Inspector-General of Taxation report
As the Inspector-General of Taxation (IGT), I am pleased to report that my office has had a very busy and fruitful year. We have built upon the foundations set in my earlier years in office and have sought improvements in the delivery of our goals. The overarching aim of my role is to improve the tax administration system for the benefit of all Australians. The role offers a unique perspective that is founded upon three pillars, being:
- statutory independence;
- compulsory information and access powers relating to the Australian Taxation Office (ATO); and
- strong relationships and consultation with the taxpaying community.
This foundation facilitates the sharing of frank and candid views in a manner not ordinarily exchanged between the ATO on the one hand and taxpayers, tax practitioners and their respective representative bodies on the other. This process of exchange between stakeholders provides a strong basis for the development of my reviews and in shaping of recommendations for improvements in the resulting report. Each review achieves both direct and incremental improvements. Whilst the full benefit of a given review may not always be immediately apparent, I am confident that the incremental changes brought about by the reviews and other complimentary activities that the IGT undertakes, over time, will result in enduring improvements to tax administration in this country. In this year's report, I highlight some of the key outcomes of the IGT's activities to illustrate the evolution and development of the office. I also provide observations on emerging themes in tax administration arising from issues raised with my office. Thereafter, I outline the results from the current year's work program and comment on the new work program planning for the 2012 and 2013 period.
Key outcomes and observations
The key role and function of the IGT is to review systemic tax administration issues and report to Government. The nature of the role necessitates a broad range of activities and interactions, the key outcomes flowing from which are highlighted in this section.
IGT submission to the Tax Forum
The October 2011 Tax Forum, an important initiative of the Government, provided my office with a unique opportunity to make submissions on a key overarching issue in tax administration, namely, ATO governance and scrutineer function. Having felt strongly about contributing to this debate, I made a written submission to, as well as participated in, the Forum. My written submission highlighted opportunities to improve governance through a combination of an ATO management board, additional Second Commissioners recruited from the private sector to perform substantive tax decision making roles (including one to head up a separate appeals and review function) and an overarching scrutineer body that consolidated the existing tax scrutineer functions. This submission is available from my office's website (see www.igt.gov.au).
Government adoption of IGT recommendations
My office not only examines systems established by the ATO, but also identifies opportunities for Government to consider policy improvements to those systems through legislative action. Recent examples of Government adoption of IGT recommendations for policy consideration include:
- legislative amendments (Tax Laws Amendment (2012 Measures No. 2) Act 2012) - implementing an IGT recommendation to better protect employees' superannuation guarantee (SG) entitlements by expanding the director penalty regime to apply to unpaid SG liabilities (recommendation 11 in my 2010 review of the ATO's administration of the Superannuation Guarantee Charge); and
- legislative amendments (Schedule 6 to the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012) - implementing an IGT recommendation to require employers to report, on payslips, superannuation contribution information (recommendation 2 from the same review above).
Other adoption of IGT recommendations
It is also interesting to observe the broader influence of IGT work, such as aspects of recommendations with which the ATO has disagreed but have been reiterated by other bodies at a later time. Examples include:
- recommendation 114 in the Australia's future tax system: Report to the Treasurer (the Henry report) reiterated that part of an IGT recommendation to require disclosure of Treasury material which the ATO uses in determining the purpose or object of the law or policy intent (recommendation 2 in the IGT review of the potential revenue bias in private binding rulings involving large complex matters); and
- recommendation 9 in the Joint Committee of Public Accounts and Audit's (JCPAA) Report 410 Tax Administration which reiterated an IGT recommendation to improve transparency on ATO reported timeframes in processing private ruling applications (recommendation 10 in the IGT review of the potential revenue bias in private binding rulings involving large complex matters).
It should be noted that the JCPAA has recently requested that the ATO provide submission to it on, amongst other things, IGT recommendations to which it did not agree and the reasons why (recommendation 6 of the JCPAA's Report 426 Ninth Biannual hearing with the Commissioner of Taxation).
International revenue and scrutineer body interaction
My office also draws on the strong ties with other countries' revenue authorities and associated scrutineer bodies to better inform our consideration of potential improvement opportunities. In this respect, my office has drawn on the experience of a range of overseas bodies. Examples include:
- consulting the United States of America Internal Revenue Service (IRS) and Canada Revenue Agency, their respective management boards and scrutineering agencies, amongst others, on their revenue authorities' governance arrangements in the course of developing my submission to the Tax Forum;
- consulting the United Kingdom's HM Revenue and Customs (HMRC) on its pilot of small business alternative dispute resolution in the course of my review of the ATO's approach to alternative dispute resolution, as well as its approach to other issues that relate to other reviews; and
- consulting with a number of revenue authorities, such as the Inland Revenue Authority of Singapore, IRS and HMRC on their pre-lodgement compliance approaches, in the course of my review into improving the self assessment system.
