ANAO Independent Audit Report

ANAO Independent Audit Report  - continued


Inspector-General of Taxation

Statement by the Chief Executive Officer and Chief Finance Officer

In our opinion, the attached financial statements for the year ended 30 June 2005
are based on properly maintained financial records and give a true and fair
view of the matters required by the Finance Minister’s Orders made under
the Financial Management and Accountability Act 1997, as amended.

[SIGNED]
David Vos AM
Inspector-General of Taxation
26 September 2005
[SIGNED]
Rick Matthews
Chief Finance Officer
26 September 2005

Statement of financial performance
for the year ended 30 June 2005

Statement of financial performance for the year ended 30 June 2005
The above statement should be read in conjunction with the accompanying notes.

Statement of financial position
as at 30 June 2005

Statement of financial position as at 30 June 2005
The above statement should be read in conjunction with the accompanying notes.

Statement of cash flows
for the year ended 30 June 2005

Statement of cash flows  for the year ended 30 June 2005
The above statement should be read in conjunction with the accompanying notes.

Schedule of commitments
as at 30 June 2005

Schedule of commitments as at 30 June 2005
Note: Commitments are GST inclusive where relevant.

(a) Operating leases:

Nature of lease General description of leasing arrangement
Lease for office accommodation The agreement allows annual fixed rental increases. There are no options to renew.
A lease in relation to office equipment — photocopier The agreement is a fixed rate over the term.

Schedule of contingencies
as at 30 June 2005

Schedule of contingencies as at 30 June 2005
The above schedules should be read in conjunction with the accompanying notes.

Notes to and forming part of the financial statements
for the year ended 30 June 2005

Note 1: Summary of significant accounting policies

1.1 Objectives of the Inspector-General of Taxation

The Inspector-General of Taxation (‘IGT’) has one outcome:

‘Improved administration of tax laws for the benefit of all taxpayers’.

The Inspector-General of Taxation Act 2003 (the Act) established an independent statutory agency on the 7 August 2003 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;

for the purpose of reporting and making recommendations to Government on how those systems could be improved.

The continued existence of the agency in its present form, and with its present programs, is dependent on Government policy and on continuing appropriations by Parliament for the agency’s administration and programs.

1.2 Basis of accounting

The financial statements are required by section 49 of the Financial Management and Accountability Act 1997 and are a general purpose financial report.

The statements have been prepared in accordance with:

  • Finance Minister’s Orders (or FMOs, being the Financial Management
    and Accountability (Financial Statements for reporting periods ending on or
    after 30 June 2005) Orders);
  • Australian Accounting Standards and Accounting Interpretations issued by
    the Australian Accounting Standards Board (AASB); and
  • Urgent Issues Group (UIG) Abstracts.

The statements of financial performance and financial position have been prepared on an accrual basis and are in accordance with the historical cost convention. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

Assets and liabilities are recognised in the Statement of Financial Position when and only when it is probable that future economic benefits will flow and the amounts of the assets or liabilities can be reliably measured.

However, assets and liabilities arising under agreements equally proportionately unperformed are not recognised unless required by an accounting standard. Liabilities and assets that are unrecognised are reported in the Schedule of Commitments and the Schedule of Contingencies (other than unquantifiable or remote contingencies).

Revenues and expenses are recognised in the Statement of Financial Performance when and only when the flow or consumption or loss of economic benefits has occurred and can be reliably measured.

1.3 Revenues

Revenues from government

Amounts appropriated for agency outputs appropriations for the year (less any current year savings and reductions offered in Portfolio Additional Estimates Statements) are recognised as revenue, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned. In the 2003-04 year the agency did not receive funds by way of the Appropriations Acts, but by section 32 transfers of funds from the Treasury.

Appropriations receivable are recognised at their nominal amounts.

Resources received free of charge

Services received free of charge are recognised as revenue when and only when a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised at their fair value when the asset qualifies for recognition, unless received from another government agency as a consequence of a restructuring of administrative arrangements.

Other revenue

Revenue from rendering of services is recognised by reference to the stage of completion of contracts or other agreements to provide services. The stage of completion is determined according to the proportion that costs incurred to date bear to the estimated total costs of the transaction.

Receivables for services are recognised at the nominal amounts due, less any provision for bad and doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.

Revenue from disposal of non-current assets is recognised when control of the asset has passed to the buyer.

1.4 Transactions by the Government as owner

Equity injections

Amounts appropriated designated as ‘equity injections’ (less any savings offered up in Portfolio Additional Estimates Statements) are recognised directly in contributed equity as at 1 July or later date of effect of the appropriation.

Restructuring of administrative arrangements

Net assets received from or relinquished to another Commonwealth agency or authority under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.

