It is now close to three years since my appointment as Inspector-General of Taxation (IGT). I am pleased that my office has been able to make significant progress, building upon the foundations set previously. During this year, my priorities were as follows:
- to progress my work program activity, including the completion of a number of reviews, the development of a new forward work program and the commencement of new reviews;
- to improve my office’s effectiveness in facilitating improvements to the tax administration system, such as working with the Australian Taxation Office (ATO) to engender real time action to address taxpayer concerns; and
- to further consider the underlying themes in tax administration that may give rise to systemic issues.
These priorities have been largely achieved as well as a number of other objectives being pursued. Each priority is addressed in more detail below.
Work program activity
At the start of the year, my office had seven reviews in progress. Five of these reviews are now either complete or in the final stages of the review process. The other two reviews are nearing completion. In addition to the above reviews, I have also developed a work program in consultation with the broad community for the period ahead. I have consistently sought to ensure my work program structure and review activation are flexible enough to accommodate urgent overriding issues of concern that may emerge at a later time. The review into the ATO’s Change Program, which I was directed to conduct by the former Assistant Treasurer in April 2010, warranted just such attention and resource support — although it necessitated delaying my review into the ATO’s management of small and medium enterprise audit and risk review. The immediate ability of my office to respond to needs of this nature in future has been eased to a certain extent through base line funding support. Furthermore, the new work program for 2011–12 has been designed to achieve outcomes in a targeted and shorter time frame to allow better accommodation of urgent review matters that may emerge during the work program life cycle. For details on specific work program activity including the status of review reports and reviews, please refer to the sections that follow.
Current year reports — publicly released
There were four review reports publicly released by the Assistant Treasurer during the annual reporting period. Each report is addressed specifically below.
Review into the Australian Taxation Office’s Change Program
In response to a direction from the former Assistant Treasurer, and concerns raised by taxpayers, tax practitioners and their representative bodies, I reviewed the ATO’s ambitious and far-reaching Change Program (the Program). The Program was a large and complex Information and Communication Technology (ICT) project aimed at delivering a range of significant capabilities to the ATO to ensure effective administration of the taxation and superannuation laws now and into the future. The Program life extended to seven years and was subject to constant change in scope over that time. This review was particularly challenging, complex and difficult for my office. The scale of the program and the related review was considerable. There were also a range of external contractors and consultants engaged in the Program. The review mainly focused on the impact on taxpayers and tax practitioners resulting from the deployment of the income tax release. The report made a number of observations and recommendations. The timing of the Program’s income tax release deployment was an important issue raised. The report observed that the ATO found itself in an invidious position where it had little choice but to ‘go live’ when it did, due to a range of factors including that further delay would have most likely resulted in significant additional costs with diminishing returns. The risk identification and management of the Program by the ATO was an area of focus. The report observed that, generally, the ATO had developed appropriate mitigation strategies to combat these risks, although some areas for improvement remained. The ATO communication about the Program with stakeholders was also an important area of concern. It was observed that the ATO did make attempts to communicate with stakeholders but it was ultimately inadequate in assisting a range of taxpayers and tax advisers to minimise adverse impacts. The report made eight recommendations aimed at the ATO, of which the ATO agreed with five, partly agreed to two and disagreed with the other. The recommendations related to stakeholder compensation where they were adversely affected by the release, improved communication with stakeholders and the need for open and frank consultation with ATO staff. The report also made recommendations for consideration by government regarding governance, scrutiny and intra-agency information exchange in the management of future large and significant ICT projects.