Furthermore, for the first time this year, I met with my US and Canadian counterparts to exchange information, views and thoughts on how we can work with our respective revenue authorities to deliver improvements to tax administration. I have also been invited to provide my insights on tax administration through presentations at international tax conferences which are also a useful source of information and ideas. The overseas ties ensure that my office is aware of new international developments and that they are considered when identifying potential improvements to tax administration in this country.
International and Australian taxation academic interaction
My office also seeks to foster relationship with academics engaged in the field of taxation law and tax administration both within Australia and internationally. The IGT values the independent insights, experiences and innovations that they bring to bear in developing and testing options to improve tax system administration. Our involvement with academics includes presenting and participating in their conferences as well as consulting with them on specific IGT reviews.
Improved scrutineer work program development
During the year, the Commonwealth Auditor-General, the Commonwealth Ombudsman and I agreed to meet collectively as part of our respective annual planning processes to share information and consider more broadly the overall ATO review activity. This agreement implements the JCPAA's recommendation aimed at avoiding unnecessary duplication where there is potential for overlap in our different roles in scrutinising the ATO (recommendation 4 in the JCPAA's Report 426 Ninth Biannual hearing with the Commissioner of Taxation). In effect, the agreement builds upon the requirement of subsection 9(2) of the Inspector-General of Taxation Act 2003 (the IGT Act) for me to consult both agencies in respect of developing my work program. As there is no such reciprocal legislative requirement on the other agencies, the implementation of this agreement ensures that such consultations are clearer and mutually conducted.
Interaction with government organisations
Tax systems do not exist in isolation and frequently interact with the functions of other government bodies. In this respect, the evolution of my office has seen an increased focus on improving the ATO's interaction within government administration. For example, my recent review into the ATO's approach to alternative dispute resolution involved interaction with the Attorney-General's Department to ensure that any recommendations on changed ATO approaches were fully informed of broader government initiatives as well as to share insights. These recommendations have been positively received, with some recommended actions being viewed as setting a precedent for other government bodies to follow. Other opportunities to improve tax administration have also been sourced from the work done in other government bodies, such as the Australian Bureau of Statistics-developed software that was identified in my review of the ATO's approaches in its benchmarking of financial performance of small business in the cash economy. More comment can be made once the report to this review is publicly released.
Emerging themes in tax administration
The IGT seeks to provide insight into the operation of the tax administration system and foster broader discussion around key themes emerging from the issues raised in reviews or consultations. In previous annual reports, the emerging themes, which still persist, included the independent internal ATO review in tax disputes, timeliness of delivery, certainty of outcomes and compliance costs, amongst others. Outlined below is a brief overview of some of the main themes arising this year.
Real time ATO compliance approaches
An emerging trend with overseas revenue authorities has been to adopt compliance risk management strategies that involve risk-orientation and differentiated responses. These strategies are typically complemented by shifting compliance activities upstream to address risks earlier in the sequence of events potentially leading to compliance failures. Consistent with this trend, the ATO has become more overt in strategies that it is developing to better assess risks at earlier points in the lodgement/compliance assurance cycle - for example, the income tax refund integrity program for individuals and the combination of the risk differentiation framework and annual compliance arrangements for medium-sized and large businesses. These approaches can enable the ATO to better target its compliance focus. It also increases ATO demands for information. These demands can arise at lodgement in the form of expanded disclosures. They can also arise both in advance or after such lodgement through pre-lodgement requirements or additional information requests. The result of such approaches is increased costs for affected taxpayers. This raised the question as to whether such approaches amounted to a swinging of the pendulum back towards a full-assessment system without any of the benefits. In such a case, there may be a need for taxpayer protections to be reconsidered and rebalanced to improve certainty. These are issues being considered in the IGT review into improving the self assessment system.
ATO staff capability
Another emerging trend relates to the challenges that the ATO faces in developing and maintaining a technically capable workforce. Fostering community confidence in the ATO's activities requires officers to discharge their duties confidently, expeditiously, equitably and accurately. Community confidence is critical to voluntary compliance with the tax laws. In my recent review of the ATO's small and medium enterprise (SME) active compliance activities, the ATO recognised that its SME business line will face significant staff capability challenges in the next few years. As such, the ATO has given significant attention to structures that should support the development and maintenance of staff capability.