Other distributions to owners

The FMOs require that distributions to owners be debited to contributed equity unless in the nature of a dividend.

1.5 Employee benefits

Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.

Liabilities for wages and salaries (including non-monetary benefits) and annual leave are measured at their nominal amounts. Other employee benefits expected to be settled within 12 months of the reporting date are also measured at their nominal amounts.

The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

All other employee benefit liabilities are measured at the present value of the estimated future cash outflows to be made in respect of services provided by employees up to the reporting date.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the agency is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration, including the agency’s employer superannuation contribution rates to the extent that the leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by reference to the work of an actuary. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and redundancy

Provision is made for separation and redundancy benefit payments. The agency, where considered necessary, will develop a detailed formal plan for the terminations and inform those employees affected that it will carry out the terminations.

Superannuation

Staff of the agency in general are members of the Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme. The liability for their superannuation benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course.

The agency makes employer contributions to the Australian Government at rates determined by an actuary to be sufficient to meet the cost to the Government of the superannuation entitlements of the agency’s employees.

1.6 Leases

A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased non-current assets and operating leases under which the lessor effectively retains substantially all such risks and benefits.

Where a non-current asset is acquired by means of a finance lease, the asset is capitalised at the present value of minimum lease payments at the beginning of the lease term and a liability recognised at the same time and for the same amount. The discount rate used is the interest rate implicit in the lease. Leased assets are amortised over the period of the lease. Lease payments are allocated between the principal component and the interest expense.

Operating lease payments are expensed on a basis, which is representative of the pattern of benefits derived from the leased assets. The net present value of future net outlays in respect of surplus space under non-cancellable lease agreements is expensed in the period in which the space becomes surplus. Currently, the agency’s surplus space is let to a related entity.

1.7 Cash

Cash means notes and coins held and any deposits held at call with a bank or financial institution. Cash is recognised at its nominal amount.

1.8 Other financial instruments

Trade Creditors

Trade creditors and accruals are recognised at their nominal amounts, being the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that the goods or services have been received.

Contingent liabilities and contingent assets

Contingent liabilities and assets are not recognised in the Statement of Financial Position but are discussed in the relevant schedules and notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an existing liability or asset in respect of which settlement is not probable or the amount cannot be reliably measured. Remote contingencies are part of this disclosure. Where settlement becomes probable, a liability or asset is recognised.

1.9 Acquisition of assets

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and revenues at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor agency’s accounts immediately prior to the restructuring.

1.10 Property, plant and equipment

Asset recognition threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases of less than $2,000 and computer equipment of less than $1,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

Revaluations

Basis

Property, plant and equipment are carried at valuation as at the reporting date. The basis for future revaluations will be at fair value, and will be conducted annually at the reporting date. Asset acquisitions for IGT that have taken place in 2003-04 with the commencement of the agency were carried on the basis of historical cost less accumulated depreciation for the period which was deemed to represent fair value at 30 June 2004. In accordance with this policy, the agency’s assets were revalued at 30 June 2005.

Frequency

All property, plant and equipment will be revalued annually.

Conduct

All valuations are conducted by an independent qualified valuer.

Depreciation

Depreciable property, plant and equipment assets are written off to their estimated residual values over their estimated useful lives to the agency using, in all cases, the straight-line method of depreciation. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease.

Depreciation rates (useful lives) and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate. Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

2004-05

2003-04

Infrastructure, plant and equipment

3-10 years

3-10 years

Leasehold improvements

Lease term

Lease term

The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed in Note 5C.

Impairment of non-current assets

Non-current assets carried at up-to-date fair value at the reporting date are not subject to impairment testing.

1.11 Taxation / competitive neutrality

The agency is exempt from all forms of taxation except for Fringe Benefits Tax and Goods and Services Tax (GST). Revenues expenses and assets are recognised net of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office, and except for receivables and payables.

1.12 Insurance

The agency has insured for risks through the Government’s insurable risk managed fund, called Comcover. Workers compensation is insured through the Government’s Comcare Australia.

Note 2: Adoption of Australian Equivalents to International Financial Reporting
Standards from 2005-2006

The Australian Accounting Standards Board has issued replacement Australian Accounting Standards to apply from 2005-06. The new standards are the Australian Equivalents to International Financial Reporting Standards (AEIFRS). The International Financial Reporting Standards are issued by the International Accounting Standards Board. The new standards cannot be adopted early. The standards being replaced are to be withdrawn with effect from 2005-06, but continue to apply in the meantime, including reporting periods ending on 30 June 2005.

The purpose of issuing AEIFRS is to enable Australian reporting entities reporting under the Corporations Act 2001 to be able to more readily access overseas capital markets by preparing their financial reports according to accounting standards more widely used overseas.

