Chapter 9: Report on improvements to tax administration arising from the inspector‑general's case study reviews of the Tax Office's management of major, complex issues
9.1 In October 2005, the IGT announced his intention to review the ATO's ability to identify and deal with major, complex issues within reasonable timeframes. This followed concerns raised by taxpayers and their representatives that the ATO took too long to come to grips with and satisfactorily resolve these types of issues. This, they argued, caused significant uncertainty whilst operating under a self-assessment environment, and also unnecessary costs in dealing with the ATO on these types of issues.
9.2 A number of examples illustrating these concerns were provided to the IGT by stakeholders. The IGT decided to focus on three of these examples as case studies for the overall review. The three examples shared similar features of scale and complexity, and all had taken an exceedingly long time to resolve.
9.3 For each case study review, the IGT examined the timeframes taken to identify and to deal with the issues, the causes of uncertainty, the ATO's approach to the issues and the costs to the community. Reports for the three case study reviews were released as follows:
- Review of Tax Office's management of complex issues — Case study on service entity arrangements — (publicly released 24 April 2007)
- Review of Tax Office's management of complex issues — Case study on living-away-from-home allowances — (publicly released 10 May 2007)
- Review of Tax Office's management of complex issues — Case study on research and development syndicates — (publicly released 16 August 2007).
9.4 The implementation of the recommendations arising from these three reports has been considered earlier in chapters 4, 5 and 6 of this report.
9.5 The three reports showed that the ATO can have difficulty grappling with the interplay between complex interpretational issues, and complex internal and legal administrative frameworks in equally complex and dynamic commercial settings. The case studies also highlighted the challenges for the ATO's top management in ensuring that espoused values are maintained throughout a large, complex and culturally evolving organisation.
9.6 In responses to the case study reports, the ATO referred to measures aimed at improving timely consideration and resolution of complex issues, for example, case management leadership, aged case management, the Priority Technical Issues (PTI) process and alternative processes to the statutory dispute resolution Part IVC process. Nevertheless, the case studies showed that despite the introduced measures prolonged delays were still experienced, indicating further changes are needed.
9.7 The IGT summarised the generic issues arising from the case study reviews and worked progressively with ATO senior management to distil key areas where there was scope for improvement in the management of major, complex issues. The following four inter-related areas were identified and agreed upon:
- Timeliness — reducing the risk and consequences of delayed resolution.
- Compliance and risk management strategies — balancing efficiency and differentiation.
- ATO values and obligations in a self-assessment system.
- Communication and transparency.
9.8 A final report1 (the fourth report) was then prepared to summarise the systemic issues identified in the case study reviews and to detail the improvements agreed for implementation by the ATO. The fourth report was released in August 2008 and a review of the status of implementation of recommendations arsing from the report is set out below.
There needs to be clear guidance for Tax Office staff and the community on what timeframes the Commissioner expects to be achieved in resolving complex issues, noting the income tax and other tax time-cycles that taxpayers must work within. Corporate time limits or performance standards need to be set for the Tax Office to conclude its view of how the law applies in respect of priority technical issues (PTIs) and other issues requiring precedential views.
The Tax Office agrees that there is a need for standards for the timeframes allowed to reach a considered ATO technical view of the law for all PTIs.
The Tax Office will implement and work to a benchmark maximum of six months for establishing the Tax Office view. If at the outset of identifying or progressing a PTI it is clear that it will take longer than six months to establish the Tax Office view, a business case will need to be made and agreed by the relevant Band 2 SES officers.
The Tax Office will continue to improve the current processes for PTIs and ensure that agreed timeframes (including significant milestones) are in place when those PTIs are registered. In addition, approval from the relevant Band 2 SES officers in both the Law Sub-plan and relevant Risk area will be required during the resolution of a PTI before those agreed timeframes are extended.
For public rulings and LAPS, the Tax Office's programs on www.ato.gov.au reflect the agreed delivery timeframes for those products including the issuing of drafts in the case of public rulings. The Tax Office processes governing the development of both products requires referral to and approval from the relevant Band 2 SES officer for existing timeframes to be varied.
The rulings program also indicates the Tax Office's 'target' timeframes for the development of taxation rulings and determinations across the different subject areas. Exceptions to these targets (for example, to allow additional consultation with industry) are advised on the program. The 'target' timeframe for a LAPS is six months from notification on the program with an additional three months allowed when public consultation is involved.
9.9 In relation to major, complex issues that fall within the above PTI process, there has been a reduction in timeframes which points to an increased Tax Office urgency in relation to the resolution of these PTIs. However, it is unclear whether timeframes that occur outside of this process (i.e. the identification and escalation of a major complex issues during compliance/ provision of advice activities, and the drafting and public communication of the ATO view) have reduced in a corresponding manner.
9.10 As set out within the Tax Office response to this recommendation, the Tax Office public ruling and practice statement programs on www.ato.gov.au set out the agreed delivery timeframes for public rulings and practice statements. These programs also identify those rulings and practice statements that have not met these delivery timeframes and provide reasons for delays. Existing processes and timeframes continue to apply to public rulings and practice statements.
9.11 On 28 July 2008, the Chief Tax Counsel and First Assistant Commissioner Law and Practice issued a Minute outlining practice management changes to priority technical issues. These changes principally applied to priority technical issues involving advice, publications, Treasury advice preparation and addenda to public rulings. This was in recognition of the governance arrangements already in place for public rulings and practice statements and the other imperatives driving the timeliness of litigation and legislation. In addition, priority technical issues involving litigation are generally considered to have a view upon registration, with the litigation being to test or defend that view.
9.12 The Minute issued to all senior staff involved in priority technical issue work including Band 2 SES officers in the Law, Compliance and Operations sub-plans and all SES officers in the Centres of Expertise and Tax Counsel Network. The Minute set out:
- a benchmark of six months for establishing the ATO view, unless additional time is agreed to at the outset by the relevant SES Band 2 officers; and
- that approval the relevant Band 2 officer in both the law and risk areas would be required before those dates could be extended.
9.13 The practical implications of the proposed changes and how best to implement them were discussed by relevant key stakeholders including representatives of the Centres of Expertise, Tax Counsel Network, business lines / risk areas, the Tax Office's Technical Network (TechNet)2 and the Priority Technical Issue and Public Rulings Branch.
9.14 The key messages in this Minute were communicated to staff via the Priorities in Focus newsletter (a quarterly newsletter prepared by the Priority Technical Issues and Public Rulings Branch within the Law sub-plan) for the September 2008 and December 2008 periods. This newsletter was emailed to SES officers in the Centre of Expertise and Tax Counsel Network as well as Priority Technical Issues co-ordinators in each Centre, Tax Counsel Network region and risk area. It was also published to the Tax Office intranet.
9.15 In implementing these improvements, the Tax Office has reviewed and updated guidance provided for staff in Practice Statement Law Administration (PS LA) PS LA 2003/10 (about the priority technical issues process) the Priority Technical Issues Process Guide (which provides detailed procedures for prioritising, approving and managing priority technical issues), the Public Rulings Manual (about the public rulings process); PS LA 1998/1 (about the practice statement process) and the Information Kit for Authors and Sponsor of Law Administration Practice Statements.
9.16 In relation to managing litigation, PS LA 2005/22 (Litigation and PTIs), PS LA 2007/12 (Conduct of Tax Office Litigation) and PS LA 2007/16 (Risk management in litigation) provide guidance and instructions to staff in relation to the conduct of litigation including project planning (which involves setting timeframes and milestones).
9.17 The Priority Technical Issues Process Guide lists, for clarity for Tax Office staff, the categories of priority technical issue work to which the 6 month benchmark (unless otherwise agreed) does apply. This includes priority technical issues involving advice (eg private ruling, audit position paper); Treasury advice preparation; publications and Class Rulings that are escalated as priority technical issues. This encompasses the priority technical issues that involve a resolution strategy other than public ruling, practice statement, litigation or legislation.
9.18 To further assist staff in planning and managing the work involved in resolving a priority technical issue, the Tax Office has also developed a suite of pro forma project plans (or 'resolution strategies'). These set out the key steps and milestones involved in each resolution strategy, with suggested timeframes where appropriate. A resolution strategy, with key milestones, including a completion date, must be agreed before the priority technical issue is registered.
9.19 In addition, enhancements to the Priority Technical Issues Proposal (which initiates work on a technical issue) have been made, together with system enhancements to the priority technical issues Register. Enhancements to the Register include the ability to input key milestone dates and to attach project plans and other relevant documentation. This allows for better work management and for progress against milestones to be monitored.
9.20 Beyond the processes for Public Rulings, practice statements and PTIs, the Tax Office has a range of "Corporate time limits or performance standards… for the Tax Office to conclude its view of how the law applies in respect of … other issues requiring precedential views".
9.21 For both class and product rulings, there is a clear expectation that Tax Officers will liaise regularly with applicants to discuss issues arising with each application and the expected timeframe for its completion. Timeframes vary considerably and can depend on the complexity of issues under consideration, any need for information from the applicant and the time taken to respond and, in some cases, changes to the arrangements under consideration (in some circumstances, material changes may constitute a new arrangement and so be considered a new application).
