Appendix C - Overview of the Tax Administration System

This Appendix was prepared by the Australian Taxation Office at the request of the Inspector-General of Taxation to provide an overview of Australia’s taxation administration systems.

Overview of the tax administration system

Working with the community

The Australian Taxation Office (ATO) interacts with every sector of the community. Most adult Australians have contact with us at least once a year, when they lodge their annual income tax return. Each financial year around 10 million individuals lodge income tax returns with around 85 per cent getting a tax refund.
Businesses lodge activity statements either monthly or quarterly. Through these activity statements, businesses record and pay the GST they have collected, as well as other taxes.
Most Australians use a tax agent at some point for their tax affairs so tax agents play a critical role in the efficient operation of the tax system. Around 75 per cent of individuals and 97 per cent of business related income tax returns are lodged through agents. 55 per cent of activity statements are also lodged through agents.
To ensure effective interactions the taxpaying community is split into five segments:

Individual taxpayers

This segment is the largest group in the tax system and is made up of around 10 million people, mostly salary and wage earners. This segment contributes around 40 per cent of Commonwealth revenue.

Microbusinesses

There are around 2.5 million businesses with annual turnovers of less than $2 million. They account for just over 10 per cent of Commonwealth revenue and around 60 per cent of the debt collected by the Tax Office.

Small to medium enterprises

There are around 108,000 businesses with an annual turnover between $2 million and $100 million. They account for around 10 per cent of Commonwealth revenue.

Large business

In the large business segment there are around 1,400 large business groups and 650 high wealth individuals who (together with their families and business entities) control more than $30 million in assets. The segment contributes approximately 17 per cent of Commonwealth income tax, 55 per cent of GST, 54 per cent of fringe benefits tax and 95 per cent of excise revenue.
This segment also includes around 460 superannuation funds which are required to comply with income tax and superannuation obligations.

Non-profit and government organisations

Only 170,000 of Australia's 700,000 non-profit organisations are in the tax system. This is because many non-profits are small groups such as sporting and recreational clubs which are run on a volunteer basis and are exempt from income tax and other taxes. However, the 30,000 largest non-profit organisations employ 8 per cent of Australia's workforce so their role is significant because they collect around $5 billion of tax paid by their employees.

Compliance

The Australian Taxation Office recently released its Compliance Program for 2003-04.
That Program details the many compliance issues the Tax Office faces in managing Australia's revenue systems. It also details the ATO’s responses to managing those issues.
The overall approach to compliance is twofold:

to ensure strategies are in place to deter non-compliance.
to maximise the number of Australians who choose to voluntarily comply and to do this, the ATO has strategies in place which make it as easy as possible for people to understand and meet their obligations, and

ATO responses are proportionate to what is found, including the firmest possible enforcement actions for those who deliberately set out to avoid their obligations.

2002-03 results

In releasing the 2003-04 program, the ATO also released a snapshot of the results of the 2002-03 Compliance Program.
The additional revenue collected in 2002-03 as a result of audit and other verification activities exceeded $3 billion.
This was the direct revenue impact only. It does not include the deterrent effect of the extensive compliance presence reflected in the wide range of audit and other verification activities detailed in the 2002-03 results. It also does not include the revenue impact of the additional 3.3 million activity statements and 420,000 income tax lodgments that resulted from an extensive lodgment enforcement program.
18 Finally the $3 billion in additional collections does not include the taxes and penalties raised that are subject to dispute.
In the large corporate sector, in excess of $2 billion in tax and penalties raised in audits last year is subject to dispute. Final collections will depend largely on the resolution of disputes, some of which can take many years to resolve through the courts.
To illustrate the breadth of the ATO’s responsibilities, the 2002-03 results snapshot also records the fact that 26 tobacco cutting machines, 58.8 tonnes of tobacco and tobacco leaf, and three illegal liquor stills were seized.

The compliance landscape

The ATO’s 2003-04 Program is shaped by a number of compliance risks.

