Appendix 1 — Terms of reference

This document contains the terms of reference for the review which the Inspector-General of Taxation will undertake into how the Australian Taxation Office (Tax Office) settles active compliance activities. It also outlines how the Inspector-General proposes to consult the community on this review.

Background

Disputed tax liabilities are often resolved by agreement between the Tax Office and the taxpayer — generally resulting in the taxpayer's assessment being amended to a lower sum than originally put by the Tax Office. In Law Administration Practice Statement (PSLA) 2007/5, the Tax Office makes a distinction between settling the amount of the liability and compromising a debt as follows:

The settlement process aims to establish an agreed tax liability where the taxpayer and Tax Office do not initially agree on the tax liability. Compromise occurs when the Tax Office and taxpayer agree on the amount of the tax liability but the Tax Office agrees to accept less than the agreed amount in finalisation of the debt …

In the two financial years 2004–06, the Tax Office settled more than 5,000 cases. Six of these cases involved a total of more than $1 billion in revenue.

In February 2006, the Inspector-General announced this topic on his short list of potential reviews. Until 2006, the Commissioner of Taxation had not previously published settlements statistics but agreed that publication would promote openness and transparency. Some statistics have since been provided in his annual reports.

Also in 2006, the Tax Office reviewed its Code of Settlement Practice and as part of that review sought feedback from the community on its practices. As a result of this review in early 2007 the Tax Office issued two practice statements, PS LA 2007/5 and 2007/6, and a revised Code of Settlement Practice.

Public confidence in the Tax Office's accountability and independence in settling disputes is critical to Australia's tax administration system of self assessment. This system relies on voluntary compliance, which is promoted when taxpayers have confidence in the Tax Office's administration of the system. Confidence in Tax Office settlements is engendered through adherence to principles of horizontal equity, consistency, transparency, clear communication, reduction of compliance costs, maintenance of appropriate checks and balances, and alignment of approaches with the expanded Tax Office compliance model.

Aspects of Tax Office settlements have been reviewed by the Auditor-General, Ombudsman and Parliamentary Committees. In 2000, the Auditor-General found that the Tax Office complied with its settlement processes in relation to 15 cases it reviewed.¹ However, in 2001 the Ombudsman and Senate Economics References Committee identified some shortcomings in relation to settlements with certain groups of taxpayers and certain settlement practices and recommended remedial action.²

The Inspector-General has recently received the following representations as reasons for conducting this review:

Taxpayers in dispute with the Tax Office argue that the Tax Office:

increases their compliance costs by sometimes unnecessarily causing disputes, inefficiently resolving disputes or ineffectively using lead cases to resolve disputes in common with other taxpayers;
sometimes ‘quarantines' cases by settling cases that may erode the Tax Office's public position on an issue; and
sometimes makes ambit claims to force taxpayers to settle because the Tax Office's initial position is not cogent, is not supported by probative evidence or does not apply penalties which correctly reflect the culpability of the taxpayer.

Taxpayers who want to comply with the law argue that settlements do not properly promote taxpayer voluntary compliance behaviours because settlements do not appropriately recognise compliance histories or encourage changes in compliance behaviours.
Taxpayers within groups who are in dispute with the Tax Office argue that widely offered settlement terms lead to inequitable settlements because they do not sufficiently reflect individual circumstances.
The community is also concerned that the Tax Office may sometimes inappropriately offer more favourable settlements to high profile or large business taxpayers.

The Tax Office says that it has a very serious and sound process of checks and balances to ensure settlements are conducted and struck in a proper way. It says that it has struck an appropriate balance between administrative efficiency and effective implementation of mechanisms which address the above concerns.

In the context of taxpayer and community concerns, the Inspector-General intends to review whether the existing Tax Office approaches, policies and practices appropriately balance the interests of individual taxpayers and those of the community.

Terms of reference

In accordance with subsection 8(1) of the Inspector-General of Taxation Act 2003, the Inspector-General conducts the following review on his own initiative.

The Inspector-General will review the whether the Tax Office's settlement approaches, policies and practices strike an appropriate balance between the interest of individual taxpayers and taxpayers as a whole. It will focus on:

the effectiveness that Tax Office governance processes and assurance measures (including those aimed at ensuring Tax Office positions are cogent and supported by probative evidence) have in engendering confidence in Tax Office settlements;
(for those settlements on issues which are common to groups of taxpayers in dispute with the Tax Office), the effectiveness that settlement terms, criteria for entry into settlement and internal review processes have in sufficiently and appropriately differentiating treatment between the circumstances of individual taxpayers;
the alignment of Tax Office settlement approaches, processes and practices with the principles of the expanded compliance model;
the effectiveness that transparency measures in relation to settlements have in addressing perceptions of potential favouritism;
practices which may minimise the adverse impacts that disputes have on businesses while providing reasonable assurance that the risk to the revenue is minimised; and
the effectiveness and quality of communication occurring during disputes to enable a shared understanding of the merits of each party's position and the consequences of alternative processes for resolution.

Consultation processes

The Inspector-General will:

publish a copy of the terms of reference for this review on his website at www.igt.gov.au;
take submissions on this review from members of the public generally, with a particular interest in those submissions detailing finalised active compliance cases in which settlements were considered or struck; and
request the Commissioner of Taxation to provide information and/or documents relevant to this review.

Contacting the Inspector-General of Taxation

To ensure consideration, submissions should focus on the terms of reference and be lodged by 19 December 2007.

Submissions may be given:

By telephone:

(02) 8239 2111

By email:

settlements@igt.gov.au

By post:

Tax Office's Settlements
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001

By facsimile:

(02) 8239 2100

¹ Auditor-General, Audit Report No. 46 1999-2000, Performance Audit, High Wealth Individuals Taskforce, Canberra, June 2000, p 41.

² See Second Economics References Committee, Operation of the Tax Office, Canberra, 2000. Commonwealth Ombudsman, The Tax Office and Main Camp Report of the investigation into the Australian Taxation Office's handling of claims for deductions by investors in a mass marketed tax effective scheme known as Main Camp, Report under section 35A of the Ombudsman Act 1976, Canberra, February 2001; Senate Economics References Committee, Inquiry into Mass Marketed Tax Effective Schemes and Investor Protection, Interim Report (June 2001), Second Report (September 2001) and Final Report (February 2002).

Next: Appendix 2 - Paragraphs 25 to 27 of the Code of Settlement Practice
Previous: Chapter 4 - Action arising as a result of the review
Return to: Contents