Review of aspects of the Australian Taxation Office’s administration of private binding rulings
This review arose out of a range of taxpayer concerns. Major concerns conveyed to the IGT were that private rulings take too long to issue, are inconsistent on the same topic and that certain topics will be refused for ruling. The Commissioner of Taxation also invited my office to review the area. During the review the ATO acknowledged that it needs to improve the timeliness of its responses to requests for private rulings, project management and related communications. The IGT also found that a group of taxpayers with the same issues and facts were being issued individual private rulings. The IGT recommended that to better manage resources in the production of these rulings, management systems be improved and that alternative approaches be considered. The ATO agreed and now prefers to issue class rulings in these circumstances, as the lack of a separate ATO-wide reporting on these types of standard rulings could potentially skew reported average delivery timeframes favourably. The IGT recommendation directed at the register of private binding rulings was only partly agreed to by the ATO. Importantly, my key recommendation that this register be retained was agreed to by the ATO. It did not, however, agree with a number of recommendations directed at enhancing the register’s usability as the ATO believes the register has a more limited purpose and that the ATO legal database is the authoritative source for information about the ATO’s interpretation of the law. The review also followed up on the implementation of recommendations arising from the IGT report into the ATO’s potential revenue bias in private binding rulings review involving large complex matters, issued in 2008. The IGT found that the agreed recommendations had been implemented.
Review into the Australian Taxation Office’s administration of the Superannuation Guarantee Charge
The Superannuation Guarantee (SG) system was found to work well for the majority of Australians under the review. However, the people most at risk in the SG system are the employees who are least empowered to take action. These very people are also the most reliant upon compulsory superannuation contributions for a higher standard of living in retirement beyond the age pension. The non-payment of the SG also provides non-compliant employers with an unfair advantage over other compliant employers that meet their SG obligations and pay employees’ superannuation on time. Additionally, the Government is exposed to higher future age pension outlays. The review made a range of recommendations to ensure that the administrative framework better supports the underlying SG policy intent and optimised SG compliance through greater detection and deterrence mechanisms. The recommendations also emphasised the nature of employer superannuation contributions as an employee entitlement and sought to improve their protection, especially for those people most at risk. A number of the recommendations for Government consideration have since been adopted and reflected in other initiatives and reviews (most notably the Review into the Governance, Efficiency, Structure and Operation of Australia’s Superannuation System or ‘Cooper Review’).
Follow-up review into the Australian Taxation Office’s implementation of agreed recommendations included in the six reports prepared by the Inspector-General of Taxation between June 2006 and October 2008
Improving the tax system’s administration is the primary goal of the IGT office. Follow-up reviews provide evidence and assurance that this goal is achieved, vindicating the efforts and valuable contributions made by all stakeholders including taxpayers and tax practitioners and their respective representative bodies. These reviews also evidence the ATO’s openness to scrutiny and commitment to making improvements as a key stakeholder in the system. This particular follow-up review was the second conducted by my office. The process is akin to a detailed assurance enquiry that seeks to ensure the original report recommendations made in the six original review reports were effectively implemented. The follow-up review found that the ATO has implemented or party implemented 38 of 41 agreed IGT recommendations. Importantly, the follow-up process only addresses the original IGT recommendations that the ATO agreed to implement in part or whole. The IGT remains concerned in relation to recommendations that the ATO had not agreed to implement. Of particular concern was the ATO’s comment on the IGT’s original recommendation that ATO guidance, which is of a significant nature and which affects a large segment of the taxpayer population, be in a binding form. The IGT continues to hold to the original recommendation in these circumstances as being appropriate. In the course of the follow-up review, the general willingness and cooperation exhibited by ATO staff to bridge improvement opportunities in recommendation implementation work was welcomed. Furthermore, this review triggered new approaches to be explored, jointly by the ATO and the IGT, for improved and more timely implementation of IGT recommendations.
Current year reports — submitted to Assistant Treasurer and awaiting release
In addition to the review reports publicly released by the Assistant Treasurer during the year, one other review report was completed and submitted and is now awaiting release.
Report into the Australian Taxation Office’s large business risk review and audit policies, procedures and practices — submitted to the Assistant Treasurer 3 May 2011
This report made a number of recommendations to address stakeholder concerns about ATO conduct in relation to large business audits and risk reviews. It is important to note that the ATO has already commenced a process of implementing agreed recommendations.
