Inspector General of Taxation, Australian Government

Crest


Issues Paper Number 1
Context For Scoping Review

 

Paper outline
Taxpayers’ systemic tax administration concerns
Increasing complexity of tax administration in Australia
Balancing individual and national interests
Consultation with taxpayer groups and tax advisers
Consultation with the commissioner of taxation
Consultation with the Auditor-General
Consultation with the Taxation Ombudsman
Concluding introductory comments and thanks
Appendix A: Parties consulted during the review
Appendix B: Overview of the Commonwealth taxation system
Appendix C: Overview of the tax administration system

Paper outline

  1. At the time of the announcement of the appointment of the Inspector-General of Taxation, the Minister for Revenue and Assistant Treasurer, Senator the Hon Helen Coonan, asked the Inspector-General to:
  • consult with taxpayer organisations to identify the main systemic tax administration issues and concerns facing taxpayers; and
  • provide a report to the Government on these findings providing initial views on the possible priorities for the future work of the office of Inspector-General of Taxation in helping the Government to address these concerns.

  1. As a result of the consultative processes to identify significant systemic issues, a number of potential review projects have been identified and are presented for further evaluation in Issues Papers 3, 4 and 5. A comprehensive listing of parties consulted appears at Appendix A.

  2. These Issues Papers cover matters that have been drawn to the attention of the Inspector-General of Taxation to date. It does not purport to represent an exhaustive list of all issues that taxpayers have with tax administration in Australia, and it is proposed to publish further Issues Papers as matters are raised.

  3. The Commissioner of Taxation was given an opportunity to comment on review topics, as required in Section 25 of the Inspector-General of Taxation Act 2003 and as discussed below.

  4. The short timeframe for this initial process limited the rigorous testing of issues raised by taxpayers and tax advisers. The fact that issues have been covered in these papers should not be construed as a finding that a problem exists.

  5. The issues raised have been incorporated into a series of issue or discussion papers. Further community input will be sought to assist in quantifying and clarifying issues, and to assist in prioritising matters for an ongoing work program. Continuing community input to the work program will be welcomed.

  6. To assist the community and Inspector-General in determining priorities for the work program, I have also published as Issues Paper Number 2 a draft framework for assessing issues. Broad community feedback is also sought on the model.

  7. This brief introduction frames the initial review process in the context of broad trends in tax administration. An overview of the Commonwealth tax system in Australia is at Appendix B. An overview of Australia’s taxation administration systems is at Appendix C.

Taxpayers’ systemic tax administration concerns

  1. Many different tax administration concerns were raised in the course of this initial process and 60 systemic issues are summarised in the Issues Papers.

  2. Behind these systemic tax administration matters are some broad themes of taxpayer unease. These themes include:

  • Apprehension about the complexity of the tax laws;
    • Including the lack of differentiation between large/small or high risk/low risk taxpayers; and
    • the differential tax treatment of capital and revenue items that creates significant compliance burdens;
  • Concern that over-engineered delivery mechanisms have been developed for tax administration;
  • Apprehension about the capability of tax administration officers, in both the private and public sector;
  • Disquiet about the way in which clarification of the tax laws is achieved when taxpayers dispute tax administration decisions;
    • Including through rulings and test litigation;
  • Anxiety about tax debt collection procedures and policies;
  • Disquiet about a lack of commercial orientation in aspects of tax administration;
    • Reflected in the time taken to finalise rulings and to settle claims for compensation for damage resulting from defective tax administration;
  • Uncertainty about what type or degree of tax planning constitutes illegal ‘aggressive tax planning’; and
  • Concern about the systems that the ATO has in place for risk assessment and market intelligence, associated with aggressive tax planning.
  1. These broad themes underlie many of the systemic issues discussed later.

Increasing complexity of tax administration in Australia

  1. There have been a number of catalysts for the establishment of the role of the Inspector-General of Taxation. One of the most obvious and important is the increasing complexity of tax administration in Australia — dating back to the 1980s — and the impact of this increasing complexity on taxpayers and tax practitioners.

  2. The tax professions (notably tax agents, accountants and lawyers) attribute much complexity in tax administration to a desire for ‘black letter’ legislation and broad anti-avoidance measures.