9.22 There are no externally reported service standard benchmarks for class or product rulings however the Tax Office currently reports internally against a notional benchmark similar to the one used for private rulings. For the 2008-09 and 2009-10 years, the benchmarks for private rulings were as follows:
- 80 per cent of cases to be completed within 28 days of receipt of all necessary information or within negotiated due date
- 99 per cent of cases to be completed within 90 days of receipt in the office or within negotiated due date.
9.23 This benchmark has yet to be fully tested for class and product rulings and so the internal benchmark is still described as 'notional'. In formalising an external performance standard, additional consideration for timeframes needs to account for the requirement to provide draft product and class rulings to the applicants for consent, the range of complexity of issues (e.g. escalation to a PTI would generally indicate greater complexity, and bring the matter under PTI timeframes) and also to consider community expectations for these types of rulings.
9.24 ATOIDs do not have separate timeframes, as they are not generally considered stand-alone products, but rather are produced to provide the ATO view as part of another product, such as a position paper in an audit or a response to a private ruling request. Those processes and products are subject to corporate time limits and service standards, which also then extend to the cover the creation of an ATOID. More complex issues within an ATOID are likely to be covered by the PTI process (as similarly noted above for class or product rulings).
IGT Conclusion — Implemented
9.25 In the 2008 fourth report, the IGT stated that there was a need to increase a general sense of ATO urgency for providing guidance on matters where taxpayers need to make decisions or may be making decisions that do not comply with the ATO view. The case studies on which the report was based, showed that the ATO took too long to finalise its view of how the law applied and did not recognise the impact of the delays on taxpayers who are faced with making decisions during protracted periods of uncertainty about the ATO's technical and compliance position. The case studies showed that delays also compounded the negative impact of compliance strategies, entrenched taxpayer resistance and exacerbated management complexity for the ATO.
9.26 In responding to recommendation A, the ATO only agreed that there was a need for standards for the time taken to reach an ATO view for priority technical issues (PTIs) and not otherwise. There is more discussion of the implications of this in paragraphs 9.28 to 9.39. A number of changes have been introduced to address this and these are discussed below. However, these changes do not apply outside of the PTI process. This point is noted with reference to the ATO's above response that it is unclear whether timeframes outside of the PTI process have reduced.
9.27 The resolution of a technical issue is just one of a number of stages involved with resolving a complex issue. There are activities leading up to and after the time when a technical issue is handled. For example, the identification and escalation of the issue during the compliance phase and the stage involving the drafting and public communication of the ATO view. Extended timeframes to resolve complex issues outside of the PTI process were highlighted as a key issue in the case studies that lead to the fourth report. For example, the IGT's case study on living-away-from-home allowances3 (LAFHAs) revealed that over a five year period, the ATO adopted at least five different strategies to address the issues and not one of these was pursued to finality.4
9.28 PTIs are usually the most complex or significant technical issues based on risk to revenue or impact on confidence in the tax or superannuation system. They usually require resolution by way of formation and/or application of the ATO view of the law and most commonly are referred to the ATO's more senior technical staff. For the purposes of managing PTIs, an 'ATO view' is considered to have been established once the ATO's preliminary view has been communicated to a taxpayer (e.g. where a draft public ruling is published).
9.29 At the lower end, an issue would be classified as a PTI where the ATO's risk mitigation strategy is at least 'very heavily' dependent on resolution of the issue and if left unresolved, could result in (for example) missed collections of between $50 to $250 million per year and at least some minor criticism of the ATO. As noted in the fourth report, complex issues usually involve a significant number or class of taxpayers, significant amounts of revenue or would attract substantial community attention. Therefore, in view of these two sets of thresholds, complex issues would generally be classified as PTIs.
Changes to PTI timeframes
- advice (private rulings and audit position papers);
- Treasury advice preparation;
- addenda to public rulings; and
- class rulings and product rulings (that are escalated to PTIs).
9.31 In response to this recommendation, the ATO has established a corporate expectation of communicating to taxpayers the ATO's preliminary or final view in respect of 'advice PTIs' within six months of an issue being registered as a PTI.
9.32 Other types of PTIs (non-advice PTIs) are PTIs that involve public rulings (including drafts) and practice statements. For these items, the ATO referred to its existing timeframes which are:
- Draft public rulings and determinations — finalisation within six months of being notified on the ATO's rulings program.
- Final public rulings and determinations — finalisation within twelve months of being notified on the ATO's rulings program.
- Practice Statements — finalisation within six months of being notified on the program (unless external consultation is required in which case it will be nine months).
9.33 Also there are PTIs that involve litigation and legislation which do not have corporate timeframes because the ATO considers that these timeframes are dependent on matters outside of their control.
Other precedential ATO views not captured by the PTI process
9.34 As part of fieldwork for this follow up review, the IGT investigated whether there was a timeframe or performance standard set for ATO Interpretative Decisions (ATO IDs).5 The ATO did not provide any timeframe or performance standard for ATO IDs. However, under the ATO's advice framework, ATO IDs document precedential views6 that officers are required to apply, unless the matter is escalated to a technical-decision maker for reconsideration.
9.35 Furthermore, the IGT notes that there are circumstances where an ATO ID can have significant impact on the tax administration system either because of the revenue implications (not just for taxpayers but also for the government) and/or because of the numbers of taxpayers involved. This situation is exacerbated where there is no other ATO guidance available on the technical issue in question. Therefore the IGT remains of the view that a timeframe expectation in line with this recommendation should be set by the ATO.
9.36 The IGT also reviewed how the ATO had set time limits for tax officers to conclude the ATO view for class and product rulings that are not escalated to a PTI. The ATO advised IGT that a set timeframe for these two products has yet to be established.
Clear guidance on timeframes
9.37 As discussed above, following the IGT's fourth report the ATO established a six month benchmark for 'advice PTIs' and communicated this to staff. Furthermore, a suite of pro forma project plans and enhancements of the ATO's PTI systems and documents, which are discussed in recommendation C, ensures that tax officers are aware of timeframes and performance standards.
9.38 For PTIs involving public rulings, determinations and practice statements, the ATO makes available the expected timeframes for tax officers via internal instructional guides and for taxpayers via the ATO website. However for taxpayers, there is a bit of work involved in locating the relevant information on the ATO website. For example, in relation to public rulings (including drafts), taxpayers are required to locate a public rulings program spreadsheet and then browse through the spreadsheet to determine the performance standards for these products. Similarly for practice statements, taxpayers are required to locate the program and then identify the paragraph specifying the timeframe.
9.39 In relation to other precedential ATO views not captured by the PTI process, a timeframe has not been set for ATO IDs or for class and product rulings not escalated to a PTI.
9.40 The ATO's agreement to the IGT's recommendation was limited to PTIs.
9.41 The ATO has introduced some welcomed changes to the PTI process in line with what it had agreed to implement. For example, the setting of a six-month corporate expectation for communicating the ATO's preliminary or final view to taxpayers in respect of 'advice PTIs' and the introduction of project plans for all PTIs to ensure that staff are aware of the timeframes for PTIs.
9.42 The IGT concludes that the ATO's agreed changes are implemented. However as demonstrated by the extended timeframes involved with the resolution of the complex issues in the case studies that lead to the fourth report, the IGT remains of the view that change should also be introduced outside of the PTI process.
9.43 Also as discussed earlier, the absence of a timeframe or performance standard for ATO IDs and for class and product rulings not captured by the PTI process should be addressed.
Ways to increase early top management awareness and hands on management of complex issues that are unresolved for unreasonable periods of time need to be developed. Circuit-breakers are needed to cut across processes and procedures where they are not leading to the timely establishment of the Tax Office technical view.
The Priority Technical Issues Committee (PTIC) process, under the leadership of the Chief Tax Counsel, regularly monitors the progress of all PTIs and governance of the PTI process.
The Tax Office has now introduced a 'top down' intervention mechanism in the management of major/complex issues, including PTIs, when it becomes apparent that a significant milestone will not be met.
The intervention is by the relevant existing SES Band 2 officers in both the Law Sub-plan and Risk areas, such as a Deputy Chief Tax Counsel, or the Chief Tax Counsel and the Deputy Commissioner responsible for the issue as part of the PTIC process which meets every six to eight weeks. If necessary/appropriate, issues can be further escalated to the relevant Second Commissioners.
9.44 As noted at the time of the report, the Tax Office has introduced a 'top down' intervention mechanism in the management of major/complex issues, including priority technical issues. Under the leadership of the Chief Tax Counsel and Deputy Chief Tax Counsel, and through the Priority Technical Issues Committee (PTIC) priority technical issues, including governance arrangements are regularly monitored.
9.45 PTIC meets every 6 to 8 weeks and is attended by senior officers from Law and Practice and Compliance, including the Senior Assistant Commissioner Centres of Expertise, all Deputy Chief Tax Counsel, the Chief Tax Counsel as well as the Second Commissioner Law and at least one Band 2 officer representing the Compliance and Operations sub-plans.
9.46 The Committee reviews all issues aged over 4 months without an ATO view, giving particular attention to those issues that appear to have stalled and require intervention. Where a strategy is not agreed at the meeting, a member of the Committee is assigned to follow up on that issue and report back to the Committee. This process acts as a circuit breaker for issues that are not being resolved in a timely manner. Prior to the meeting, individual areas, such as the Centres of Expertise and the respective risk areas, may undertake separate call-overs of issues.