Resolving policy or legislative ambiguity
Disputes may arise between the ATO and taxpayers that may have positional or tactical aspects in an environment where the law is generally thought to be reasonably settled or the policy understood. Taxpayers clearly have a right to dispute administrative decisions, but this is generally expected to be at their own cost where they are not ultimately vindicated on review. A number of disputes, however, may arise because the law, its policy or both are unclear or ambiguous. In these circumstances, questions arise as to whether private litigants should bear the cost of prosecuting their view, especially where the resolution of that ambiguity would benefit numbers of taxpayers. Legislative ambiguity may be settled through judicial decisions providing precedential views which 'clarify' the law. In certain instances, where the ambiguity has broader impacts and a range of other criteria are satisfied, the ATO has provided a limited level of litigation funding to affected taxpayers via its test case litigation funding program. However, there are circumstances where insufficient clarity of policy may make judicial determination an unattractive option to address the underlying ambiguity. In this respect, improved consultation among the ATO, Treasury and the private sector may be required before new laws or amendments are enacted. These issues have been and are being considered in my reviews into the ATO's approach to alternative dispute resolution and improving the self assessment system.
Substantial and incremental change
Each IGT review makes incremental change to underlying systemic issues. This is due to the nature of the review process which examines 'symptoms' of underlying problems as a window that may cast light upon and assist in identifying options for improvement. Over time and viewed together the IGT reviews and the ATO's implementation of the recommendations in them result in substantial improvements. Importantly, improved administration of tax laws can also be achieved without formal advice to Government, such as through direct day-to-day interaction between my office and the ATO. Also, the Commissioner of Taxation may of his own initiative take action to address a potential area for review that is identified by my office but without the IGT undertaking a formal review. A recent example is the ATO's restructuring of its tax technical decision making function. The IGT had raised concerns about the ATO's tax technical decision making and taxpayer access to ATO technical experts from as early as 2005 (in the Review into Tax Office audit timeframes) and subsequently in other IGT reviews and annual reports. In line with these concerns, the ATO embarked on a number of initiatives to deliver more effective and efficient use of tax technical resources through earlier engagement of tax technical expertise - its Transforming Tax Technical Decision Making project. Resulting enhancements in technical decision making and the effective employment of ATO technical expertise should go some way to ensuring that matters at risk of ongoing dispute and litigation are identified and addressed by the most appropriate ATO personnel.
Three reviews were in progress at the start of the 2011–12 financial year, with an additional two commencing during the year. By year end, three reviews were complete, while two were in their final stages of completion and two of the completed review reports were publicly released. Additionally, one review report completed in the previous year was publicly released this year. The first report to be publicly released this year was the review into the ATO's large business risk review and audit policies, procedures and practices. This report highlighted the large business market as an important segment within the tax system providing significant revenue to Government, the vast majority of which is collected through voluntary compliance. Stakeholders were concerned to ensure that the ATO risk review and audit responses are appropriately measured in delivery and take account of the significant cooperation they provide in a very complex self assessment environment. In this respect, improvements to ATO processes were identified as being achieved through greater transparency, accountability and improved stakeholder understanding. Of particular note was the ATO's risk differentiation framework that is intended to better align administrative treatment with the perceived risk of non-compliance. The second report released this year was the review into the ATO's administration of class rulings. This review observed that while the class ruling system is a useful element of the tax system, there was room to improve the administration of the class rulings' processes and related areas, such as case management, reporting, record keeping, external performance standards, communication, transparency, ATO staff awareness of existing procedures and policies and the ATO's Siebel system search functionality. The last report released this year was my review into the ATO's SME audit and risk review policies, procedures and practices which was conducted in response to concerns raised by taxpayers, tax practitioners and their representative bodies following the ATO's increased compliance focus on larger SMEs and high wealth individuals (HWIs) pursuant to its commitment to Government. A number of recommendations in the review are aimed at improving ATO staff capability which was identified as the main underlying issue. The ATO acknowledged the need for improvements in this area, as well as in other areas, and had already begun a body of work to effect such improvements. Some of my recommendations reinforced this ATO work whilst other recommendations were more distinct but complimentary to that work. Another key achievement of this review was the ATO's agreement to replace its Wealthy and Wise booklet, which focused on HWIs, with a booklet to cover its compliance approaches to the entire SME and HWI market segment, providing taxpayers and their advisors with better understanding of the process and a means of holding ATO officers to account where expectations are not met. The review into the ATO's use of early and alternative dispute resolution has been completed but was not publicly released as at year end. This report made a number of recommendations to address stakeholder concerns about the ATO's approach to alternative dispute resolution and its broader commitment to resolving disputes as early as practicable in compliance activities. It is important to note that the ATO has already commenced a process of implementing the agreed recommendations. The two reviews in the final stages of completion as at year end were the review into the ATO's use of benchmarking to target the cash economy and the review into improving the self assessment system. They are expected to be submitted to the Assistant Treasurer in the next few months. Further comment will be made following the public release by the Assistant Treasurer in due course.
