Review by the Inspector-General of Taxation
Completion of the year ended 30 June 2005 brings me close to my second anniversary as Inspector-General of Taxation. The role of the Inspector-General is to review perceived systemic problems or opportunities for improvement in tax administration and to provide advice to the Government on those reviews. As at 30 June 2005, I had completed a scoping study and formal reviews into the following topics:
- Remission of the General Interest Charge for Groups of Taxpayers in Dispute with the Tax Office (Report to Minister, 5 August 2004);
- Tax Office Administration of GST Refunds Resulting in the Lodgment of Credit BASs (Report to Minister, 19 January 2005);
- Tax Office's Small Business Debt Collection Practices (Report to Minister, 12 April 2005);
- Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities (Report to Minister, 18 May 2005); and
- Tax Office Audit Timeframes (Report to Minister, 19 July 2005).
Also, at 30 June 2005, a review of the Tax Office's administration of its litigation program, including the Test Case program, was well underway. These reviews, conducted formally under the Inspector-General of Taxation Act 2003, and their outcomes, combined with feedback from community stakeholders, provide clear evidence that the role of the Inspector-General is working well and is very effective in improving tax administration for the benefit of all taxpayers.
Interaction between the Inspector-General and the Commissioner of Taxation
I am currently satisfied with the support my Office is getting from the Tax Office. This situation is the product of experience since this Office was established and the mutual recognition that a positive relationship is essential where our roles require us to work constantly together. Maintaining an open and positive relationship is especially important where the Inspector-General's role necessarily includes reviewing circumstances where the Tax Office is perceived to have gone off the tracks or can better manage the impact of its operations on the community. While the overall Tax Office agenda is very broad, we do have a common aim of improving tax administration in Australia. This common aim underpins a good working relationship. It has become apparent to me that when the Commissioner becomes aware of my intention to undertake a formal review, the Tax Office begins to focus internally on that area. When formal reviews do eventuate and outcomes are reported, it therefore comes as no surprise that many of the issues encountered often are in the course of being internally examined. Where improvement is required, steps are often underway to move in that direction. I see this responsiveness as very positive. Combined with frank and open liaison during the progress of a review (which both Offices have promoted), it creates an environment of 'no surprises' and often leads to improvements being implemented earlier than they might have been. With very few exceptions, the Tax Office has accepted my recommendations for improvement arising from formal reviews. While my review intentions clearly are not the only prompt for Tax Office improvement initiatives, during the year I have noticed with interest the following Tax Office actions which have coincided with announcements of formal reviews:
- implementing benchmark timeframes in Tax Office active compliance areas for the completion of business audits and enhanced escalation processes for aged cases after we announced the audit timeframes review;
- streamlining the risk review of GST refunds to speed up processing after we announced the GST refunds review; and
- re-vamping the Test Case Program guidelines and developing litigation practice statements in the course of the review of litigation management.
In addition to formal reviews, there is a fairly constant exchange between my Office and the Tax Office on matters raised by the community or other sources that require exploration as potential issues for review. Through this process, I have found during the year that much can be achieved in line with my role through less formal interaction with the Tax Office. The Tax Office has responded positively to these initial lines of inquiry and again may begin to focus on the area in anticipation of a potential formal review. Examples of issues which have been the subject of dialogue with the Tax Office, but which have not as yet resulted in a formal review, include the Research and Development syndication arrangements, the service trust compliance approach and the widely-based settlement panel proposed by the Tax Office in connection with resolving remaining mass-marketed schemes cases.
Public sector stakeholders
The Commonwealth Auditor-General and the Commonwealth Ombudsman also scrutinise the Tax Office. However, feedback from private sector stakeholders indicates that they appreciate and see as important the distinct focus on systemic issues of administration and impacts on the community. I meet regularly with these public sector stakeholders both as required by the law and to benefit from the different perspectives of tax administration and the Tax Office. In the course of the year, I have also had ongoing involvement with senior Treasury personnel, providing input on such matters as the Report on Aspects of Income Tax Self Assessment (RoSA). I also have ongoing contact with the Board of Taxation.
Community and private sector stakeholders
I have enjoyed a positive and cooperative ongoing relationship with all of our private sector stakeholders (refer Table 3). The role of the Inspector-General is largely dependent on the freely given supply of information from the private sector and I spent considerable time seeking to maintain good relationships with these organisations. This has led me and others in my Office to present many speeches throughout the year. These are set out in Table 2. I meet with private sector stakeholders at least twice a year to consult with them in respect of my ongoing work program. I consult with them throughout the various reviews undertaken by my Office and at other times when necessary. The willingness of professional and business associations in particular, and members of the community to provide their time and effort in both bringing matters to my attention and in assisting with my reviews well demonstrates their appreciation of my role and responsibilities.