9.47 The Tax Office Minute of 28 July 2008 referred to above, outlines escalation processes for issues at risk of not meeting key milestones. The Minute outlined that two months before the Tax Office view planned date, the PTI and Public Rulings Branch would contact staff involved in resolving those issues seeking confirmation that due date would be met. The Minute also stated that if it was apparent the milestone could not be met, the officers working on the issue would be required to escalate the issue to the relevant Band 2 officers, advising how the issue would be resolved and specifying a revised date. Given existing approval and escalation processes for rulings and practice statements, this process was implemented for those priority technical issues to be resolved by way of advice, a publication other than a public ruling or practice statement, advice to Treasury and addenda to public rulings.
9.48 One such exercise has been undertaken, complemented and supplemented by the PTIC process. The outcome was that strategies were agreed to bring the matters to completion. These processes will continue to be run in parallel with PTIC assisting in identifying strategies for resolving issues and any other escalation that is necessary. PTIC has SES Band 2 membership from Compliance so that individual PTIs that are slipping on the program can be and are discussed at the meeting. Through PTIC, opportunities for improvement continue to be explored. Transfer of the priority technical issues to Siebel is also expected to deliver the opportunity for further business improvements.
Data in relation to improvement in figures since implementing these improvements:
9.49 As at 30 June 2008, there were 60 priority technical issues without an ATO view.7 Of these, 26 were aged over 6 months, 3 of which were aged over 24 months. There were 4 issues with advice as a resolution strategy (1 of which involved a priority private binding ruling) and aged between 4—6 months. In addition, a further 4 were in the 7—12 month category, 1 was aged 13—24 months and 2 were aged over 24 months.
9.50 As at 30 June 2009, there were 48 technical issues without an ATO view.8 Of these, 20 were aged over 6 months; there were no issues aged over 24 months. There were 5 issues with advice as a resolution strategy and aged between 4-6 months. A further 5 (2 of which involve priority private binding rulings) were in the 7-12 month category and a further 1 was aged 13-24 months. PTIC is continuing to monitor all of these issues.
9.51 Graphs showing the resolution types at 30 June 2008 and 2008 and the age profile for those PTIs are attached.
PTIs with no ATO View by Age and Status (as at 30 June 2008)
PTIs with No ATO View by Age and Status (as at 30 June 2009)
9.52 Note — in 2009, the Tax Office added a work type of 'Addendum' separate to 'public ruling' to separately identify those priority technical issues that involved amendments to an existing ruling from new rulings. Priority technical issues that are 'impeded' are those where resolution of the issue cannot move forward for reasons outside Tax Office control such as where it is the subject of a review by the Board of Taxation.
IGT Conclusion — Implemented
9.53 As discussed in IGT's 2008 fourth report, the reason for this recommendation was to reduce ATO delay in the resolution of complex issues through increasing senior management's awareness and involvement. The case studies, on which the report was based, demonstrated that resolution is faster when very senior managers become directly involved. This suggested that strong disciplines were required to guarantee early intervention at top management levels where resolution is not being achieved within expected timeframes.
9.54 In response to the recommendation, the ATO has introduced a series of processes and procedures to promote earlier awareness, and in turn hands on management, of matters affecting the resolution of PTIs. The IGT observed the appropriate application of these changes in the PTI cases reviewed during fieldwork and a summary of the introduced changes is provided below.
9.55 However, as in key recommendation A, these changes do not apply to the activities involved with the resolution of a complex issue which fall outside of the PTI process. In addressing the implementation of what the ATO agreed for this recommendation, the IGT is limited to a consideration of change to the PTI process.
Changes to the management of the PTI process
9.56 The first key change (discussed in detail in recommendation C9) has been the introduction of a suite of project or resolution plan templates10 which specify the proposed activities and target dates for a PTI case. These plans are created and submitted to ATO executives11 when a request is initially made for a matter to be classified as a PTI. The introduction of these plans has provided ATO executives with a reference point to use when undertaking a number of the below mentioned activities.
9.57 Also at the time of registration of a PTI, Senior Executive Service (SES) Band 2 officer approval is now required where it is apparent that the six-month timeframe to reach the ATO view will not be met. Senior ATO executives therefore have up-front knowledge of these cases and have the discretion to approve or not approve registration as a PTI.
9.58 The project or resolution plan must be regularly12 reviewed by the ATO's PTI and Public Rulings Branch (PTIPRB) which manages the operation of the PTI process (and on a monthly basis by PTI case officers). Where at any review point it is apparent that a milestone will be missed, requiring a change to the expected completion date, the relevant ATO executive13 must be provided with an explanation and a revised resolution schedule for the completion of the case. Their approval to extend the key milestone and completion dates must be obtained.14
9.59 The second key change has been the introduction of quarterly 'call overs' enabling the SES executive in charge of a business line (BSL) to review the progress of a PTI case and to be updated regarding any difficulties. Reports from these call overs are referred to the ATO's PTIPRB. The information contained in these reports is then included in the report used by the ATO's Priority Technical Issues Committee (PTIC).15
9.60 The third change to improve top management awareness has been the introduction of a briefing now provided to the ATO's Chief Tax Counsel (CTC) prior to each PTIC meeting by the committee's convenor. This briefing outlines the PTI cases to be reviewed in an upcoming PTIC meeting and provides the CTC with early awareness of cases experiencing difficulties. The CTC then initiates follow up action prior to the PTIC meeting.
9.61 A further change introduced involves PTIPRB staff contacting case officers ten days prior to a PTIC meeting for an update on any PTI they are working on 'without an ATO view'.16 This enables a further update to be provided to the CTC prior to the PTIC meeting. In addition, PTIPRB also runs a final report17 a few days before the PTIC meeting as a final check and update for the CTC.
9.62 Where there is disagreement amongst PTIC members during a meeting over a proposed strategy for the handling of a delayed PTI, the matter is now assigned for follow up by a member and a report is subsequently provided to the committee. This procedure has been introduced following IGT's fourth report as an additional action point to address delayed PTIs.
9.63 A strategic 'call over' is now also held twice a year to review the progress of PTIs and to oversee a re-evaluation of the priorities of the PTI process in consideration of changing BSL risk management strategies. These sessions are chaired by the Second Commissioner (Law).
9.64 For 'advice PTIs'18, a new circuit-breaker process has been introduced whereby a PTI case officer (and his or her manager) is contacted by the PTIPRB two months before the due date for finalisation of the ATO view. Where the case officer is unable to confirm that it will be finalised on time, the officer must escalate the matter, together with recommended strategies, to an SES Band 2 officer to review. If an extension is granted, the SES Band 2 officer is required to set review points within the revised time schedule and these are to be monitored by both the case officer's manager and by the PTIPRB.
9.65 As indicated in the ATO's response, the ATO's procedural guide and practice statement19 relating to PTIs have been updated to refer to the changes identified in recommendation B and to emphasise for staff the importance of actively managing to effect the timely resolution of PTI cases.20 Enhancements to ATO systems have also been made enabling more detailed recording of updates for each PTI case. This in turn has provided tax officers with more readily available information regarding a PTI case.
9.66 For PTIs involving litigation, the ATO considers that the strategic internal litigation committee (SILC) process21 (discussed in recommendation F) provides sufficient senior management awareness. Timeframes for these types of PTIs are not always within the control of the ATO and are dependant on the Court and Tribunal process.
9.67 ATO executives are kept aware of the status of PTIs over four months without an ATO view by reference to the report used for PTIC meetings. Detail regarding these cases, including the numbers of cases involved, are reported monthly to the Law and Practice Executive and on a twice-yearly basis to the ATO's executive committee22 responsible for monitoring office-wide performance.
9.68 The ATO's annual report specifies the numbers of PTIs finalised during the year and also the proportion of aged PTIs (i.e. past the six-month timeframe) without an ATO view compared with the total number of PTIs. The following figures indicate a steady reduction in the number of aged PTI cases 'without an ATO view'23:
- 50 of 236 PTIs on hand (21 per cent) at 30 June 2007;
- 26 of 192 (14 per cent) at 30 June 2008; and
- 20 of 172 (12 per cent) at 30 June 2009.
9.69 The above results suggest that the changes in ATO process and procedure have brought additional urgency to the resolution of PTIs. As outlined above, the ATO has employed significant effort to bring about change to the PTI process as it agreed to do for this recommendation.
9.70 The IGT concludes that the ATO's agreed changes are implemented. However, as demonstrated by the extended timeframes involved with the resolution of complex issues in the case studies that lead to the fourth report, the IGT remains of the view that change should also be introduced to increase top-down management and intervention for activities involved with the resolution of complex issues outside of the PTI process.
To assist management of the events that are critical to timely resolution of complex issues, the Tax Office should improve project management capability for large complex issues, and introduce initiatives to ensure that compliance actions are fair and based on a contemporary appraisal of the factors that have led to the issue.
Improving project management capability is important to the Tax Office. Project plans are required for the resolution of all PTIs. In addition to the PTI Committee process mentioned under 'Area B' above, there are regular call-overs to monitor progress of resolution of PTIs against project plans.