For-profit entities complying with AEIFRS will be able to make an explicit and unreserved statement of compliance with International Financial Reporting Standards (IFRS) as well as a statement that the financial report has been prepared in accordance with Australian Accounting Standards.

AEIFRS contain certain additional provisions that will apply to not-for-profit entities, including Australian Government agencies. Some of these provisions are in conflict with IFRS, and therefore the agency will only be able to assert that the financial report has been prepared in accordance with Australian Accounting Standards.

AAS 29 Financial Reporting by Government Departments will continue to apply under AEIFRS.

Accounting Standard AASB 1047 Disclosing the Impacts of Adopting Australian Equivalents to International Financial Reporting Standards requires that the financial statements for 2004-05 disclose:

  • an explanation of how the transition to AEIFRS is being managed;
  • narrative explanations of the key policy differences arising from the adoption
    of AEIFRS;
  • any known or reliably estimable information about the impacts on the financial
    report had it been prepared using AEIFRS; and
  • if the impacts of the above are not known or reliably estimable, a statement
    to that effect.

Where an entity is not able to make a reliable estimate, or where quantitative information is not known, the entity should update the narrative disclosures of the key differences in accounting policies that are expected to arise from the adoption of AEIFRS.

The purpose of this Note is to make these disclosures.

Management of the transition to Australian Equivalents to International
Financial Reporting Standards

IGT has taken the following steps for the preparation towards the implementation of AEIFRS.

The Chief Finance Officer is formally responsible for the project of the transition to and implementation of AEIFRS and the plan’s progress.

The plan requires the following key steps to be undertaken and sets deadlines for their achievement:

  • All major accounting policy differences between current AASB standards and
    AEIFRS were identified by 30 June 2004.
  • System changes necessary to be able to report under the AEIFRS were evaluated,
    including those necessary to capture data under both sets of rules for 2004-05.
    The changes required were of only a minor nature and procedures have been
    implemented to accommodate those changes.
  • A transitional balance sheet as at 1 July 2004 under AEIFRS and a reconciliation
    of equity was completed by 30 September 2004 as scheduled.
  • An AEIFRS compliant balance sheet as at 30 June 2005 was also prepared
    during the preparation of the 2004-05 statutory financial report.
  • The 2004-05 Balance Sheet under AEIFRS will be reported to the Department
    of Finance and Administration in line with their reporting deadlines.
  • Consultants were engaged where necessary to assist with each of the above
    steps.

Major changes in accounting policies

Changes in accounting policies under AEIFRS are applied retrospectively, that is, as if the new policy had always applied except in relation to the exemptions available under AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards. This rule means that an AEIFRS compliant balance sheet had to be prepared as at 1 July 2004. This will enable the 2005-06 financial statements to report comparatives under AEIFRS.

Management’s review of the quantitative impacts of AEIFRS represents the best estimates of the impacts of the changes as at reporting date. The actual effects of the impacts of AEIFRS may differ from these estimates due to:

  • continuing review of the impacts of AEIFRS on the agency’s operations;
  • potential amendments to the AEIFRS and AEIFRS Interpretations; and
  • emerging interpretation as to the accepted practice in the application
    of AEIFRS and the AEIFRS Interpretations.

Changes to major accounting policies are discussed in the following paragraphs.

Property, plant and equipment

It is expected that the 2005-06 Finance Minister’s Orders will continue to require property, plant and equipment assets to be valued at fair value in 2005-06. Commencing in 2004-05, IGT will implement a program of revaluing all property, plant and equipment assets on a fair value basis as at 30 June each year. As such, there will be no impact from AEIFRS on the agency’s property, plant and equipment.

AEIFRS also require the recognition of provisions for decommissioning and removal of assets, and site restoration. Under IGT’s current premises lease, there is a requirement for the agency to ‘make good’. As such IGT has commissioned an independent, professional organization to establish the extent and potential future value of the ‘make good’ provisions under the lease. The future value of the provision ($72,300)
has been discounted to its present values which are reflected in the Reconciliation of Impacts — AGAAP to AEIFRS schedule below.

Impairment of non-current assets

The agency’s policy on impairment of non-current assets is at Note 1.10.

Under AEIFRS these assets will be subject to assessment for impairment and, if there are indications of impairment, an assessment of the degree of impairment. (Impairment measurement must also be done, irrespective of any indications of impairment, for intangible assets not yet available for use.) The impairment test is that the carrying amount of an asset must not exceed the greater of (a) its fair value less costs to sell and (b) its value in use. Value in use is the net present value of net cash inflows for for-profit assets (which does not apply to IGT) and the depreciated replacement cost for other assets which would be replaced if IGT were deprived of them.

