Contributed by Associate Professor Justin Dabner, Law School, James Cook University, Cairns, Australia; Principal of Tax Resolutions
On 5 April, the ATO issued its Impact Statement on Pintarich v DFC of T 2018 ATC ¶20-657. As had been hinted by senior ATO staff, there was more to the case than the disclosed facts had revealed. Although the circumstances identified by the ATO may suggest that “justice was done”, it may also be an example of the lawyer’s adage that “hard cases make bad law”. It was certainly a shame that the High Court was not prepared to hear the appeal.
In the result, taxpayers and their advisers are left to operate under the principle established in the case as elaborated in the Impact Statement. What does this mean in practice?
A refresher on Pintarich
The Full Federal Court decision in Pintarich was examined last year in “Judgment Day! The AI wars have begun”. On 17 October, the High Court denied special leave to appeal.
At issue was whether a letter from the ATO, purportedly remitting the taxpayer’s general interest charge (GIC), amounted to a “decision” with the consequence that there was either no GIC owing that could be the subject of a further (less favourable) remission decision or any such subsequent decision was an invalid attempt to vary the earlier decision.
Following an application by the taxpayer for remission of GIC relating to unpaid primary tax, an ATO officer had entered information into a computer-based template that automatically generated a letter that was sent to the taxpayer without manual checking. On one view, the letter purported to state an agreed settlement sum for the tax payable that included a remission for all the GIC. Such was the view embraced by the taxpayer.
However, the ATO argued that the decision on the remission request was yet to be determined and, although the computer generated letter was ambiguous, this was the understanding with the taxpayer.
In the event, a majority of the Full Federal Court held for the ATO holding that, although the offending letter did appear to be an “objective manifestation of a decision”, it could not amount to a valid “decision” by the Commissioner in the absence of a “mental process” of reaching the decision. All the ATO officer had done was to input data. He had not turned his mind to whether a remission should be granted.
In dissent Kerr J suggested that the principles relied upon by the majority to establish the existence of a decision failed to appreciate the new automated world where machines can make decisions independently of human mental input. Thus, he placed greater emphasis on whether there had been a manifestation of a decision. As the circumstances of the letter arose according to the normal practice of the ATO, and would have been understood by the world at large as being a decision, then the ATO should be bound by it. This would avoid the administrative uncertainty that would follow if the ATO were free to argue that correspondence from it that on its face purported to evidence a decision was not to be relied upon.
The ATO’s Impact Statement
The Impact Statement goes to length to detail how the taxpayer and his adviser must have known that the letter did not purport to remit the GIC as per their application. It accepts that the letter was ambiguous (resulting from an acknowledged deficiency that it claims has since been remedied) but then identifies communications and behaviour by the taxpayer and his adviser that were inconsistent with them having understood the letter to be a remission decision.
Accepting the ATO’s version of events does raise a suspicion that the taxpayer might have been “trying it on”. That is, one characterization of what occurred could be that when the taxpayer and their adviser were presented with the ambiguous letter they seized the opportunity to ”run with it” to see if they could extract a favourable outcome from the ATO, leveraging off its ineptitude in issuing the letter.
So much is implied by the Impact Statement and if this was, in fact, the case then justice would seem to have been done by the majority decision. However, where does that leave other taxpayers and their advisers?
When can taxpayers rely on ATO communications?
Following the decision, and the Impact Statement, are taxpayers now left wallowing in a world of administrative uncertainty as envisaged by Kerr J? When can taxpayers rely on ATO correspondence? The critical lines from the Impact Statement are the following:
“… documents and other forms of communications should be interpreted within the context in which they were made as measured against the objective facts and evidence. Whether a particular document evidences a decision is not a task left to the interpretation of the terms of such a document in isolation. Ultimately the meaning of a document will turn on the particular facts.”
So if the meaning of a communication from the ATO depends on the surrounding circumstances, taxpayers and their advisers are to be careful relying on communications where they come as a surprise in the context of the engagement occurring with the ATO. I would call this the “too good to be true” rule. So if a taxpayer receives a communication from the ATO that is too good to be true, the onus is on the taxpayer to follow up to confirm whether it accurately reflects the application of a mental process by a human being within the ATO.
Passing risk on to taxpayers
Although the Court in Pintarich might have resolved the difficult facts in a way that ensured justice was done, this “hard” decision has the implication that the risk associated with unclear ATO communications is passed on to taxpayers. With the ATO gearing up with more and more automated services in the pursuit of cost efficiencies, a more appropriate outcome might have been that the ATO should bear the risk of an error, or even just an ambiguity, impacting taxpayers. In the plain vanilla case of unclear correspondence requiring the taxpayer’s adviser to go back to the ATO for clarification, then it is hardly appropriate that the taxpayer (or the adviser) should be out of pocket for this professional time.
It is unfortunate that the ATO did not recognize these implications in its Impact Statement. In particular, reference might have been made to a taxpayer’s rights under the Scheme for Compensation for Detriment caused by Defective Administration (CDDA) . If a taxpayer bears professional (and maybe other) costs due to the issue of ambiguous computer-generated correspondence, then the ATO needs to acknowledge this as defective administration and readily provide compensation.
Maybe their first applicant on this basis will be one Mr Pintarich?