Work program for 2011–12
As foreshadowed in last year’s annual report, broad consultation with the community was undertaken in developing the IGT forward work program for 2011–12. On 4 April 2011, the outcome of these consultations was the IGT work program announcement which set out the review topics for the period ahead. Broad consultation with the community ensures that the resources of the IGT office focus on tax administration issues of greatest concern and that investigation of such issues are strongly supported by the community. The selected review topics involve issues of concern to differing stakeholders. However, collectively, the work program canvasses issues of concern for the whole community including, individuals, businesses, tax practitioners and their representative bodies as well as Government and its agencies. In developing this work program, a more flexible structure has been adopted to facilitate effective delivery of resources to current reviews, which also provides for more urgent review action that may arise outside of the formal work program life cycle. The work program topics for review are listed below:
- review of ATO implementation of the Report on Aspects of Income Tax Self Assessment (ROSA) recommendations (subsequently called Improving the self assessment system);
- review into ATO use of benchmarking to target the cash economy;
- review into ATO use of Early and Alternative Dispute Resolution;
- review into the ATO’s Small and Medium Enterprise (SME) audit and risk review policies, procedures and practices; and
- follow-up review into ATO implementation of IGT recommendations.
More details on the above reviews are provided below in the sections entitled ‘Current year reviews — in progress as at year end’ and ‘Following year reviews’ respectively.
Potential work program topics
The IGT work program process identified a range of strong topics for review that were not included on the current work program. Three important topics not included on the work program are specifically outlined below.
ATO technical decision making processes and proceduresIssues concerning the ATO’s technical decision making processes and procedures have been raised in many IGT reports historically. These issues were again raised last year in the Review into the Implications of any Delayed or Changed ATO Advice on Significant Issues (the so-called ‘U-turns’ review) as well as being foreshadowed for IGT review in my previous annual report. The ATO responded to these concerns by conducting a broad internal review. The recommendations resulting from this internal review have now been adopted by ATO management and are in the process of being implemented. Accordingly, it would be more appropriate to consider reviewing this area once these changes are implemented and bedded down.
Project WickenbyA number of taxpayers and tax practitioners made representations to the IGT, seeking review of the ATO’s actions in Project Wickenby. As Project Wickenby is an across-government agency project, the ATO, while a major contributor, is only one of a number of agencies involved. The IGT only has jurisdiction to consider the ATO’s role, whereas, the Australian National Audit Office (ANAO) and the Commonwealth Ombudsman have broad jurisdiction to investigate or review across a number of government agencies. Shortly after the above representations were made, the IGT consulted the ANAO and the Ombudsman on this matter. Thereafter, the ANAO announced a cross agency review into Project Wickenby and the Ombudsman also indicated that he was considering a similar review into the matter, which was later effected. As a consequence, the IGT will await the results of the ANAO and Ombudsman’s reviews before considering a further review. The ANAO and the Ombudsman have both been advised that the IGT would provide any appropriate assistance, if required, in relation to the review.
ATO approach to Freedom of InformationStakeholders raised issues with the ATO’s handling of their Freedom of Information (FOI) requests. At the time of the work program announcement, the Government had announced new arrangements for information management, which included the integration of the Privacy Commissioner’s office with the newly established Office of the Australian Information Commissioner (the OAIC) and the FOI Commissioner. Accordingly, the OAIC may be better placed to investigate concerns of this nature at first instance.