In addition to improvements to assist officers in their planning for the development and delivery of public rulings and LAPS, the Tax Office is developing further assistance for officers in both the Law Sub-plan and the relevant Risk areas to improve the management and timeliness of resolution of PTIs. The main assistance is aimed at improving their project management capability by providing assistance with project plans that must be completed on registration of a PTI. Achievements against these plans are subsequently monitored through the PTIC and related call over processes to ensure milestones are met. Where there is risk that a significant milestone will not be met, the SES Band 2 officers will intervene as outlined above.
Risk owners for major compliance activities will ensure that:
- adequate field work is undertaken to identify the issue and differentiate categories of taxpayers' circumstances;
- direct communication takes place with affected taxpayers and/or their advisers;
- regular reappraisal is made of compliance and revenue risk and costs, and
- the quality of information provided to taxpayers to help them meet their obligations is tested before a compliance strategy is designed and commenced.
(1) Improving project management capability for PTIs
9.71 Following the issue of the Tax Office Minute on 28 July 2008 referred to above, PS LA 2003/10 and the Priority Technical Issues Process Guide was also updated to set out the new policy and processes including:
- Emphasising the need for better project management of priority technical issues, including the need for clear and agreed timeframes; and
- Specifying escalation processes so that where there is a risk that a significant milestone will not be met, the relevant SES Band 2 officers will intervene.
9.72 See in particular, paragraphs 10, 26 to 28, 35 and 40 of PS LA 2003/10 and the Priority Technical Issues Process Guide (paragraphs 4, 6.3.2 to 6.3.4, 7.1 to 7.1.4).
9.73 To further assist staff in planning and managing the work involved in resolving a priority technical issue, the Tax Office developed a suite of proforma project plans (or 'resolution strategies'). These set out the key steps and milestones involved in each resolution strategy, with indicative timeframes where appropriate. A resolution strategy, with key milestones, including a completion date, must be agreed before the priority technical issue is registered. Staff are required to consider any additional activities they will need to undertake and the amount of time that will be needed to complete each activity.
9.74 These proforma resolution strategies are available to staff via the priority technical issues intranet site. Staff were made aware of these via the Priorities in Focus newsletter (for September 2008 and December 2008). Links to these schedules are also included in the PTI proposal form and on the public rulings and practice statement web pages; the Public Rulings Manual; the PTI Process Guide; and in the Information Kit for authors and sponsors of practice statements.
9.75 In addition, enhancements to the Priority Technical Issues Proposal (which initiates work on a technical issue) have been made, together with system enhancements to the priority technical issues register. Enhancements to the Register include the ability to input additional key milestone dates and to attach project plans and other relevant documentation. This allows for better work management and monitoring of progress against milestones. Reports, including those of aged priority technical issues provided to the PTIC, have been enhanced to include data from these additional fields.
9.76 These improvements have been embedded into the design for priority technical issues, public rulings and practice statements in the new Siebel environment.
(2) Initiatives to ensure that compliance actions are fair and based on a contemporary appraisal – context and initiatives
9.77 The elements of this accepted IGoT recommendation are now embedded as published policy within Tax Office work processes and that policy duly states the risk owner expectations as agreed. It is available to staff through the Tax Office intranet:.
9.78 Furthermore, the Tax Office plan is to also publish these risk owner expectations (and others) by 30 June 2010. This information to be published as Tax Office-wide Risk Management Instructions for Enterprise Risk Owners will be available to staff through the intranet.
9.79 They are issued under the Risk & Issues Management Corporate Management Practice Statement PS CM 2003/02 which has been refreshed this year.
9.80 Assurance of conformance with this practice statement for risk management will be provided through an annual Certificate of Assurance by the Chief Knowledge Officer (Corporate Governance – Risk Management).
9.81 The Chief Knowledge Officer may include sub-assurance questionnaires specifying criteria compliance with this practice statement to be completed by Business Service Lines in respect of risk management.
Other implementation activities and context:
9.82 The Tax Office has undertaken a stock take of risk management activities undertaken within key external forums such as National Tax Liaison Group (NTLG)24 sub-committees and practitioner forums.
9.83 This was a focus because the Tax Office needed assurance that the most significant risk activities were being discussed with relevant external stakeholders for their feedback, input and awareness.
9.84 In particular, this check was felt necessary for the Tax Office to identify risk issues and differentiate categories of taxpayer circumstances through discussion with key external stakeholders. Furthermore, these forums are used to ensure the Tax Office can help taxpayers to meet their obligations through providing the right level of information.
9.85 These forum discussions are important because direct communication and community input from taxpayers and key advisers informs broader ATO compliance strategies which assists in achieving high levels of voluntary compliance. Taxpayer audits are only one element of ATO strategies.
9.86 Where this stock take noted that there were gaps, they were not significant.
9.87 Significant complex product risks across the Tax Office are managed by the product committees such as the Income Tax Steering Committee which endorse risks and compliance strategies with input from risk owners as part of an annual HOTSA (Health of the System Analysis) process. These product committees have membership across the ATO including senior executive officers from Compliance, Law and Operations.
9.88 Within Compliance sub-plan, the detailed strategies are developed and managed at a product, market and special focus area (e.g. ATP, SNC) level. The governance and management arrangements require regular reassessment and monitoring of risks to test assumptions, evaluate effectiveness of treatment strategies and to identify where risks have changed. The outcomes of these reviews and the deliberations of these committees are reflected in the relevant risk registers, the formulation of our Compliance Program and specific treatment strategies.
9.89 Many significant risks are mature and are not new such as non-disclosure of capital gains. This means that our risk management processes for many of our on-going risks would not require anything new as a result of this IGoT recommendation. This is because we continue to work with key external stakeholders and re-appraise our risk strategies.
9.90 The development of new strategies is undertaken in collaboration with businesses and their intermediaries and is guided by the recently published "Developing effective compliance strategies" [NAT 72788-11.2009]. In particular, there is a section in that publication on "Engagement – consultation, collaboration and co-design". The forums mentioned later in this response are utilised extensively for this purpose.
9.91 Furthermore, at a detailed level, SES risk owners manage a technical risk by reference to the PTI practice statement, PSLA 2003/10, which states a number of risk owner responsibilities, including the regular review of risk levels. These responsibilities are:
Responsibilities of SES risk owners and risk contact
The SES Risk Owner, together with the nominated Risk Contact who reports to them, is responsible for:
- managing the overall mitigation strategy (or project, should one exist, of which resolution of the PTI is a part) for the relevant risk including, for example, Taxpayer Alerts, call centre scripts, communication strategies, systems requirements, follow up compliance strategies, advice to Government
- ensuring that the risk associated with the PTI is recorded and maintained on the ATO or business line Risk Register where relevant
- together with the PTI Owner regularly reviewing the level of risk and the importance of resolving the PTI, and therefore the priority level of the PTI
- advising the PTI Owner of any new intelligence, changes to the importance of resolution of the technical issue to the risk mitigation strategy or changes to the rating of the associated risk
- ensuring that the PTI Owner is given every assistance in resolving the technical issue
- liaising with the PTI Owner and stakeholders in articulating the technical issue and ensuring the resolution strategy deals appropriately with the business risks
- together with the PTI Owner and PTI SES, developing a plan for resolving the PTI, including the establishment of milestones and deadlines and the conduct of a consultative process
- in consultation with the PTI Owner, engaging as early as possible all relevant stakeholders including other business lines and areas such as Aggressive Tax Planning, International Strategy & Operations, Governance and Government Relations, Law & Practice, Goods and Services Tax or parties external to the Tax Office (including consultative processes as necessary)
- regularly reviewing progress of resolution of the technical issue (with the PTI Owner, PTI SES and stakeholders) to ensure that milestones and deadlines are being met and/or updated
- together with the PTI Owner, escalating changes to key milestone dates and completion dates to relevant DCTC or DC of the owning business line for approval
- ensuring that any related cases are maintained and managed in the appropriate case management systems and finalised once the technical issue is resolved, and
- determining any residual risk and evaluating the risk mitigation strategy on completion.
9.92 When a new risk emerges, the first response from the Tax Office is not to undertake extensive audit activity. Where appropriate, it may undertake limited review fieldwork with a number of taxpayers to understand if a risk exists and to assist with assessing the prevalence and size of the risk.
9.93 If a risk does exist the ATO assigns a risk owner and develop a comprehensive risk management strategy for complex risks. Necessarily, this work involves an appraisal of the risk drivers and the basis of the technical positions adopted which may be confirmed through our liaison with key stakeholders in the external forums mentioned above.
9.94 In some cases, the ATO risk management strategy has been to simply clarify the law through a tax ruling or determination. The strategy may take other paths.
9.95 For example, when new aggressive tax planning arrangements emerge, the Tax Office issues tax alerts and as possible, it then follow up the relevant taxpayers with correspondence explaining its views and giving those taxpayers and opportunity to make a voluntary disclosure. In particular, this activity demonstrates direct communication by the ATO with taxpayers and/or their advisers as required by the recommendation.
9.96 Division 7A is another risk topic where the Tax Office adopted an enquiring approach [instead of an intensive audit program], followed by law changes and clarification of the law. Throughout this process the ATO worked with the relevant tax professionals through key ATO external forums with the impact not being an audit program but a measured improvement in voluntary compliance which is now evident through ATO Compliance Effectiveness work.