As the agency’s non-current assets are carried at up-to-date fair value at the reporting date, they are not subject to impairment testing.

Employee benefits

The provision for long service leave is measured at the present value of estimated future cash outflows using market yields as at the reporting date on national government bonds.

The 2003-04 financial reports noted that the AEIFRS standards may require the market yield on corporate bonds to be used. The AASB has decided that a deep market in high quality corporate bonds does not exist and therefore national government bonds will be referenced.

AEIFRS require that annual leave that is not expected to be taken within 12 months of balance date is to be discounted to its present value. After assessing the staff leave profile, the agency does not expect that any material amounts of the annual leave balance will be subject to these provisions of the standard, however the adjustment amounts are disclosed in the Reconciliation of Impacts — AGAAP to AEIFRS schedule below.

Administered items

The agency has no administered items.

Reconciliation of Impacts – AGAAP to AEIFRS

Reconciliation of Impacts – AGAAP to AEIFRS
(a) 30 June 2005 total represents the accumulated impacts of AEIFRS from the
date of transition.

Note 3: Events occurring after reporting date

The agency is not aware of any significant events that have occurred since balance date that warrant disclosure in these statements.

Note 4: Operating revenues

Note 4: Operating revenues

Note 5: Operating expenses

Note 5: Operating expenses
(a) These comprise minimum lease payments only.

Note 6: Financial assets

Note 6: Financial assets

Note 7: Non-financial assets

Note 7: Non-financial assets

Note 7: Non-financial assets (continued)

Note 7: Non-financial assets (continued)
All property, plant and equipment are at valuation as at 30 June 2005 in accordance
with the agency’s revaluation policy (note 1.10). Amounts as at 1 July
2004 are at cost, and as they had only recently been acquired, it was deemed
that depreciated cost represented fair value at that time.

Note 7D: Other non-financial assets

Note 8: Employee provisions

Note 8: Employee provisions

Note 9: Other provisions

Note 9: Other provisions

Note 10: Supplier payables

Note 10: Supplier payables

Note 11: Equity

Note 11: Equity

Note 12: Cash flow reconciliation

Note 13: Contingent liabilities and assets

There are no unquantifiable or remote contingencies.

Note 14: Executive remuneration

The number of Executives who received or were due to receive total remuneration of $100,000 or more.

Note 14: Executive remuneration

Note 15: Remuneration of auditors

Note 15: Remuneration of auditors

No other services were provided by the Auditor-General.

Note 16: Average staffing levels

Note 16: Average staffing levels

Note 17: Financial instruments

Note 17A: Interest rate risk

Note 17A: Interest rate risk

Note 17B: Net fair values of financial assets and liabilities

The net fair values of cash and non-interest bearing monetary financial assets approximate their carrying amounts.

The net fair values for trade creditors are approximated by their carrying amounts.

Note 17C: Credit risk exposures

The agency's maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the statement of financial position.

The agency has no significant exposures to any concentrations of credit risk.

All figures for credit risk referred to do not take into account the value of any collateral or other security.

Note 18: Specific payments disclosure

Note 18: Specific payments disclosure

Note 19: Acquittal of Authority to Draw Cash from the Consolidated Revenue
Fund (CRF) for Ordinary Annual Services Appropriations

Note 19: Acquittal of Authority to Draw Cash from the Consolidated Revenue Fund (CRF) for Ordinary Annual Services Appropriations
In the 2003-04 financial year the agency did not receive funding by way of the
Appropriations Acts, but by the transfer of monies from the Department of the
Treasury (FMAA section 32). No disclosure was required in the Agency’s
2003-04 financial statements. The balance of the section 32 transfers ($360,279
representing cash at bank from 2003-04 financial year) is included above to
present the Agency’s 2004-05 closing position.

Note 20: Reporting of outcomes

The Inspector General of Taxation has one outcome:

‘Improved administration of tax laws for the benefit of all taxpayers’

Note 20A: Net cost of outcome delivery

Note 20A: Net cost of outcome delivery

Note 20B: Major classes of departmental revenues and expenses by output groups
and outputs

The agency has two outputs (Output Group 1.1):

Output 1.1.1 — Identification of issues for review and prioritisation of work program

Output 1.1.2 — Provision of independent advice to the government on the administration of the tax laws

The basis of attribution in the table below is consistent with the basis used for the 2005-06 Budget, which estimated the proportion of agency activities to be assigned to each of the outputs. This basis was evaluated during 2004-05 through monitoring of agency activities and no adjustment was considered necessary.

Note 20B: Major classes of departmental revenues and expenses by output groups
and outputs (continued)

Note 20B: Major classes of departmental revenues and expenses by output groups and outputs (continued)