Current year reviews — in progress, as at year end
Two of the reviews in progress, as at 30 June 2010, are nearing finalisation. A further review, improving the self assessment system, was announced on my new forward work program in April 2011. It is not possible to detail findings and recommendations arising from these reviews at this time. These reviews are listed below along with a brief description.1
Review into the Australian Taxation Office's administration of class rulings — commenced 25 March 2010
Stakeholders repeatedly raised concerns that class rulings sometimes take too long to issue and sometimes are not issued at all. They asserted that ATO processes for dealing with class rulings are not well known to potential applicants and can involve poorly targeted requests for information. Stakeholders also asserted that there can be communication issues between the ATO and applicants and that there are ATO delays in establishing agreed facts or in establishing the correct view of the law that is to be applied to those facts. The IGT is investigating whether concerns such as the above are justified. This involves examining the management of selected class rulings with a focus on important milestone events and the underlying issues and behaviours. The review is considering whether ATO behaviours and decision making processes are leading to extended timeframes. The review report is expected to be submitted to the Assistant Treasurer in the next few months.
Review into the Australian Taxation Office's Small and Medium Enterprise (SME) audit and risk review policies, procedures and practices — commenced 7 April 2010
Taxpayers and their advisers cited unmanageable and, at times, unnecessary costs and workloads caused by the ATO’s approach to its current compliance focus on all SMEs in the $100 million to $250 million turnover range, including High Wealth Individuals. Concerns related to delays, the level of commercial awareness and type of conduct of ATO staff and the quality of ATO engagement on technical issues. A significant number of submissions from the taxpayer community have been received. The IGT has also met with a range of taxpayers and their advisors to discuss their concerns. The review is seeking to establish whether there is substantial evidence of these concerns and, where this is the case, develop recommendations for improvement. As with a number of other reviews, the IGT has also established an advisory group that consists of relevant senior ATO officers, tax practitioners and IGT personnel to explore their concerns and develop solutions. The nature of the review and the interaction process means it will be afforded a longer period for progress. The review report is expected to be submitted to the Assistant Treasurer before the 2011 calendar year end.
Review into improving the self assessment system — commenced 16 June 2011
The review into improving the self assessment system is a broad enquiry that seeks to respond to a range of concerns raised in submissions to the IGT. The issues raised touch on many aspects of the system but five main themes have emerged, namely:
- the need for the self assessment regime to be updated to take into account the recent developments in compliance approaches such as pre-assessment compliance activities;
- the role of the tax administrator in the self assessment regime and the advice framework;
- whether the administration of reasonably arguable position can be improved or whether it needs replacing with a new concept;
- the Commissioner’s discretions and whether these should be expanded to allow the Commissioner to act in the taxpayer’s favour in appropriate cases; and
- the as yet unimplemented recommendations arising out of the Review into Aspects of Income Tax Self Assessment.2
This review is wide ranging and is expected to absorb considerable IGT resources. It is not expected to be completed until some time into the next calendar year.
Following year reviews
The IGT seeks to ensure the work program as announced is challenging and also appropriate in matching available resources to review demands. Given the office’s size and the need to develop terms of reference and submission guidelines, a given review may commence in the financial year following the original work program announcement — such reviews are identified below.
Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution (ADR) — commenced 26 July 2011
Submissions to the review have suggested that both the ATO and taxpayers could benefit from greater use of ADR, and especially so where this is applied at an earlier point in time and as close to the original decision as possible. There is a perception that the ATO currently only uses ADR sparingly, is unwilling to settle and favours litigation over ADR. The Commissioner has also asked the IGT to undertake a review in this area. As part of this review, the IGT will aim to determine whether the ATO is currently making sufficient use of early and alternative dispute resolution and whether the ATO and taxpayers could benefit by making greater use of these methods. The review will also examine the circumstances in which it is appropriate for the ATO to utilise early and alternative dispute resolution methods. The terms of reference and submission guidelines for this review were issued in July 2011, and work on this review is well underway.
Review into the Australian Taxation Office’s use of benchmarking to target the cash economy
A number of stakeholders have raised concerns about the appropriateness of the ATO’s use of benchmarking data to identify taxpayers who may be underreporting their income and to calculate default assessments where an identified taxpayer’s records are deemed inadequate. The IGT will investigate whether benchmarks are an appropriate tool for identifying the potential underreporting of income and for the calculation of default assessments. The investigation will also consider whether the ATO’s expectations in relation to micro and small business record keeping are clearly communicated and reasonable. This review is expected to commence in the second quarter of the following financial year.