  3. The increasing complexity of tax regulation — and the underlying reasons — were recently discussed by the Chairman of the Productivity Commission, Gary Banks, addressing a conference of economists on regulation in Australia.1 Noting that the Income Tax Assessment Acts (both the 1936 and 1997 Acts) are now 60 times longer than when the original Income Tax Assessment Act was introduced in 1936 (as illustrated in Chart 1), he speculated that, if this rate of growth was maintained, these Acts could amount to 830 billion pages by the end of the century, requiring three million years of continuous reading to assimilate. While obviously unrealistic in a future sense, this does demonstrate the rate of change over recent times

Chart 1: Growth of the Income Tax Assessment Act(s)

Chart 1: Growth of the Income Tax Assessment Act(s)

Source: Gary Banks, Address to the Conference of Economists, Business Symposium, 2 October 2003, p. 4.

  1. Gary Banks warned against regulatory complexity being seen as “something ‘done to us’ by naïve or incompetent regulators” noting that:

There is of course a reason for the increasing regulatory detail and complexity — us. Regulations that limit choice or impose costs on people invite evasive responses as much as compliant ones, sometimes more so. Hence the endless quest for tax loopholes (and the commensurate growth of tax consulting services) and the inevitable page-lengthening defensive responses by government.2

  1. Gary Banks suggested that complexity in the tax laws should be seen as part of a strategic environment.

  2. The strategic environment of tax administration, and, in particular, increasing conflict between the compliance strategies of the Australian Taxation Office (ATO) and the tax planning strategies of taxpayers, has been another catalyst for the establishment of the Inspector-General of Taxation. This conflict is discussed below.

Balancing individual and national interests

  1. The Explanatory Memorandum to the Inspector-General of Taxation Bill 2002 observed that improving tax administration for all taxpayers involves balancing competing interests, including where simplifying tax administration for some taxpayers could prejudice efficient revenue collection to the detriment of the taxpaying community as a whole.

  2. In tax administration, there is an inherent tension between the interests of individual taxpayers and the need to protect the revenue for the benefit of the community as a whole.

  3. This tension was evident throughout the consultative process, with taxpayer advocates arguing that the complexity, inflexibility, and onerous compliance burden of current tax administration systems flow from an undue focus on protecting the revenue.

  4. It is important to recognise that the Commissioner of Taxation and his staff are not personally responsible for all of this tension. The perception, encountered in the process, that there is an ongoing battle between taxpayers and the ATO, may arise in some cases because the ATO is the intermediary between taxpayers and a complex tax system. Taxpayers’ real concerns may be with tax design, but the point at which they realise the difficulties that confront them in complying with tax laws is when they need to deal with the ATO.

  5. Behind the scenes in the tax design process, many different Commonwealth agencies, Government advisers and community advocates have had a hand in formulating tax proposals and tax legislation. The ATO is not solely, and perhaps not at all, responsible for the tax laws it implements. Sometimes tax laws are not framed in a way that facilitates simple tax administration procedures, because of a need to tradeoff simplicity to achieve other policy imperatives.

  6. The Issues Papers cover 60 potential reviews that could be undertaken by the Inspector-General of Taxation. Some of these would involve an examination of the laws underpinning systemic administrative issues. These reviews could result in recommendations for changes to the law, not just changes to ATO systems.

Tax minimisation

  1. The tension between individual and collective interests is seen most starkly in cases where some taxpayers seek to minimise their tax liabilities. Since Australia has strong anti-tax-avoidance provisions in the tax laws, the question then arises as to where to draw the line between legitimate tax planning and illegitimate ‘tax avoidance’.

  2. Most taxpayers seek to avoid paying unnecessary tax if they have options available to them. Indeed, the Government relies on ‘tax aversion’ to achieve desired behavioural changes in the community. For example, the aim of the Medicare Levy surcharge on high-income earners who do not have private medical insurance was to encourage the take-up of private health insurance, not to raise revenue. Clearly, taxpayers who avoid the surcharge by taking out private health insurance are not to be regarded as ‘tax cheats’.

  3. In 1936, the House of Lords upheld tax avoidance arrangements entered into by the Duke of Westminster. Lord Tomlin was of the view that: ‘Every man is entitled if he can to order his affairs so that the tax … is less than it otherwise would be.’3 This view was reflected in the Privy Council’s first consideration of early anti-avoidance provisions in Australia’s income tax assessment legislation in 1958, with Lord Denning suggesting that: ‘In these days, when rates of tax are high, it is natural enough for a man to seek so to order his affairs that the tax attaching under the appropriate Acts is less than it otherwise would be’.4

  4. These judicial decisions preceded the introduction in 1981 of the Part IVA tax avoidance provisions in the Income Tax Assessment Act 1936 (ITAA 1936). In his Second Reading Speech for the Part IVA amending legislation, the then Treasurer, the Hon John Howard MP, recognised that there is no broad agreement on what constitutes tax avoidance:

We are acutely aware that the term ‘tax avoidance’ means different things to different people.