9.97 ATO risk activities on Division 7A illustrates implementation of this agreed recommendation. In particular, the ATO has re-appraised the risk through our Compliance Effectiveness framework. That framework is the ATO process for appraising risk assumptions and risk ratings. ATO work on this risk also demonstrates the testing of the quality of information provided to taxpayers to help meet their obligations.
9.98 Another significant example of this recommendation in action is in GST where through the ATO's refund integrity work, a significant Section 13 risk emerged where some taxpayers took a view of the GST rules which became a risk and required clarification. The Tax Office communicated early and consistently with all relevant taxpayers and their advisers on this GST risk and as a result, fully appraised the risk. This action resulted in an efficient and effective way of managing the risk early preventing significant audit activity.
9.99 Importantly, all activities required by this recommendation are evidenced by our work on this GST risk. Our work on this risk particular demonstrates our testing of the quality of information provided to taxpayers to help meet their obligations.
9.100 Our approach to the management of risk associated with trusts is consistent with this recommendation. The ATO had long been concerned about the significant interpretational and administrative difficulties relating to the taxation of trusts. Rather than conduct a program of audits enforcing our views, the ATO committed to funding various issues before the Courts.
9.101 In the most recent example, we funded the Bamford test case to the High Court. Pending resolution we issued Practice Statement PS LA 2009/7 centralising the coordination of all trust case work involving the assessment of the net income of a trust, to ensure a consistent approach. The Practice Statement instructed staff to only take active compliance action to apply the Commissioner's (then) view in any particular case where there had been a deliberate attempt to exploit the operation of the trust assessing provisions or where there was a dispute involving the trust for some other reason. The tax profession were consulted regularly through this process.
9.102 In relation to the wider management of the trust risk, the ATO has established a Trusts Steering Committee (TSC) to ensure that we deliver co-ordinanted whole-of-ATO responses.
9.103 The Tax Office position is that any noting of agreed risk owner expectations in the Siebel work processes is only there to prompt tax officers and has not been held out to give complete assurances that risks will be managed as agreed with IGoT. Assurances come from amongst other things: continuing to work with key external stakeholders, complying with the PTI PSLA risk owner requirements, case appraisal and quality assurance processes, on-going effectiveness reviews and management of our complex risks through accountable Tax Office committees which oversight the work of risk owners.
Part i) - Implemented
9.104 The IGT's fourth report stated that changes to reduce the risk of delayed resolution were needed to assist the management of the critical path events generic to complex issues. Generic events were said to include early identification; establishing and communicating robust technical views; and sound approaches to confirming risks and behaviours. Others might involve selecting a number of test cases and going through the objection, review and appeal processes, or it may be by seeking declaratory proceedings while the matters are still at the audit stage. These critical path events might also provide a good framework for considering ways of achieving improvements in other agreed areas including communication.
9.105 In responding to the IGT's report, the ATO referred to measures aimed at improving timely consideration and resolution of complex issues. These measures included case management leadership, aged case management, the PTI process and alternative processes to the statutory dispute resolution Part IVC process. However, the case studies showed that despite the introduced measures, prolonged delays were still experienced, indicating that further change was needed. The first part of recommendation C was directed at this by seeking improvement to the ATO's project management of complex issues.
9.106 As in recommendations A and B, the ATO's response to the first part of recommendation C has been directed towards the changes it agreed to implement in the management of PTIs.
9.107 Firstly, the ATO has introduced a suite of project plan templates25 to assist staff meet key milestones and to manage the various types of PTIs. These plans are submitted with the initial PTI proposal and are therefore considered for approval by at least two senior ATO executives.26 The project plans specify the proposed activities and target dates for the PTI. The plans must be regularly27 reviewed by the PTIPRB (and also reviewed on a monthly basis by PTI case officers). Where at any review point it is apparent that a milestone will be missed, requiring a change to the expected completion date, the relevant ATO executive28 must be provided with an explanation and a revised resolution schedule. Their approval is required before any extension of key milestone or completion dates is allowed.29
9.108 A number of the changes discussed in recommendation B, including the introduction of quarterly 'call overs' enabling BSL SES officers to review the progress of PTIs and to address issues causing delay, also contribute to the more effective project management of PTIs.
9.109 The IGT observed the appropriate application of the above mentioned changes in the PTI cases reviewed during fieldwork.
9.110 As indicated in the ATO response, the procedural guide and practice statement30 relating to PTIs have been updated to refer to the changes identified in recommendation C and to in turn emphasise to ATO staff the importance of actively managing to effect the timely resolution of PTI cases.31 To assist the introduction and operation of the project plans, the ATO also made a number of enhancements32 to the PTI proposal, the PTI register and to associated systems.
9.111 In summary, the ATO's agreement to the IGT's recommendation was limited to PTIs.
9.112 The ATO has introduced changes to assist in the project management of PTIs which is in line with what it had agreed to implement. For example, the introduction of new project plans that are submitted for approval by senior ATO executives at the start of the PTI process.
9.113 The IGT concludes that the ATO's agreed changes are implemented. However, as evident with the extended timeframes involved with the resolution of complex issues in the case studies that lead to the fourth report, the IGT remains of the view that change should be introduced outside of the PTI process.33
Part ii) - Implemented
9.114 The IGT's 2008 report stated that there was a danger that leveraged compliance approaches used by the ATO may inadequately differentiate between the types of taxpayers involved or may be based on inadequate fieldwork to confirm and distinguish taxpayer behaviours. Lead cases may be selected initially for examination by the ATO to understand potential tax risks and their scope and can aid in understanding the relevant technical issues. This initial activity can inform and strengthen ATO compliance risk mitigation strategies and views of the law, without being representative of the full range of cases where different circumstances or legal interpretations may exist.
9.115 The IGT found that risk assessments of emerging major issues may not be borne out by field appraisals and subsequent experience. The IGT also found that the risk of this type of approach was at its highest where the scale of a compliance issue, and the potential effort required to address it, causes the ATO to look for a highly leveraged 'silver bullet' strategy, including the potential for applying anti-avoidance provisions.
9.116 The IGT's fourth report stated that there was a need for the ATO to introduce initiatives to ensure that an appropriate balance is struck between administrative efficiency and the need to recognise individual circumstances. There was also a need that risk assessments of major compliance issues be regularly updated to ensure that compliance action is in proportion to the monetary and non-monetary costs and benefits, and relative to other compliance risks.
9.117 The IGT also recommended that the quality of information provided to taxpayers to help meet their obligations be tested before the design of a compliance strategy. This was considered necessary to ensure that appropriate information be made available to taxpayers operating in a self assessment environment before the launching of a compliance strategy.
9.118 A further point arising from the case studies leading to the IGT's fourth report was the need for the ATO compliance strategies to feature direct and early communication with taxpayers potentially affected by a compliance concern.
9.119 The IGT notes that the ATO communicates with taxpayers directly through a variety of methods, including through the issue of taxpayer alerts. Furthermore, the IGT notes that the ATO discusses its compliance tax risks and strategies with tax agents and tax professionals at a myriad of ATO forums including NTLG sub-committee meetings.
9.120 During fieldwork conducted for the follow up review, the IGT identified circumstances where tailored communication has been provided to groups of taxpayers involved in arrangements. In addition, during the course of this review the ATO provided IGT with examples demonstrating its efforts to communicate early and directly with taxpayers and tax agents regarding complex tax risks where those taxpayers with tax risks could be identified. The issue of alerting taxpayers to compliance concerns as and when they arise is considered more fully in the IGT's Review into delayed or changed ATO views on significant issues.
9.121 In August 2009, the ATO issued guidelines to staff through its intranet setting out the additional agreed requirements arising from this IGT recommendation, including the need for improved project management capability for the handling of large complex issues. In March 2010, this internal guideline was updated to reflect a similar recommendation contained in the IGT's Review into aspects of the Tax Office's settlement of active compliance activities (namely recommendation 13).
9.122 The ATO guidelines apply to risk owners managing major compliance activities and major complex issues including those with multiple taxpayer or 'leveraged' active compliance cases.
9.123 The ATO has advised IGT that the oversight of major complex issues rests with product committees for income tax, GST, Excise, Superannuation and has been in place for some time (led by SES Band 2 officers). The ATO advised IGT that these committees conduct on-going reviews of the risks with risk owners, review strategies to manage risks and also assess compliance effectiveness.
9.124 The ATO is now in the final stages of publishing34 its newly approved Risk Management Instruction to ensure that the agreed requirements set out in the above mentioned guidelines35 are met. Assurance is to be achieved by assigning SES Band 2 level officers with accountability and sign-off that the minimum requirements relating to the effective management of risk categories, including the handling of complex issues, is complete.
9.125 The ATO's Risk and Issues Management corporate practice statement36 has been updated to incorporate the introduction of the above mentioned corporate instruction. In particular, reference is made to the new responsibilities held by SES Band 2 officers and to the requirement that they provide evidence to the ATO's Chief Knowledge Office (CKO) regarding their adherence to the corporate instruction. The practice statement notes that the CKO is responsible for providing assurance of conformance and also for actioning non-conformance. The CKO is also required to provide an annual Risk Management Certificate of Assurance. The practice statement states that ongoing monitoring and analysis to ensure that issues are being effectively identified, recorded, managed and escalated in the ATO is to be undertaken by a First Assistant Commissioner.