Follow-up review into the Australian Taxation Office's implementation of agreed recommendations included in IGT review reports prepared since October 2008
This follow-up review is directed at assessing the ATO’s progress with implementing agreed changes in a number of the IGT’s reviews released since November 2008. The IGT has been in dialogue with the ATO with a view to establish a more robust and effective recommendation implementation framework. The IGT and ATO have in more recent reviews adopted a new implementation process that improves upon the historical follow-up review reporting approach. Accordingly, the form and timing of this follow-up reporting will likely reflect this new approach, reducing resourcing demands in this area for the IGT office.
Potential new issues — work program
Throughout the year, the IGT office receives a range of representations from the tax community directly about their concerns. The issues of biggest impact are generally taken up by the IGT for the work program. However, the resources of the IGT office limit the number and scope of issues that can be reviewed. Where topics of concern are identified, the IGT office seeks to capture these on a reserve or potential issues list. The selection of topics for review action may change during the year where an urgent review or resourcing need arises at short notice. The IGT wishes to ensure that stakeholders appreciate that the IGT office is always open to understanding emerging new stakeholder concerns to ensure these are addressed at the earliest opportunity, while also appreciating the limitations and constraints that the office may have in actioning requests.
Observations — underlying themes in tax administration
The IGT seeks to improve the tax administration system for the benefit of all taxpayers. The role offers a unique perspective. It is truly independent of the ATO, yet has the power to access ATO files and information just like the ATO can when dealing with taxpayers. These features level the information access and accountability playing field by ensuring there is transparency and improved understanding, which engenders better cooperation between all parties. The IGT also has strong links with the taxpaying community through its relationships with peak bodies and key stakeholders who take great solace from this aspect of the IGT’s information access powers. This access also facilitates the sharing of frank and candid views which would not ordinarily be exchanged between the ATO, on the one hand, and taxpayers, tax practitioners and their respective representative bodies on the other. The tax administration landscape is not fixed, but ever changing and evolving. The following observations are offered to foster debate and better understanding in this area.
Independent internal ATO review in tax disputes
A consistent concern raised by stakeholders relates to the ATO’s approach to tax disputes and whether the ATO sufficiently evaluates and re-evaluates its adopted position throughout the dispute process. This issue has been explored in earlier IGT reviews where an end-to-end dispute resolution framework and the need for independent review have been advocated. The ATO, to its credit, has adopted this end-to-end philosophy, however, concerns persist. The main concern is that many disputes run far too long through the process that either should not have been raised in the first place or otherwise resolved at a much earlier time. This, it is argued, is reflected in an increasing number of cases that the ATO is losing in the courts. The underlying concern is the insufficient level of independent internal review of ATO positions adopted initially such that organisational inertia may overshadow the process, allowing disputes to originate and continue in the absence of a functionally separate independent review unit like an internal appeals and objections area. There are precedents for such an approach both overseas and historically in the Australian tax system. The objective is not to put an end to disputes per se, given the complexities of tax law, but rather to ensure that only genuine disputes that have been carefully and rigorously considered are taken forward in formal processes and therefore prevent the incidence of wasteful and unnecessary compliance costs for all parties.
Timeliness, certainty and compliance costs
In a self assessment system, a high level of responsibility to discharge regulatory obligations in a very complex environment is imposed on taxpayers. Accordingly, taxpayers expect to receive a degree of regulatory accommodation when they voluntarily comply with their reasonable understanding of the tax laws. Clearly, it is the responsibility of the Commissioner to act promptly and decisively when the ATO becomes aware that taxpayers may be in conflict with relevant tax laws. The ATO has sought to introduce measures directed at assisting taxpayers and more recently undertaken a broad ranging review of its technical decision making function. The major challenge for the ATO remains to move quickly to provide certainty or appropriately accommodate taxpayers’ positions where there is new law or where complex issues arise. In a compliance context, stakeholders have indicated that a number of the ATO’s initiatives, including the more recent pre-lodgement information gathering strategies, are giving rise to ever increasing compliance costs and complicating management of matters unnecessarily. Certain aspects arising in this context are being investigated in the context of the review into improving the self assessment system.