Overseas study trip
In late April/early May 2005 the then Deputy Inspector-General, Steve Chapman and I visited a number of countries. We had meetings with senior officials in the revenue agencies of the United Kingdom, United States of America and Canada. As well, we had meetings with senior officials of the OECD in Paris, the IMF in Washington DC and the Adjudicator's Office (UK). In addition, we had meetings with the Treasury Inspector General for Tax Administration (US) and his senior staff and the National Taxpayer Advocate (US) and her senior staff. It was very interesting to note the high regard the Australian Tax Office is held in by other revenue agencies. The representatives of the overseas revenue agencies and the senior officials of the OECD believe that the Tax Office leads in its approaches to managing risk in the area of tax compliance. The Tax Office is almost the only OECD revenue agency to publish an annual compliance program. Australia is also regarded as one of the best at interfacing with taxpayers electronically. Themes identified during our visits are as follows:
- The growth of small business tax debt is an increasing concern in all countries.
- Small business non-compliance is growing.
- The use of tax havens and aggressive tax planning by global businesses is surfacing as an ever increasing risk to revenue. Transfer pricing is of concern in every country.
- The administration of tax credits and social welfare payments by tax authorities is an ongoing problem leading to many complaints.
- The quality of services provided by tax preparers is of concern in many countries. Many are unregistered and tax authorities are always striving to improve the standard and governance of the preparers.
- Tax authorities are finding it difficult to manage community expectations in closing the perceived tax shortfall disclosed by publishing the estimated 'tax gap' in certain countries.
Issues and changes in tax administration
Completion of formal reviews, involvement with the Tax Office and other Commonwealth agencies, regular liaison with community stakeholders and learning from overseas administrations enables me to identify some underlying issues that have been apparent in 2004–05. It is also important to recognise in that context some of the significant changes underway that will influence both tax administration and my work program into the future.
A consistent underlying issue emerging from a number of our formal reviews has been that the Tax Office continues to construct some compliance strategies with an undue bias towards administrative efficiency at the expense of sufficiently individualised treatment of taxpayers. Reviews into small business debt collection and into GST refund administration provide examples and made specific recommendations in this area. A key element of the Tax Office's business model is that with its limited resources it aims to administer the tax system by tailoring its approaches in ways that differentiate its compliance responses on the basis of taxpayer circumstances, behaviour and risk profiles. However, where the Tax Office merely 'ramps up' resources in an area and fails to identify key demographics, or sufficiently disaggregate those demographics, the Tax Office may miss opportunities to devise strategies that get closer towards providing sufficiently tailored treatments with its limited resources. This approach continues to expose the Tax Office to community criticisms that it takes a largely 'one size fits all' approach. The transparency with which the Tax Office carries out its operational activities in these areas and, in appropriate circumstances, its strategy development appear to fuel further these community criticisms.
Timeliness and certainty
In a self assessment system, taxpayers have a right to a high level of certainty where they seek in good faith to voluntarily comply and with a reasonable understanding of the tax laws. Clearly it is the responsibility of the Commissioner to act promptly and decisively when the Tax Office becomes aware that taxpayers may be in conflict with the Tax Office's view. The Tax Office has introduced various measures to redress deficiencies in its approaches to issues. However, concern remains, backed up by examples, that the Tax Office still appears unable to move quickly and to provide certainty to taxpayers when major, complex issues arise. Linked with the issue of a lack of differentiation mentioned above, concerns extend to the level of certainty that is finally provided when the Tax Office does respond. Many taxpayers have told me that the Tax Office has effectively 'changed its mind' or, alternatively, has merely been tardy in reacting to market intelligence and expressing its view to individual taxpayers or taxpayers at large.
In a self assessment system, if all taxpayers were compliant the role of the Tax Office would be minimalist — to deal with the lodgment obligations and the collection of tax as it fell due. While the Tax Office puts a great deal of effort into educating and helping taxpayers to voluntarily meet their tax obligations, most of its resources are allocated to active compliance and debt collection activities including lodgment and payment monitoring. This is a sad testimony to the fact that a significant number of 'taxpayers' engage in aggressive tax planning or simply avoid tax. Further, there are taxpayers who have voluntarily complied with their tax liabilities but who fall behind in paying their tax. To an extent, costs are to be expected as a necessary part of regulation. However, stakeholder discussions are increasingly drawing attention to the unnecessary costs and unproductive intrusion upon compliant taxpayers and their agents where Tax Office active compliance efforts are poorly focused.
Notwithstanding the high proportion of its resources allocated to active compliance, the Tax Office is not resourced to keep every aspect of the tax system up to par all of the time. It must make risk management choices that result in some compliance work not being done. Lower risk, smaller amount cases, particularly in debt and lodgment areas, are passed over or receive scant attention, but remain on the books. An issue behind a number of Inspector-General reviews this year is that over time, these cases accumulate into big compliance problems involving large numbers of taxpayers. It is worth noting that this dynamic exists. Recurring Tax Office compliance campaigns, such as the amnesties of the past and the more recent small business debt initiative and lodgment compliance focus, are the resultant catch-up strategies that can generate angst and further issues for review. The challenge for me is to work with the Tax Office to ensure that these campaigns are designed around a good appreciation of taxpayer demographics and individual circumstances so that they can deliver fair outcomes for all involved.
