Contributed by Associate Professor Justin Dabner, Law School, James Cook University; Principal of Tax Resolutions
“Listen. Understand. That Terminator is out there. It can’t be reasoned with, it can’t be bargained with…it doesn’t feel pity or remorse or fear…and it absolutely will not stop. Ever. Until you are dead.”
Kyle Reese, The Terminator, Orion Pictures Corporation 1984
Introduction: you’re terminated
There has been much talk recently about the likely impact of technology, especially artificial intelligence (AI), on our lives. Tax accountants are told that there is a 94% chance that a robot will take their job (willrobotstakemyjob.com). Lawyers are safe though with a 3.5% chance. Get out!
All readers would be experiencing the impact of the ATO’s massive program of automation. Much of this is helpful (or will be once the bugs are ironed out). However, as we rush towards a world dominated by algorithms and machine learning there is a fear that the law is lagging behind.
Facts: Skynet goes rogue
At issue was whether a letter from the ATO apparently remitting the taxpayer’s general interest charge (GIC) amounted to a “decision”. The question arose for consideration because the taxpayer had received a subsequent letter from the Commissioner purporting to exercise the remission power in a less favourable way. The taxpayer argued that as he had been previously notified of a decision to remit the GIC then there was either no GIC owing that could be the subject of a further (less favourable) remission decision or that this was an invalid attempt to revoke or vary the earlier decision.
It was common ground that the taxpayer had earlier applied for remission of GIC and to enter into a payment arrangement in respect of the outstanding tax of $1.17m. An ATO officer entered information into a computer-based template that automatically generated a letter that was sent to the taxpayer without manual checking. The letter, headed “Payment arrangement for your Income Tax Account debt”, read in part:
“Thank you for your recent promise to pay your outstanding account. We agree to accept a lump sum payment of $839,115.43 on or by 30 January 2015.
This payout figure is inclusive of an estimated general interest charge (GIC) amount calculated to 30 January 2015. Amounts of GIC are tax deductible in the year in which they are incurred.”
The ATO official and the taxpayer were in disagreement as to their understanding prior to the letter being issued. The ATO officer’s evidence was that the remission request was still to be determined (notwithstanding what the letter said), whereas the taxpayer’s evidence was that he understood that if he satisfied the payment obligation the matter would be “all over and done with”. The taxpayer acted on this letter to raise a bank loan to meet the payment arrangement, with the court accepting that there was nothing that put the taxpayer on notice that the statements in the letter were incorrect. However, he was subsequently advised that any decision to remit GIC was still pending and the earlier letter had been issued in error.
At first instance before the Federal Court, the taxpayer argued, unsuccessfully, that the letter constituted or manifested a “decision” by the Commissioner to remit GIC up to the date of the letter, if the lump sum payment was made. The taxpayer appealed.
The Majority decision: hasta la vista taxpayer
A majority of the Full Federal Court dismissed the taxpayer’s appeal, finding that the ATO letter did not amount to a valid “decision” made by the Commissioner. Their Honours relied on established authorities for the proposition that for a decision to be made two elements had to be satisfied:
- • a “mental process” of reaching the decision, and
- • an objective manifestation of that decision.
On the facts, although there was an objective manifestation of a decision in the form of the letter there was no evidence of the ATO officer engaging in a mental process in relation to the remission of GIC. All he did was to input data. Furthermore, he had never intended the letter to include the phrase “this payout figure is inclusive of an estimated general interest charge…”. Importantly, evidence in the form of file notes of telephone conversations with the taxpayer before the letter was sent supported the ATO officer’s position. Additionally, the ATO’s “Statements of Account” issued in the months following also showed GIC continuing to accrue.
On the face of it this outcome seemed unfair. The letter clearly stated that payment of the lump sum amount would be in full discharge of the taxpayer’s primary tax and GIC liabilities. A statement that the taxpayer had relied on.
As much was acknowledged by the majority. However, their Honours opined that any possible “administrative uncertainty” was outweighed by the small likelihood of a similar data entry error being made by the ATO in relation to other decisions in the future. To their Honours the circumstances of the case were unusual and unlikely to arise very often (see para 151–152).
The dissent: taxpayer salvation
In a strong dissent, Kerr J demonstrated an appreciation of the spread of automation throughout society and, especially, Australian government departments. Automation was sidelining human interaction with “machines make contracts with machines”. On this basis, the principles relied upon by the majority to establish the existence of a decision were to be viewed as “rapidly becoming an artefact of the past”. The legal conception of what constituted a decision should not be static. Rather, it must reflect that technology has altered how decisions are made and that they can now occur independently of human mental input (see paras 45–49).
Kerr J therefore placed greater emphasis on the manifestation part of the principle. The focus should be on whether the circumstances in which the conduct was said to constitute a decision arose, according to the normal practice of the organisation and whether the manifestation of that conduct would be understood by the world at large as being a decision.
There was clearly something wrong if a decision maker could renounce as “not a decision” something they had manifested in writing simply by asserting that their subjective mental process did not align to that physical act or document, especially where they failed to check the document before it was issued. His Honour took the view that just because a mental process differed from that manifested by the subsequent act or document it should not cease to be a decision for that reason.
Any other conclusion would be productive of administrative uncertainty and confusion, where correspondence on its face appears to all the world to be a decision properly reached.
Conclusion: I’ll be back
It is understood that the taxpayer has sought leave to appeal. The matter needs to be considered by the High Court. There is a broad public policy issue as to who must take responsibility in the case of automated functions. This issue has a high profile in the context of possible (and since March this year, actual) accidents involving autonomous vehicles. But automation already pervades our lives in many ways — with ATO letters and bulk mail-outs as only one example.
The suggestion by the majority that the circumstances, of templates being utilised by data inputters with correspondence issued that does not reflect their true intentions, is unlikely to arise often, with respect, beggars belief. Whether it is the complexity of modern life or the emergence of strict (so-called quality control) procedures, templates are ubiquitous and, unfortunately, those keying in data are not always across the nuances or details of the document that they are generating. As AI makes further inroads into our society this phenomenon will become even more prevalent.
The decision in Pintarich raises the prospect that taxpayers are not able to take at face value communications from the ATO, especially automated correspondence. The ATO would be free to argue that the manifestation of a decision was not binding on it as there was a failure in the mental process in the decision making. Alternatively, the computer went rogue!
One final aspect of the case deserves particular comment. Once it was concluded that there was no valid decision that could be manifested in the letter in relation to GIC then clarity would demand that the whole letter should be disregarded. However, as Kerr J pointed out, the majority decision allowed the ATO to disregard that part of the letter dealing with remission of GIC as not a valid decision, yet the other part dealing with the payment arrangement was to be treated as binding.
There’s a storm coming.
[This article was originally published in CCH Tax Week on 17 August 2018. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow – Income Tax module. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]