A number of issues raised in last year’s IGT annual report (such as risk identification, transfer pricing and service standards) are still under consideration. To the extent that they are not addressed in existing reviews, they will be further explored in the context of the future IGT work programs.
Improving effectiveness and engendering real time action
The IGT relationship with the ATO continues to evolve and there have been some resulting improvements. A significant improvement this year has been the enhancement of ATO processes for ensuring that agreed IGT recommendations are more quickly and appropriately implemented. This has also resulted in corresponding changes to the way IGT reviews are conducted. As stated earlier, this may result in IGT follow-up reviews becoming redundant. A more constructive relationship with the ATO facilitates improvements to tax administration more quickly and efficiently. The IGT’s own review processes have been evolving to achieve this end. The IGT has also encouraged the ATO to act in addressing IGT concerns before reviews are finalised or even anticipated. A good example is the overhaul of the ATO’s technical decision making processes which the ATO undertook following concerns raised by the IGT, as stated earlier. Notwithstanding the IGT’s aim of building on the constructive relationship with the ATO, it should always be appreciated that a degree of tension should always exist between an administrator and a scrutineer body. This tension, professionally managed, is entirely appropriate to maintain the community’s confidence in the scrutineer’s independence. In relation to the conduct of reviews, the IGT has also increased its use of advisory groups consisting of external stakeholders as well as ATO and IGT personnel. This approach facilitates the coming together of all parties to explore all aspects of complex issues and develop solutions jointly with a shared goal of improving the tax system. As opportunity arises, the IGT will continue to look at innovations or changes that may assist in the improvement of the administration of the tax system. An important initiative in future years will be the development of a deeper research capability within the IGT to provide an independent capacity for innovation and improvement.
I would like to sincerely thank the many taxpayers, tax practitioners and their respective representative bodies who bring matters for review to our attention and for their assistance in conduct of reviews. Due to its relative size, the IGT is heavily reliant on the contribution of such external stakeholders to deliver improvements to tax administration in this country. The contribution of external stakeholders is increasing as they become better acquainted with the work of the office and appreciate that matters can be shared with us on a strictly confidential basis without waiving legal professional privilege.
Public sector stakeholders
The ANAO and the Commonwealth Ombudsman also scrutinise the ATO from their own perspectives. The roles of each agency are different but there is potential for some overlap. To avoid unnecessary duplication, the IGT is in contact with both agencies in respect of developing our respective work programs and on some specific reviews, consistent with the requirements of subsection 9(2) of the Inspector-General of Taxation Act 2003 (the IGT Act). I appreciate the assistance that my office has received from these agencies. I would also like to thank the Commissioner of Taxation and his staff for their professional assistance. Communication between our respective offices has been frank, open and has led to improvements to the tax system. I would also like to thank the Treasury as partner in this relationship and also the Assistant Treasurer and his staff for their support.
In setting my work program, I have taken into account the requirements of subsection 9(2) of the IGT Act and have consulted with the Commonwealth Ombudsman and the Commonwealth Auditor-General. SIGNED Ali Noroozi Inspector-General of Taxation
The IGT Act established an independent statutory agency to review:
- systems established by the ATO to administer the tax laws; and
- systems established by tax laws in relation to administrative matters.
The IGT 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 Government on the administration of the tax laws. To ensure that reviews undertaken reflect areas of key concern to the Australian community, the IGT 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.
1. Expenses not requiring appropriation is made up of depreciation and amortisation expenses.
Appendix 1 — Agency resource statement
as at Budget May 2010
2 Treasury, Report on Aspects of Income Tax Self Assessment, Canberra, 2004.