9.126 At a higher level, the ATO Audit Committee oversees internal governance and assurance policy to monitor and evaluate internal controls (such as risk management) to support the ATO's Integrity Framework.
9.127 Given that these changes are yet to be finalised, IGT is currently unable to test their application and effect in terms of the recommendation. However, the IGT recognises the changes being made by the ATO and the work it has undertaken in response to the recommendation. For example, the introduction of guidelines for staff in August 2009 which has now been reinforced through the Risk Management Certificate of Assurance process. The IGT considers that for the purposes of this review this part of the recommendation is implemented providing the process is effected in the manner envisaged above.
More needs to be done to reduce the time taken to identify and progress test or lead cases including increasing Tax Office efforts to identify a suitable lead case on an issue, and offering inducements encouraging taxpayers to come forward.
The Tax office is committed to clarifying the law through litigation of contentious areas of the law. Our test case litigation program is designed to do this. As well as considering applications for test case funding from taxpayers, we will continue to proactively seek significant or contentious lead cases and, because of the public interest in having the law clarified, fund them as part of our test case program. This will include:
- generally offering test case funding where the Commissioner appeals against an AAT decision or seeks special leave to appeal to the High Court;
- given the nature of the issues covered by the test case program, funding will generally be extended to appeals against funded decisions, at least to the Full Federal Court. Where cases are approved for funding in state or territory courts, funding will generally extend to the Court of Appeal or equivalent in the relevant Supreme Court. In contrast to the current test case funding arrangements, a fresh application for funding will not usually be needed but a decision on funding will be made by taking into account the nature of the issue being tested on appeal.
- contacting all taxpayers that we have identified as having objections lodged on a legal issue and seeking their willingness to be part of the test/lead case process and including the likely factual matrix needed to test the legal issue;
- resolving objections from taxpayers who have suitable cases and encouraging them to come forward as a test case
- publicly announcing that a test case is being sought describing the issue to be clarified and why; and
- seeking NTLG/professional body assistance to publicise the fact that a test case is being sought.An ongoing challenge is to identify, and obtain agreement from, taxpayers to be test cases where there is no application from a taxpayer for test case funding.
The Inspector-General has raised concerns in relation to the need for new procedures to accelerate and encourage the identification and progression of test cases. In response to those concerns the Tax Office will increase the existing 50 per cent GIC remission concession (currently available for disputed tax debts where taxpayers enter into a 50/50 arrangement by paying a minimum of 50 per cent of the tax in dispute) from 50 per cent to 75 per cent where a test or lead case funded as part of the test case program is involved.
It would not be expected that penalties would generally be imposed in test cases. Penalties may, however, be imposed in certain lead cases for widely marketed schemes. It would not be appropriate to remit penalties in such cases merely because a case is the first case to be litigated.
It is generally easier to get agreement from taxpayers to be test cases where there is agreement on the facts of the case. We will continue to seek agreement on facts where possible in those cases which we believe would be suitable to test a contentious area of the law.
Once identified we seek to fast track test cases through the court. This involves the necessary cooperation of taxpayers and the court. New Federal Court directions for tax litigation should enable more timely progress of cases, particularly test or lead cases.
We are currently revising our test case funding guidelines which explain our approaches to law clarification through litigation of contentious issues. The revised guidelines will include the relevant approaches agreed in this report.
9.128 The Test Case Litigation Program, continues to be an effective means of identifying contentious areas of the law that need to be clarified, and has revised its published guidelines to incorporate and explain the approaches to law clarification as agreed with the Inspector-General. The revised test case litigation guide was launched on 9 June 2009. Hard copies of the guide are available on request and an electronic copy is available online on the Tax Office website: www.ato.gov.au. This guide was revised to clarify the funding process for applicants and to clarify the types of funding the Tax Office offers.
9.129 The deputy chair of the Test Case Litigation Panel recently completed a series of discussions with the Legal Services Branch teams encouraging staff to identify potential test case issues amongst their cases. Staff were asked to consider as a matter of practice, whether test case funding would suit any new matters, and to constantly revisit the possibility of test case funding during Strategic Internal Litigation Committee (SILC) conferences with the litigation team as the litigation progresses. Staff were invited to advise the strategic litigation unit of any such cases for the test case secretariat and the deputy chair to consider.
9.130 Steps continue to be taken to identify issues at the audit and objection stages, and also from private ruling requests. The deputy chair of the panel and the test case secretariat continue to conduct discussions with the BSL SES officers responsible for litigation and the BSL litigation co-ordinators to identify emerging issues, at audit or objection, where litigation would be a means of resolving the issue.
9.131 As such, more has been done to reduce the time taken to identify and progress test or lead cases and offering inducements encouraging taxpayers to come forward. The identification and progress of test cases is a continuing process in a business as usual environment.
9.132 Continuing in a business as usual manner:
- The test case program has recently approved funding for a number of further appeals. This kind of funding assures that test case issues are litigated at least to the Full Federal Court to achieve greater certainty and clarification of the relevant issues.
- The test case program has recently approved funding to a taxpayer for the Commissioner's appeal to the Federal Court against a decision of the AAT. This kind of funding allows the Commissioner to seek judicial clarification concerning issues decided by the Tribunal without placing taxpayer's at a financial disadvantage.
- The test case program is closely monitoring the progress of a number of litigation matters, brought to the attention of the program by LSB staff in relation to legal expenses. For example, the program identified the deduction of legal expenses as an issue it sought to test further after the Shane Day decision of the High Court.
9.133 We have now amended Chapter 28 of the ATO Receivables Policy, 'Recovering disputed debts', at paragraphs 16-19 and 22 to give effect to the agreed area for improvement. These paragraphs outline our commitment to increase the GIC concession available for funded test cases from 50 per cent to 75 per cent.
IGT Conclusion — Partly Implemented
9.134 The case studies, upon which the IGT's fourth report was based, had showed that where resolution of complex issues appropriately involved testing a technical position through litigation the lead times to identify and progress test cases could be protracted and result in major delays. As a result, taxpayers were faced with making decisions during extended periods of uncertainty surrounding the ATO's technical and compliance position. The IGT therefore raised a number of possible courses of action to address this issue and called for the ATO to do more to reduce the timeframes in identifying and progressing test or lead cases. This included processes to demonstrate ATO openness to have matters tested in court, and for actions to get matters into the courts to be publicly demonstrated. Additionally, more was needed to be done to manage critical path events such as selecting a number of test cases and going through the objection, review and appeal processes, or it may be by seeking declaratory proceedings while the matters are still at the audit stage. Furthermore, the IGT suggested that procedures and positive inducements be introduced to encourage taxpayers to come forward with cases requiring judicial clarification and for the ATO to proceed these matters to hearing without impediment or delay.
9.135 In responding to the IGT's fourth report, the ATO committed to demonstrate to the public through the test case program its openness to have matters tested and to proactively seek cases using particular approaches. A key change to address this has been a re-write of the ATO's test case booklet which was released in 2009. In undertaking this re-write, the ATO sought input from relevant stakeholders including the NTLG. Feedback from one leading professional association lead directly to the ATO developing and including in the booklet an 'overview' flowchart to provide taxpayers with a clearer understanding of what is involved with applying for a test case and the stages of the process. Positive feedback from stakeholders regarding the clarification provided by the revised booklet was received by the ATO following the booklet's release.
9.136 The ATO has also developed new processes leading to more continual dialogue internally regarding issues that could be the subject of a test or lead case. For example, senior ATO law and business line litigation executives now meet on a quarterly basis to discuss current test cases and to also present the top five emerging issues within their own groups. Also on a six-weekly basis, the ATO's team who manages the test case program (the Strategic Litigation Unit — SLU) conducts a call over for current test cases with executives from the ATO's Legal Services Branch (LSB), as well as with Senior Tax Counsels (STCs) which includes discussion of potential issues for test case program funding.
9.137 The ATO also points to improved dialogue with externals to identify issues requiring clarification. For example, publicly announcing that a test or lead case is being sought by the ATO as well as outlining the issue(s) involved. This has been completed through the use of media releases and through the inclusion of agenda items at stakeholder consultation forums such as the NTLG. Also during the course of this review, the IGT examined cases where the ATO identified and approached a particular class of taxpayer (and their professional association) and asked them to apply for test case funding.
9.138 Fieldwork undertaken by the IGT, including a review of nine completed cases, demonstrated the ATO's efforts to identify and progress test and lead cases, including the particular methods agreed to (by the ATO) in response to the IGT's recommendation. For example, offering a range of inducements to come forward with a potential case such as by funding reasonable pre-litigation costs to develop a case and also providing funding without the need for application to the Test Case Panel.37 This fieldwork also demonstrated the ATO fast-tracking the resolution of taxpayer's objections and encouraging taxpayers to participate as a test or lead case.
9.139 The IGT notes that the ATO's above response also refers to an increase in the level of GIC remission concession for funded cases from 50 per cent to 75 per cent. Fieldwork undertaken by the IGT determined that this new inducement has not yet been applied in any case, however, the IGT notes that this only applies to cases where the taxpayer has entered into a 50/50 arrangement by paying a minimum of 50 per cent of the tax in dispute. The ATO has advised the IGT during the course of this review that it will investigate whether there are any gaps in the process behind this concession.