The dynamic and volatile nature of the world financial and trading system which continues to demand the ATO’s attention and resources. This is because of the inherent complexity of dealings and risks associated with transfer pricing and abusive use of tax havens.
Tax planning is a key feature of any tax landscape. Maintaining the line between legitimate tax planning  no one has an obligation to pay more tax than is payable under the law  and planning ultimately designed to avoid taxes payable under the law, remains a challenge for all.
The appetite to find ways to pay less tax and the propensity to profit from devising and promoting schemes to satisfy that appetite is an ever present risk to the revenue systems.
Of concern are warning signs of aggressive tax planning techniques being used for GST purposes and in the emerging bartering sector.
Work expense claims, such as car, travel, uniform, laundry and self-education expenses continue to rise at rates out of step with ordinary price increases.
- Around 6.4 million taxpayers claimed $9.4 billion last year, an increase of around 12 per cent on the previous year.
Reflecting trends in the investment property market, an additional 60,000 rental property owners came into the tax system last year.
Around 1.3 million taxpayers declared rental income of $12.6 billion and claimed rental deductions of $13.2 billion last year, both up 8 per cent on the previous year.
Many more people are now managing their own superannuation funds. There are around 250, 000 DIY funds, with registrations growing at more than 2,000 a month.
Serious fraud and evasion also remains an ever present risk, particularly with the rise of identity fraud as a more significant threat, not restricted to tax.
The progressive withdrawal of cigarette manufacturers from the local tobacco leaf market increases the risks of illegal tobacco or chop chop as it is better known being sold on the black market.

Robust collections

Last year's collections as forecast in the May 2003 Budget were $1.7 billion above the original budget forecast.
As detailed in the Large business and tax compliance booklet released in June 2003, growth in corporate tax continues to outstrip the growth in GDP.
Similarly, effective tax rates for large corporates, measured by tax payable compared to total income, profit, total expenses or total assets are all on an upward trend.

Additional compliance resources in 2003-04

Some 850 additional staff will be devoted to managing compliance in 2003-04 compared to last year.
The additional compliance resources will be devoted to both improving assistance programs and expanding audit and verification activities.
This year approximately one-third of the compliance budget will go towards the provision of advice and assistance, including marketing and education, while almost two-thirds will fund active compliance, including audit and other verification activities and debt and lodgment enforcement.
The full range of compliance activities these resources are expected to be devoted to over the coming year is detailed in the Compliance Program.

Governance issues

In releasing the Large business and tax compliance booklet, the role of boards of directors and good governance in relation to taxation was raised.
The expectation is that large corporates will ensure appropriate oversight of systems for management and integrity assurance relative to the importance of various tax issues. This requires close management and scrutiny of material issues.
The ATO does not expect directors and CEOs to be experts in the fine detail of the many volumes of tax code.
At the same time, a failure of tax compliance can have significant financial consequences for corporations and their shareholders.
The Large business and tax compliance booklet is pitched at a common sense explanation of what will attract tax office attention and the features of arrangements the ATO can be expected to challenge. It should assist directors and CEOs to gain a reasonable understanding, and make reasonable enquiries on tax issues related to major transactions and compliance systems within their corporations.
One of the more fundamental issues for a board and CEO is to consciously decide the position it wishes to take on tax planning, rather than have it made for them by others.
What is clear from the 2003-04 Compliance Program is that many of these issues are just as relevant for many medium-sized businesses whose turnover is high but below the $100 million threshold the ATO uses to classify large businesses.
The ATO will increase its focus on this segment by applying the sophisticated economic and tax performance analysis used in the large corporate segment, with preliminary analysis pointing to similar results.
820 detailed risk reviews are planned this year, with compliance action being determined by the results of those reviews.
Learnings and experience gained in managing large corporate compliance will be applied to better managing compliance in the medium-sized business market with ATO experts from large business sharing their experience and expertise with tax office people working in the small to medium market.
Preliminary results of work undertaken last year to assess levels of compliance confirm there are issues to be addressed in relation to governance with some do it yourself (DIY) superannuation funds. Part of the tax office’s response is educational and will include continuing trustee education program, as well as providing advice through more than 100 planned seminars and presentations.
At the same time the ATO is reviewing identified high risk trustees, including those disqualified through bankruptcy, to ensure their appropriateness as trustees.