Progressive implementation of new laws and changes to Tax Office approaches aimed at giving effect to the recommendations of the Treasury Report on Aspects of Income Tax Self Assessment (RoSA) should cool some longstanding hotspots in the self assessment system as it has operated in the past. Shorter periods for the Tax Office to raise and review compliance issues, the introduction of the shortfall interest charge, and greater scope for the Tax Office to provide binding advice should considerably improve fairness and certainty, and reduce some of the anguish caused to taxpayers caught up in Tax Office audit activities covering a number of prior years. Significant other changes are foreshadowed such as the introduction of promoter penalties laws and refinements to the regulatory arrangements for tax agents. Combined with the implementation of the RoSA recommendations, these changes will create a markedly different and, in my view, improved tax administration framework for the future.
Pursuant to subsection 41(2) of the Inspector-General of Taxation Act 2003 there were no directions to undertake reviews given by the Treasurer or the Minister for Revenue and Assistant Treasurer to the Inspector-General under subsection 8(2) of the Inspector-General of Taxation Act 2003 during the year. In setting my work program, I have taken into account the requirements of subsection 9(2) of the Inspector-General of Taxation Act 2003 and have consulted with the Commonwealth Ombudsman and the Commonwealth Auditor-General.
The Office of the Inspector-General has enjoyed ongoing consistent staff retention. However during the year one adviser chose to leave to take up a senior position in the Tax Office and the Deputy Inspector-General of Taxation, Steve Chapman, was promoted to the role of Deputy Auditor-General on 11 July 2005. I am pleased to report that Rick Matthews PSM, previously a First Assistant Commissioner in the Tax Office was appointed to the position of Deputy Inspector-General from 18 July 2005. I am grateful for very competent and loyal staff who are keen to work with me in seeking to improve tax administration for the benefit of all taxpayers in an environment where we have very limited resources at our disposal.
Looking forward to the future
There is still much to be done. The sheer size and diversity of the Tax Office and of the tax laws themselves leaves me with absolutely no doubt that there will be ongoing tax administration issues requiring my attention, investigation and reporting to Government. I am grateful to the ongoing support of private and public sector stakeholders. I look forward to continuing to make a contribution to the improvement of tax administration in Australia working with the Commissioner to improve process, procedures and to minimise waste of effort and other things which that can bring on a level of anguish, concern and cost to taxpayers in the community as a whole. In setting my ongoing work program I will give high priority to the views of the community and will continue to foster and develop strong relationships with the representative business, accounting, legal and tax organisations. My staff and I will continue to bring together an empathy with taxpayers and an understanding of Tax Office operational issues to ensure that significant and workable improvements in tax administration are achieved. David Vos AM Inspector-General of Taxation
Role, function, outcome and output structure
The Inspector-General of Taxation Act 2003 established an independent statutory agency to review:
- systems established by the Australian Taxation Office to administer the tax laws; and
- systems established by tax laws in relation to administrative matters.
The Inspector-General seeks to improve the administration of the tax laws for the benefit of all taxpayers. This is to be achieved by identifying systemic issues in the administration of the tax laws and providing independent advice to the government on the administration of the tax laws. To ensure that reviews undertaken reflect areas of key concern to the Australian community, the Inspector-General develops a work program following broad-based consultation with other stakeholders including taxpayers and their representatives, the Commonwealth Ombudsman, the Commonwealth Auditor-General and the Commissioner of Taxation.
Figure 1: Outcome and output structure
Figure 2: Inspector-General of Taxation management structure
Inspector-General of Taxation services
The Inspector-General is an independent adviser to the Government on systemic issues in the administration of the tax laws. All reports by the Inspector-General to the Government are required to be either tabled in both Houses of Parliament or to be made otherwise public by the Government.
The Inspector-General and his Office need a range of skills to deliver to the Government the services required. These include:
- a broad understanding of the tax laws;
- a broad understanding of the business environment;
- investigative and analysis skills to identify and understand systemic issues in tax administration;
- a capacity to conceptualise and analyse systemic issues within the broad tax context;
- relationship skills to develop and maintain excellent relationships with both public sector and private sector stakeholders; and
- writing skills — the ability to present facts, argument and suggested solutions in a cogent form on systemic tax administration issues.
For the Inspector-General to be effective in his role, he and his Office must foster productive working relationships across government, public sector stakeholders (particularly the Commissioner of Taxation and his Office) and private sector stakeholders. Although independent of both the Government and the Commissioner of Taxation, the Inspector-General must have an understanding of overall government policies and the role and activity of the Commissioner of Taxation. The main public sector stakeholders are the Commonwealth Auditor-General, the Commonwealth and Taxation Ombudsman, the Commissioner of Taxation, the Treasury and the Board of Taxation. Private sector stakeholders include those set out in Table 3.
Table 1: Resources for Inspector-General of Taxation outcomes