9.140 Despite the ATO's efforts, there is a significant limitation in terms of measuring and monitoring from the time that an issue has been identified as requiring law clarification to the time a test or lead case enters the judicial system. During fieldwork for this follow-up review, the IGT sought to sample test the timeframes involved, however the ATO was unable to point to any system capability that would enable the IGT, or the ATO themselves, to do so. This is a key shortfall in terms of the IGT's recommendation as this type of analysis is required before any determination can be made whether the ATO's efforts are working.
9.141 Discussions during the course of the review between the IGT and SLU executives noted that an internal review is required to address this and that this would be an aspirational target for the ATO. The ATO advised the IGT that it is in the initial stages of discussions between the business lines (BSL) about how to effectively track timeframes and what needs to be done. There are number of options to consider that will improve things including, for example, appropriate sign-off (and tracking) by BSL Deputy Commissioners when escalating an issue for test or lead case consideration.
9.142 In conclusion, the IGT has observed the efforts of the ATO to identify and progress test or lead cases. However, as outlined above, there is more to be done in terms of the IGT's recommendation, beginning with an appropriate system to track the progression of matters.
Transparency and communication would be greatly enhanced if the Tax Office's full agenda of significant technical issues under consideration was made publicly available and easily accessible. A consolidated listing of all significant technical issues that it has under consideration on a 'Technical Issues Agenda' area within the Tax Office website would be a suitable way of making this improvement.
The Tax Office website currently has information on significant technical issues through the publicly available rulings and LAPS programs. The ATO also provides a list of Strategic Litigation issues to the NTLG on a regular basis.
Within the next two years (in recognition of current major Tax Office IT commitments) the Tax Office will work towards consolidating its information on significant technical issues (generally all PTIs) into one reference area on the Tax Office's web site with links to other relevant areas such as the Public Rulings and LAPS Programs. Some issues may not be included due to confidentiality considerations.
9.143 The Tax Office has recently moved the management of interpretative assistance work, such as priority technical issues, private and public rulings and practice statements, to a new information technology platform, known as 'Siebel'. In recognition of this, it was agreed that the Tax Office would work towards implementing this recommendation over 2 years from the date of the finalisation of the report [which was 6 August 2008].
9.144 From September 2009, all work in relation to priority technical issues, public rulings and practice statements are completed using the Siebel system.
9.145 Issues around reporting are yet to be fully resolved and detailed management reports (such as the public rulings and practice statement programs) are still to be 'built'. Until that time, these reports will continue to be generated from existing systems, such as the PTI Register, requiring considerable manual intervention to both capture data and produce such reports. This work has had priority over implementation of this recommendation, to ensure we can continue to effectively manage our priority technical issues and public advice products through to resolution.
9.146 We are continuing to work on better automating our enterprise reporting processes for PTIs, Public Ruling and related work, and are confident that as we develop more effective reporting from our enterprise systems, we will be better placed to understand how the Tax Office website can be enhanced so that information relating to these issues can be captured in the one reference area. This recommendation is being taken into consideration in determining the reports that are needed and how they are designed.
9.147 As our reporting capability improves and once we have developed a prototype design for the Tax Office website, we will consult with the National Tax Liaison Group and other stakeholders as appropriate.
9.148 Taking these factors into account, an implementation date towards the end of 2010 is forecast.
IGT Conclusion — Not Implemented
9.149 The IGT's fourth report found that the case studies indicated some variance in respect of the ATO's directness and timeliness of communication with taxpayers. It stated that at the level of principle, all ATO compliance strategies need to feature direct and early communication with taxpayers potentially affected by a compliance concern (an exception may be some serious non-compliance criminal matters). A reliance on exposing issues to professional bodies through consultation forums or on indirect communication, such as speeches and seminars, is no substitute for a default approach of direct communication and guidance to both taxpayers and their advisers. As noted in the IGT's fourth report, a consolidated listing of all significant technical issues that the ATO has under consideration in a 'Technical Issues Agenda' area on the ATO website would be a suitable way of making this improvement.
9.150 The ATO's above response states that it is now working towards implementation of the recommendation by the end of 2010.38 This includes the development of reporting capability that is to be generated from its new Siebel technology platform. Upon completion of this work, the ATO considers that it will be better placed to capture the information relating to this recommendation in one reference area on the ATO website. However, it remains unclear why the implementation of this recommendation is dependent on this new technology platform. An interim measure to address the recommendation should be possible given that a significant amount of relevant information is already available39 on the ATO website.
To avoid uncertainty, draft or all final public advice products (including taxation rulings, determinations, interpretive decisions, Practice Statements, Fact Sheets and publications), should be promptly withdrawn or appropriately flagged as soon as the Tax Office has changed its view of the law, or where a court decision has raised the need for review. This should occur as soon as the change or need for review is identified, even if a replacement or fully updated product is not immediately available.
The Tax Office recognises the need to ensure the public advice and guidance it provides represents the current Tax Office view. It recognises the importance in a self-assessment system of taxpayers having access to advice and guidance about the application of the laws administered by the Commissioner.
The Tax Office agrees that once it concludes that its view has changed, the existing public advice or guidance should be withdrawn immediately and the Tax Office should clearly indicate whether replacement advice or guidance is required.
Where the existing view is merely being reconsidered due to possible uncertainty, the existing advice or guidance would not normally be withdrawn. Where there is a change to a general administrative practice that is less favourable for taxpayers and that change is not communicated by way of a public ruling, the Tax Office will not necessarily amend assessments that were raised consistently with a practice in place at the time of the assessments. As a general rule the Tax Office will amend assessments only where tax avoidance is involved or the practice has been exploited in an unintended way. (See para 32 of PS LA 2008/3.)
The Tax Office's views about the provision of advice and guidance are now comprehensively explained in PS LA 2008/3 — Provision of advice and guidance by the Tax Office.
9.151 As stated in the response to this agreed area, the Tax Office agrees that once it concludes that its view has changed, the existing public advice or guidance should be withdrawn and the Tax Office should clearly indicate whether replacement advice or guidance is required.
9.152 This is current Tax Office policy and the Tax Office's views about the provision of advice and guidance are now comprehensively explained in PS LA 2008/3 (about the provision of advice and guidance by the Tax Office). Additional guidance on this policy in specific circumstances, such as public rulings, practice statements, ATO Interpretative Decisions and court decisions is set out in the Public Rulings Manual (rulings) ; the Information Kit for Authors and Sponsors (practice statements), PS LA 2001/8 (ATO Interpretative Decisions) and PS LA 2007/2 (court decisions and decision impact statements).
9.153 Additional guidance about the selection, development, publication and review (including withdrawal) processes for public advice and guidance products is contained in PS LA 2008/12 (see in particular paragraphs 69, 74 to 77, and 81 to 92). Further, PS LA 2003/3 (Precedential ATO view) sets out processes and responsibilities for maintaining the currency, accuracy and consistency of precedential ATO view documents, including public rulings (see in particular paragraphs 35 to 40).
9.154 Additional guidance on Tax Office policy in specific circumstances, such as public rulings, practice statements, ATO Interpretative Decisions and court decisions is set out in the Public Rulings Manual (rulings) ; the Information Kit for Authors and Sponsors (practice statements), PS LA 2001/8 (ATO Interpretative Decisions) and PS LA 207/2 (court decisions and decision impact statements).
9.155 As an example and in the context of public rulings, part of the approval process for a withdrawal includes giving a reason for the withdrawal. Where there is no replacement product, the area initiating the withdrawal must give reasons for that which might include factors such that the law is obsolete or that there is new law which is clear and no additional guidance is needed.
9.156 It should also be noted that, as stated in the response to this agreed area that where the existing view is merely being reconsidered due to possible uncertainty, the existing advice or guidance would not normally be withdrawn. Where there is a change to a general administrative practice that is less favourable for taxpayers and that change is not communicated by way of a public ruling, the Tax Office will not necessarily amend assessments that were raised consistently with a practice in place at the time of the assessments. As a general rule the Tax Office will amend assessments only where tax avoidance is involved or the practice has been exploited in an unintended way. (See paragraph 32 of PS LA 2008/3 Provision of Advice and Guidance by the Tax Office.)
IGT Conclusion — Partly Implemented
9.157 As discussed in IGT's fourth report, the reason for this recommendation was to ensure that taxpayers are clear about their situation and that ATO advice is up-to-date. To achieve this end, the IGT stated that taxpayer uncertainty would be reduced if the ATO promptly withdraw or flag draft or final public advice products as soon as it has changed or is uncertain with its view of the law, or where a court decision has raised the need for review. Although the ATO's above response refers to processes and practices already in place, fieldwork by the IGT has demonstrated that there are still examples occurring where the ATO must improve its efforts to promptly flag or remove items to avoid uncertainty for taxpayers in accordance with the IGT recommendation.
9.158 One example involves the timeliness of the publication of decision impact statements. These are documents developed by the ATO in response to recommendations in the IGT's 2006 report Review of Tax Office management of Part IVC litigation. The purpose of the IGT's recommendations was for the ATO to provide a timely and succinct statement of intent as to the ATO's interim administrative approach following the handing down of a decision by a court or tribunal. This form of guidance was intended to inform taxpayers of the way forward and to enable them to operate in a self-assessment environment.