Reasonable men and women are bound to differ on this crucial question and on the subsidiary matter of the appropriate tests for determining what behaviour a general anti-avoidance provision ought to proscribe. ….5

  1. Community attitudes to tax planning change over time, becoming more or less accepting of tax minimisation arrangements. Examples include the previous ‘entity taxation’ or ‘taxation of trusts’ debate, and the current commentary on negative gearing of rental properties.

  2. Where community attitudes and behaviour are closely aligned to the compliance policies of the ATO, tension is minimised. When community attitudes and behaviour are out of step with the compliance policies of the ATO, as illustrated in Figure 1 below, it is reasonable to expect a high degree of resistance amongst taxpayers. This is exacerbated if the tax laws or tax administration are seen to be unfair in that some people are able to take advantage of tax concessions simply by dint of better access to professional advice and advocacy.

Figure 1: Conflicting attitudes to tax compliance

Fraud

Tax evasion

Tax avoidance

Tax planning

Tax liability

     

    Figure 1: Conflicting attitudes to tax compliance

    1. An important function of systemic tax administration reviews will be to promote public debate and mutual understanding between taxpayers and tax officials on what constitutes ‘a fair thing’ in tax administration.

    Sharing the costs of tax administration

    1. The divergence of views between taxpayers and the Commonwealth is not confined to tax planning. There is equal or greater concern about how tax compliance costs are allocated amongst taxpayers, their advisers and the ATO. A continuum of cost sharing arrangements is illustrated in Figure 2 below.

    2. Amongst the tax advising professions, there is concern about the increasingly heavy tax compliance burden they seem to face. As the majority of taxpayers now rely on tax agents, their contribution to tax administration is crucial. They suggest their clients are not happy to pay professional fees for tax compliance tasks (as distinct from tax advice). Further, clients are not likely to be happy to pay for time that their agents spend negotiating with the ATO when an administrative mistake is made or there is a problem with the interface between ATO IT systems and agents’ systems.

    3. Some business groups argue that the tax system should factor in compensation to taxpayers and advisers for the costs of cooperating in the collection of the revenue and administration of the tax laws, quite apart from tax deductibility for the cost of managing one’s own tax affairs.

    Figure 2: Conflicting attitudes to sharing tax administration functions

    Tax agents take increasing responsibility for facilitating tax collection

    Taxpayers are responsible for self-assessing tax liabilities

    ATO should provide advice through binding rulings and information products

    ATO should assist taxpayers to meet tax obligations

    Taxpayers and businesses should be compensated for the costs of compliance and revenue collection

    Figure 2: Conflicting attitudes to sharing tax administration functions

    1. The issue of how tax administration and compliance costs are shared is also worth public airing and debate, the opportunity for which will arise in reviews.

    2. A key challenge for the Inspector-General of Taxation will be to balance conflicting views on how to balance individual taxpayer interests with the broader national interest of protecting the revenue base and spreading the tax burden fairly. The policy framework proposed to achieve such balance is outlined in Issues Paper Number 2.

    Consultation with taxpayer groups and tax advisers

    1. The foundation of the initial work has been consultation with taxpayer groups, with tax advising professions, and with business groups.

    2. Submissions to this process will not be published at this stage. Certain key submissions were lodged in confidence, and their publication is restricted under Section 26 of the Inspector-General of Taxation Act 2003. It would be inappropriate to attribute the broad range of views expressed in this report to a subset of submissions that could be released publicly. The list at Appendix A includes all parties who were invited to make submissions, some of whom took up the opportunity and some of whom participated in meetings.

    3. A three-stage approach to consultation was adopted. First, there were meetings between the Inspector-General of Taxation and key taxpayer groups, professional organisations and business groups in Sydney and Melbourne in late August. Second, 100 organisations were invited to lodge submissions on 25 August 2003. Finally, the Inspector-General of Taxation conducted breakfast and luncheon workshops in Perth and Brisbane with ‘focus groups’ of taxpayers and tax practitioners, to hear from a broad cross-section of people who deal with the Australian Taxation Office (ATO) on a daily basis.