Serious fraud and evasion

The tax law provides administrative penalties as the usual response to non-compliance.
Clearly the court system could not cope with all cases of non-disclosure of income or over-claiming of deductions being brought before it. Dealing more firmly with the more serious cases of fraud and evasion through prosecution action is an option that will not be ignored.
In 2002-03 161 successful prosecutions resulted from the 167 cases brought before the courts and 67 prison sentences were handed down.
The courts have shown they take an extremely serious view of revenue fraud, with two to three-year-plus sentences not unusual.
Investigators dealing with aspects of serious fraud and evasion were recently brought into one team under new senior management arrangements. As well as trafficking in illegal tobacco, this 400-strong group will have a specific focus on credit fraud (related to the broader issue of identity crime) and on people attempting to operate outside the tax system. This latter work will build on recent experience with some barristers.
The ATO is examining the use of sophisticated data matching technology. Initial projects include continuing to examine a range of professional groups, including the legal, medical, accounting and architectural professions.
Credit fraud involves the adoption of false identities to claim credits, whether through refunds claimed on income tax forms or false GST input tax credits claimed through activity statements.
The ATO already has systematic approaches to identify suspect refund or credit claims prior to them being paid.
Last year 88,500 high risk refunds or credit claims were checked prior to issue. These checks may involve telephone queries or field reviews. In some cases, third-party suppliers may be contacted to validate transactions resulting in claimed refunds.
In 2003-04 the ATO will conduct over 113,000 such checks.
The balance the ATO has to strike here is applying reasonable checks without unreasonably delaying refunds to typically small businesses facing cash flow issues.
Identification and investigation work after refunds have been issued is therefore another feature of work in this area. The ATO works in close partnership with law enforcement agencies, including the Australian Federal Police and the Australian Crime Commission, which has a specific reference on money laundering and revenue fraud.
Extensive data matching with Centrelink, the Department of Immigration and Multicultural and Indigenous Affairs and with Births, Deaths and Marriages data helps identify use of false identities, including the use of other people's identities.
The ATO is also actively working with other government agencies in developing whole-of-government approaches to proof of identity processes.
The growth of identity fraud as a community issue has raised issues about the integrity of the Tax File Number data base where the number of Tax File Numbers (TFN) built up over the years exceeds the taxpayer population.
Aided by funding from government, new data matching programs and the introduction of electronic Births, Deaths and Marriage data, the ATO has been undertaking a major program to verify and update the TFN Register.
In 2002-03 the ATO updated or removed 2 million Tax File Numbers.
To date that work has revealed little evidence of concern about fraud with excess TFNs being typically related to deceased taxpayers or taxpayers who have left Australia. Cases being reviewed for the possibility of fraud amount to only $7 million in potential revenue at risk.

Making It easier to comply

Compliance management is not simply about audits, verification and enforcement. It is also about making it as easy as possible for people to comply.
One-third of the ATO’s compliance budget is directed at provision of advice and assistance. This includes a wide variety of marketing and education programs, advisory visits for new businesses, seminars and responding to telephone and written enquiries.
Last year, for example, the ATO conducted over 41,000 advisory and new business service visits, responded to over 12 million telephone and counter enquiries, issued almost 14,000 private rulings and conducted over 900 bizstart seminars.
A little over 2 per cent of the ATO budget will be invested in a program of initiatives designed to support the easier, cheaper and more personalised initiative.
The recently released booklet Making it Easier to Comply outlines a three year program detailing how the ATO will provide easier, cheaper and more personalised services, information and advice.
Already the program has delivered personalised tax agents' portals with account and other details of their clients and improved phone services, notices and website. A small business portal is being tested.
Effective management of revenue systems is also about managing a complex set of relationships, differentiating treatment according to the compliance posture adopted by different taxpayers and working co-operatively with others who have a role in the operation of those systems.

Tax agents

The major role played by tax agents in the operation of those systems cannot be underestimated.
In recognition of the critical role of tax agents, much of the initial focus of the Easier, Cheaper, More Personalised Program has been on better supporting these professionals.
Long established forums such as the National Tax Liaison Group and the ATO Tax Practitioner Forum ensure tax agents can contribute to ATO administrative approaches.
Tax agents face a number of challenges in remaining abreast of the law in the face of a continuing raft of new legislative measures. This challenges us to rethink role in educating them about changes to the law.
At the same time, a number of ATO activities are directed at monitoring the overall tax performance of tax agents, both personal tax performance and practice integrity. This includes identifying trends in claims, income reporting and advice that, at a minimum, raises questions about the practices of some agents.
After three years of operation of the new tax system, the ATO is implementing a renewed focus on the systematic profiling of returns lodged by tax agents to better identify patterns and trends that may indicate less than acceptable tax return preparation by particular agents.
Apparent patterns of poor compliance or competency issues by particular agents, or a trend across agents, will result in appropriately tailored compliance and education activities. Tax agents may be advised where the ATO sees a trend, visits an agent, undertakes a specific audit program, or conducts a broader review of their tax practice management procedures and controls.

Conclusion

The purpose of publishing the Compliance Program and associated papers such as the Large business and tax compliance booklet is to be more accountable to the community by explaining the decisions made in applying the resources available to the ATO in managing compliance.
Equally, in publishing material about what the ATO sees and what it is doing about it, the ATO is seeking to influence decisions by people in their approach to meeting their obligations.
These publications will provide a platform for informed consultation and feedback from the community on ways that the ATO can further improve management of Australia's revenue systems.

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