9.159 The IGT's recommendations envisaged that the statements of intent would be based on existing internal ATO documents, in the form of finalised case reports, which set out the implications of decisions on current rulings and determinations, and flag matters that could be potentially impacted following more detailed analysis by the ATO. The ATO's own internal practice requires that the aforementioned case reports must be prepared within one week of the relevant court or tribunal decision.
9.160 Statements of intent provided immediately following the handing down of a decision, would assist taxpayers in charting their way forward and to enable them to operate in a self-assessment environment. Detailed 'technical' interpretation or analysis, if this was required, could be provided later following appropriate review and analysis by the ATO's technical staff.
9.161 The IGT recommended an eight-week timeframe for the publication of this guidance to taxpayers to take into account the normal periods of appeal that may apply to court or tribunal decisions. In agreeing to this recommendation in principle, the ATO noted that it may not be logistically possible to do so within eight weeks in all cases (such as where the possible application to other cases is unclear).
9.162 Although the ATO has directed its officers regarding this eight-week timeframe40, the average timeframe for finalisation of a decision impact statement is currently seven weeks more than the set timeframe. Fieldwork conducted during the course of this review evidenced that the ATO can in fact meet the eight-week timeframe. In one matter41, publication occurred within just ten days of the decision being handed down.
9.163 In making the above comments, the IGT recognises that there are some cases that may take longer than the set timeframe given the complexity of the law surrounding a court or tribunal's decision. Furthermore, the IGT notes that the ATO has reduced the backlog of outstanding cases and continues to employ efforts to reduce average timeframes.
9.164 A second example indicating the need for the ATO to improve its efforts to promptly ensure that taxpayers are clear about their situation involves the ATO's denial of GST input tax credits (ITCs) in relation to charter boat expenses. In 2003, the ATO had openly set its approach by directing relevant charter boat taxpayers to a new public ruling on income tax issues (TR 2003/4 Income tax: boat hire arrangements) and to a fact sheet on GST issues (GST and boat hire arrangements).
9.165 In December 2006, the Administrative Appeals Tribunal (AAT)42 identified an apparent anomaly in the tax law which reversed the ATO's approach of denying ITCs for charter boat acquisitions. In February 2007, the ATO obtained external legal advice which agreed with the Administrative Appeals Tribunal (AAT) view and in April 2007, the ATO's Tax Counsel Network (TCN) instructed tax officers to resolve objections in view of this adjusted approach. Despite this change in approach, the ATO did not take any steps to announce to the public on its Charter Boat industry webpage the change in approach or to inform previously affected taxpayers. The ATO's public advice was not updated.
9.166 On 21 June 2007, new law43 was enacted which corrected the anomaly referred to by the AAT (with effect from 1 July 2007).44 Also on June 21, despite removing the above GST fact sheet from the above mentioned webpage, the link to the fact sheet was merely deactivated — no explanation was provided and therefore one could have assumed that the fact sheet was still current.
9.167 An addendum to TR 2003/4 in response to the June 2007 legislation was not issued until 29 October 2008. The ATO's Charter Boat industry webpage still has no indication of this addendum.
9.168 A review of the ATO webpage by the IGT in August 2009 revealed that the inactive GST fact sheet link remained. However, a further review one month later revealed that the link was finally removed (although still no acknowledgement to taxpayers that anything had changed). Apart from this, the webpage remains unchanged.
9.169 The ATO original response to this recommendation stated:
'The Tax Office agrees that once it concludes that its view has changed, the existing public advice or guidance should be withdrawn immediately and the Tax Office should clearly indicate whether replacement advice or guidance is required.' 45 [emphasis added]
9.170 The ATO could have indicated on the Charter Boat industry webpage whether replacement advice or guidance was required. Instead, an inactive link to the fact sheet containing its prior view was left on the ATO webpage for more than two years, leaving taxpayers to think that the reason for the inactive link was a technology problem rather than the ATO distancing itself from the content of the fact sheet.
9.171 As identified during this follow up review, the ATO continues in its efforts to effect timely communication. The IGT recognises the challenges posed by this recommendation but maintains its view that ATO advice or guidance should be promptly withdrawn or flagged as soon as it is identified that there is a change in, or need for review of, the ATO view.
9.172 The above examples highlight that despite the efforts to date, further improvement in terms of the recommendation is required. The IGT will maintain a watching brief over the ATO's efficiency in carrying out these practices.
9.173 The IGT concludes that the recommendation is partly implemented.
1 Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues.
2 TechNet is a forum that focuses on improvements to and assurance of the quality of technical decision making. Technical decision making involves the interpretation and application of the laws administered by the Commissioner. Given that technical decision making is undertaken in the Law, Compliance and Operations sub-plans. TechNet membership is drawn from those sub-plans – usually at the SES or EL2 level.
3 Review of Tax Office's management of complex issues – Case study on living-away-from-home allowances (2007).
5 An ATO ID is a summary of a decision on an interpretative issue and is indicative of the Commissioner's view on the interpretation of the law on that particular issue. ATO IDs are produced to assist tax officers to apply the law consistently and accurately to particular factual situations.
6 ATO IDs are listed in the ATO's instructional guide for staff as a precedential document (paragraph 3 of PS LA 2003/3 Precedential ATO View)
7 At June 2008, total priority technical issues on hand was 192.
8 At June 2009, total priority technical issues on hand was 172.
10 Referred to by the ATO as 'resolution schedules'. No update was made to the project management approach of the ATO for litigation matters.
11 Two officers at the SES Band 2 level.
12 PS LA 2003/10 Management of Priority Technical Issues (at paragraph 27).
13 At the SES Band 2 level.
14 PS LA 2003/10 (at paragraph 28).
15 As outlined in the ATO's response to recommendation A, PTIC meets every six to eight weeks and is a committee attended by the Second Commissioner (Law), the Chief Tax Counsel and other senior ATO executives to review all issues aged over 4 months without an ATO view, giving particular attention to those issues that appear to have stalled and require intervention.
16 ATO view is discussed in paragraph 9.23 of recommendation A.
17 Using the ATO's Siebel case recording system.
18 See paragraph 9.30. The two new processes for 'advice PTIs' have been included in the ATO's internal PTI procedural guide (paragraphs 7.1.1 and 7.1.3 of the PTI Process Guide) and also in the ATO's practice statement relating to the management of PTIs (paragraph 28 of PS LA 2003/10]).
19 PS LA 2003/10.
20 Staff were also made aware of these changes via ATO Minute PTIs and practice management (28 July 2008)
21 The SILC process involves a number of strategic litigation meetings held between ATO staff involved with the litigation.
22 The ATO's Plenary Governance Forum.
23 These figures are reported in the ATO's 2008 and 2009 annual reports. The charts provided by the ATO in response to this recommendation cover all PTIs without an ATO view in the 2008 and 2009 financial years. In respect of these charts, it is noted that although the proportion of aged PTIs without an ATO view has slightly decreased between these two periods, the proportion of aged 'advice' PTIs without an ATO view has slightly increased. However, care must be taken with this last point as aged 'advice' PTIs without an ATO view represent less than half of all PTIs without an ATO view.
24 The NTLG is the peak consultative forum dealing with complex technical and policy issues between the tax, accounting and legal professions and the Tax Office, and its sub-committees.
25 Referred to by the ATO as 'resolution schedules'. No update was made to the project management approach of the ATO for litigation matters.
26 At the SES Band 2 officer level.
27 PS LA 2003/10 Management of Priority Technical Issues (at paragraph 27).
28 At the SES Band 2 level.
29 PS LA 2003/10 Management of Priority Technical Issues (paragraphs 27 and 28).
30 PS LA 2003/10 Management of Priority Technical Issues.
31 Staff were also made aware of these changes via ATO Minute PTIs and practice management (28 July 2008).
32 For example, enabling the project plans to be attached as a link to PTI proposals.
33 As discussed in recommendation A, the resolution of complex issues involves a number of stages and corresponding activities and the case studies that lead to the IGT's fourth report revealed extended delays in the completion of these stages.
34 To be published by 30 June 2010.
35 Issued in August 2009.
36 PS CM 2003/2.
37 Also, the administrative-side of the test case process has now been simplified through the removal of the need to make a separate funding request for most appeals.
38 It is noted that this is a few months more than the timeframe agreed to by the ATO in the IGT's 2008 report.
39 The IGT's 2008 report highlighted the level of information already in place on the ATO website including, for example, information on around 70 per cent of the Tax Office's list of PTIs (albeit in a disparate form).
40 Annexure F, paragraph 68, PS LA 2009/9 Conduct of Tax Office litigation.
41 South Steyne Hotel Pty Ltd & Ors v Commissioner of Taxation  FCAFC 155.
42 VCK and Commissioner of Taxation  AATA 1073.
43 Tax Laws Amendment (2007 Measures No 2 ) Act 2007.
44 Although a separate page was included on the ATO website containing links to the legislation and supporting materials, the IGT considers this should have been clearly identified on the ATO's Charter Boat industry webpage.
45 Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues (October 2008) at page 13.