Skip to content

Small business litigation funding: improvements recommended

, ,

A recent Inspector-General of Taxation and Taxation Ombudsman (IGTO) has recommended improvements to the small business litigation funding program. The report from the IGTO was mainly based on two completed dispute investigations, with a further three investigations under way. The original intention of the funding program was to mitigate the disadvantage that small business taxpayers face against the ATO, which is a well-resourced and experienced litigant in proceedings which are often complex and costly.
The IGTO report presents recommendations aimed at delivering better access to justice and fairness for small businesses by improving the operation of the small business litigation funding program. The investigation program was announced in 2019 with the original intention of mitigating the disadvantage that small business taxpayers face against the ATO, which is a well-resourced and experienced litigant in proceedings that are often complex and costly. 

Taxpayers that are self-represented in the Administrative Appeals Tribunal Small Business Taxation Division (AAT SBTD) in disputes with the Commissioner of Taxation are generally eligible for litigation funding where the ATO engages external legal representation. Eligible small business taxpayers will have reasonable costs of engaging an equivalent level of legal representation covered. A litigation funding offer will be made to eligible taxpayers and should it be accepted, a letter of agreement containing terms of funding will need to be signed for the funding to commence. 

After signing the agreement, taxpayers will need to provide the ATO with an estimate of the costs that they are expected to incur in relation to the legal representation for the AAT SBTD within 30 days of the date of the agreement. Any updated estimate of costs of representation that are likely to exceed the original estimate are required to be provided to the ATO as soon as practicable. 

In the IGTO’s two completed dispute investigations, taxpayers expressed concerns that the ATO had attempted to cap the funding to levels below that necessary to run their matter. In addition, there were also questions as to the ATO’s calculation basis for reimbursements which taxpayers were not made aware of when entering these agreements, and the ATO’s “numerous emails to the taxpayers’ legal representatives questioning the bills which … detracted from case preparation”. 

To mitigate these concerns in future cases, the IGTO produced recommendations, including: 

  • for the ATO to amend the template funding agreement entered into between the ATO and taxpayer applicants in the Tribunal to accord with underlying policy objectives of the program, provide greater up-front clarity on what expenses will and will not be paid, and to ensure that relevant terms are incorporated into the contractual agreement; 
  • in consultation with the small business community, the legal profession and the Australian Small Business and Family Enterprise Ombudsman, for ATO guidance material and internal instructions to be amended to provide greater up-front clarity to taxpayers, their representatives and internal ATO staff; 
  • considering whether additional steps are necessary to preserve the integrity of the program with respect to applicants that are related or otherwise connected to their legal representatives, and to raise applicants’ awareness of the fees charged by their legal representatives and the extent to which they are reimbursed by the ATO; and
  • for ATO procedures to be amended to establish a process for appropriately dealing with supporting claim documentation that contains information which is confidential, privileged, or the disclosure of which might otherwise prejudice the applicant in active litigation. 

The IGTO notes that without the adoption of its suggested improvements to litigation funding by the ATO, further dispute investigations should be expected. Meanwhile, in response, the ATO considers itself to be no longer bound by the original policy intent of the program, and have continued to confine the findings of the report to the two cases investigated, notwithstanding similar ATO actions and decisions that have been subject to further complaints to the IGTO. 

However, it is understood that the ATO does have the intention to consult with stakeholders before committing to any improvements and that the IGTO recommendations contained in the report will be considered as a part of this process. While changes may not be forthcoming for the small business litigation program, the takeaway for taxpayers is that they can always turn to the IGTO which provides an independent body to investigate the ATO’s decisions.