    Consultation with the Commissioner of Taxation

    1. Section 25 of the Inspector-General of Taxation Act 2003 gives the Commissioner of Taxation a right of reply before the Inspector-General can report any matters that are expressly or impliedly critical of the ATO.

    2. The Commissioner of Taxation received advance notice of the issues that had been raised with the Inspector-General in submissions and meetings, via a summary of those issues provided to the ATO on Tuesday 7 October 2003. The Commissioner gave his preliminary comments on these issues on 14 October 2003.

    3. The Commissioner was given a copy of the draft Issues Papers on 20 October and responded to the issues raised in that draft on 27 October. The Commissioner also met with the Inspector-General of Taxation on 27 October.

    4. Many of the Commissioner’s specific comments on review topics have been incorporated in Issues Papers 3, 4 and 5.

    Consultation with the Auditor-General

    1. The Inspector-General of Taxation met with the Deputy Auditor-General and officers of the Performance Audit Services Group, Australian National Audit Office (ANAO) on 29 October 2003.

    2. The meeting enabled a discussion of the respective independent roles of the Auditor-General (as an officer of the Parliament) and the Inspector-General of Taxation (as an adviser to the Government).

    3. In 2003-04, the Auditor-General is undertaking, or is proposing to undertake, audits of:
    • FarmBis, Farm Help and Farm Managements Deposits (includes ATO);
    • ATO’s management of Business Activity Statements;
    • ATO’s management of Aggressive Tax Planning;
    • ATO’s use of Investment and Income Reports;
    • Internet-delivered government programs and services (includes ATO);
    • ATO’s administration of Superannuation Surcharge contributions;
    • Taxpayers’ Charter;
    • Energy Grants Credits Scheme;
    • ATO’s administration of Taxation Rulings (follow-up);
    • ATO’s management of call centres;
    • ATO’s use of AUSTRAC data (follow-up);
    • Non-taxation revenue estimates preparation and reporting (includes ATO);
    • ATO’s management of Tax File Number integrity;
    • Business Authentication Framework (includes ATO);
    • Financial Management and Reporting of Administered Special Appropriations (includes ATO); and
    • (the reserve audit topic for 2003-04) Superannuation Guarantee (follow-up).6

    1. While some of the above topics are covered in this report, the Inspector-General is not proposing to review any of these matters in 2003-04.

    Consultation with the Taxation Ombudsman

    1. The Inspector-General met with the Ombudsman on 28 October 2003.

    2. The Taxation Ombudsman is currently reviewing the ATO’s use of statutory search and entry powers.

    Concluding introductory comments and thanks

    1. The initial consultative process has been undertaken in a very tight timeframe. This has only been achieved with the cooperation and help of key stakeholders. Sincere thanks are extended to those taxpayer groups, tax practitioners, representatives of the legal profession, and business groups, who participated in meetings and workshops in August and early September, often on short notice. Those who prepared written submissions to this review made a particularly important contribution.

    2. The Inspector-General of Taxation acknowledges with thanks the assistance of the Auditor-General and the ANAO. Thanks are also due to the Taxation Ombudsman and his Special Tax Adviser.

    3. The Inspector-General of Taxation recognises the cooperation of the Commissioner of Taxation and his staff. The Commissioner hosted an information session on the ATO’s corporate and compliance strategies for the Auditor-General, Taxation Ombudsman and Inspector-General of Taxation on 28 August 2003.

    4. The consultative process was conducted prior to the recruitment of the Inspector-General’s permanent staff. The Inspector-General acknowledges with thanks the special contribution of Susan Johnston and Bradley Brown from the Treasury.

    1 Gary Banks, Chairman, Productivity Commission, ‘The good, the bad and the ugly: economic perspectives on regulation in Australia’, Address to the Conference of Economists, Business Symposium, Hyatt Hotel, Canberra, 2 October 2003 p. 4.

    2 Gary Banks, Address to the Conference of Economists, 2 October 2003, p. 3.

    3 IRC v. Duke of Westminster [1936] AC 1.

    4 Newton v. Federal Commissioner of Taxation [1958] 98 CLR 1.

    5 Hon John Howard MP, Treasurer, 2nd Reading Speech, Income Tax Laws Amendment Bill (No. 2) 1981.

    6 Australian National Audit Office, Audit Work Program 2003-04, July 2003, pp. 101-07.

     

    Next: Appendix A - Parties Consulted During Review

     

    © Commonwealth of Australia 2003