The road ahead
In looking at the road ahead, one review topic remains from the previously announced work program for 2011–12. This is the review to follow up the ATO's implementation of recommendations made in the following previously completed reviews:
- review into the ATO's administration of the Superannuation Guarantee Charge - publicly released 24 November 2010;
- review into the implications of any delayed or changed ATO advice on significant issues - publicly released 17 March 2010;
- review into aspects of the Tax Office's settlement of active compliance activities - publicly released 1 December 2009;
- review into the non-lodgement of income tax returns - publicly released 16 October 2009;
- review into the underlying causes and the management of objections to Tax Office decisions - publicly released 11 August 2009; and
- review into the Tax Office's administration of public binding advice - publicly released 7 August 2009.
I will commence this follow up review in the first quarter of the next financial year. I will also commence consultation on my new work program in the first quarter of the next financial year. I welcome submission from the broad taxation community as part of this consultation. A number of potential review topics have already been identified. Some of these have come to light in the course of conducting the various reviews this year whilst others are a result of continuing stakeholder feedback. These potential review topics include:
- delayed income tax refunds;
- the ATO's services and support for tax practitioners;
- the ATO's risk assessment processes;
- the ATO's administration of penalties;
- the ATO's compliance approach to micro enterprises and individuals;
- the ATO's interactions with the Australian Valuation Office;
- the ATO's use of client feedback questionnaires;
- the ATO's administration of Part IVA of the Income Tax Assessment Act 1936;
- the ATO compliance approach to transfer pricing;
- the ATO's test case litigation program; and
- Project Wickenby.
During the consultation process, whilst stakeholders would be encouraged to raise any topics that they feel merits an IGT review, comments would also be invited on the suitability of the above topics. It should be noted that review selection for the work program is shaped by the scope and objectives of the relevant governing legislation and the nature of stakeholder consultations and submissions to the IGT. Whilst all submissions are given due consideration, topics for review which help to focus stakeholder thinking on enhancing the equity/fairness, efficiency and simplicity of tax administration for the benefit of all taxpayers provide the greatest opportunities for 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 the conduct of reviews. Due to its relative size, my office 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 any legal professional privilege.
Public sector stakeholders
The Commonwealth Auditor-General and the Commonwealth Ombudsman also scrutinise the ATO from their perspectives. The roles of each agency are different but there is potential for some overlap. As discussed above, our agencies have agreed to meet collectively as part of our respective annual planning processes. Review activity will continue to be undertaken as appropriate, within the boundaries of our respective legislative frameworks. I appreciate the assistance that my office has received from these agencies. I would also like to thank the Commissioner of Taxation and ATO personnel for their professional assistance. Communication between our respective offices has been frank, open and has led to improvements to the tax system. The IGT continues to develop a more constructive relationship with the ATO. My office also continues to evolve its own processes, including its approach to better and earlier identification of issues and related action that may be taken to address those concerns. The role of the IGT as an independent consulting scrutineer is crucial. It is also important to ensure the constructive relationship with the ATO, is balanced carefully to ensure that independence is maintained. It should always be appreciated that a degree of tension should always exist between an administrator and the scrutineering function. As acknowledged previously, this tension, professionally managed, is entirely appropriate to maintain the community's confidence in the scrutineer's independence. I would also like to thank the Department of 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
Role, function, outcome and output structure
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 the 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.
Figure 1: Outcome and program structure
Figure 2: Inspector-General of Taxation management structure
Appendix 1 - Expenses for outcomes
|Outcome 1: Improved tax administration through community consultation, review, and independent advice to Government||Budget 2011-2012 '000||Actual Expenses 2011-2012 '000||Variation 2011-2012 '000|
|Program 1.1: Inspector-General of Taxation|
|Revenue from independent sources (section 31)||5||-||5|
|Expenses not requiring appropriation in the Budget year||38||18||20|
|Total for Program 1.1||2,729||2,360||369|
|Total expenses for Outcome 1||2,729||2,360||369|
1. Ordinary annual services (Appropriation Bill No. 1)
|Average staffing level (number)2||7||11|
2. Portfolio Budget Statement 2011-12
Appendix 2 - Agency resource statement
|Actual available appropriation 2011-12 '000||Payments made 2011-12 '000||Balance remaining 2011-12 '000|
|Ordinary Annual Services1|
|Total ordinary annual services||2,724||2,250||474|
|Total Available Annual Appropriations and payments||2,724||2,250||474|
|Total resourcing and payments||2,724||2,250||474|
|Total net resourcing and payments for Inspector-General||2,724||2,250||474|
1. Appropriate Bill (No.1) 2011-12
2. Includes and amount of $0.04 million in 2011-12 for the Departmental Capital Budget. For accounting purposes this amount has been designated as 'contributions by owners'.