the architecture of the system,

    The Review Panel has been tasked with a ‘root and branch’ review, not just the ‘pruning and shaping’, of the tax and transfer system. Its deliberations involve a comprehensive examination of the structure of the system for the long term and its effects on individuals, businesses and Australia’s macroeconomic performance.

    We will be looking for ideas that address system complexity and deliver superior economic, social and environmental outcomes.

    Our goal is to identify enduring reform directions for the tax and transfer system; to craft an architecture that might support multiple reform packages over many years.

    If we are going to find that architecture, and give it human scale, we are going to have to be a lot more imaginative, a lot more creative, and we are going to have to get much better at seeing things from the perspectives of people like Jim.

    In what way shape or form does muzzling taxpayers reflect a taxation system operating on a human scale? I, like most reasonable people, say not at all.

    Quite frankly I am surprised that legal firms engaged by the ATO in relation to these matters do not consider the potential risk to there own business reputation. I wonder whether the relationship between the ATO and the legal firms they engage is simply too close. This is certainly something I have noticed within the management consultancy sphere. Overly close relationships can become problematic and distort decision making.

    What I do see in all of this is the internal corporate culture of the ATO. Specifically,

    Blind compliance as opposed to compliance

    Severe risk aversion as opposed to risk management

    Reputation management and spin as opposed to ‘walking the talk’

    A belief in management infallibility

    Severe hostility to critical questioning

    The question for us all is whether we can afford to have these internal cultural attributes spilling over into the wider community? I think not. Especially given the apparent legal costs alone.

    Steve Davies
    Founder, OZloop