It is my pleasure to report that the office of the Inspector‑General of Taxation (IGT) has had another productive year. The IGT has focused on completing a significant number of reviews covering a broad spectrum of taxpayers, issues and Australian Taxation Office (ATO) approaches with the aim of improving tax administration for the benefit of all Australians.
In this report, I outline the diversity of matters that have been addressed in my work program of reviews. I also discuss the consultation and development of a new work program for 2014 and 2015 and my assistance to the Federal Parliament's House of Representatives Standing Committee on Tax and Revenue (Parliamentary Committee) with its Inquiry into Tax Disputes (Tax Disputes Inquiry). Thereafter, the May 2014 Federal Budget Measure to transfer the tax complaints function from the Commonwealth Ombudsman to the IGT is discussed followed by the Government's policy initiatives arising from IGT reviews.
Transfer pricing review, Base Erosion & Profit Shifting and ATO capability
Currently, there is significant global attention on base erosion and profit shifting and the related impact it has had on reducing national taxation revenues.1 Australia's presidency of the G20, commencing in December 2013, has brought the issue into clear domestic focus and it is therefore imperative that Australia has in place an appropriate administrative framework to identify and address the existing and emerging risks.
Concerns had been raised with my office regarding the ATO's capability to deal with transfer pricing issues some time prior to the above international events and they continue to be raised. Consequently, my transfer pricing review2 was timely and pertinent.
The examination of the issues revealed the key causes of concern related to inadequate succession planning, resource management, the complex interactions between the ATO's internal functions and a lack of clarity with respect to the decision‑making process. Accordingly, a number of my recommendations were aimed at improving the ATO's organisational and long‑term capability including retention and development of specialist officers. Recommendations that were particularly aimed at the short‑term, whilst the ATO rebuilds its capability, included improving the risk identification process, giving priority to project‑based activities which target the highest risk to revenue, limiting wide‑ranging reviews and matching the scope and scale of its transfer pricing cases to the available specialist capability.
Relevant observations and recommendations made in this review as well as other IGT reviews such as the SME/HWI review3 and my submission to the 2011 Federal Government Tax Forum (2011 Tax Forum Submission4) were provided as input into the Australian Public Service Commission's capability review of the ATO.5
Risk assessment tools and taxpayer compliance costs
In today's self assessment environment, risk assessment is a key part of the organisational management of revenue authorities around the world. Given their limited resources, it is not possible for revenue authorities to undertake compliance activities in relation to every taxpayer. The use of risk assessment tools provides a basis for revenue authorities to allocate their scarce resources to achieve optimum compliance levels.
My recent review into the ATO's use of compliance risk assessment tools6 was aimed at improving the ATO's risk assessment systems to minimise revenue leakage and impact on taxpayers. In the absence of evaluation metrics, I drew on the examination of the ATO's main risk assessment tools in this review, as well as those investigated in previous IGT reviews to create guidelines for developing effective risk assessment tools for the future. These IGT‑recommended guidelines address key stakeholder concerns, such as the governance, inputs and transparency of the ATO's risk assessment processes as well as related communication with taxpayers and the proportionality of resulting ATO compliance action to detected risks. Furthermore, these guidelines emphasise the importance of effective project management to minimise adverse impacts on taxpayers whilst making best use of ATO resources.
I have also made recommendations to improve specific aspects of those risk assessment tools with which stakeholders raised the most concern. It should be noted that such recommendations were also made in earlier reviews including in my cash economy benchmarking review.7 The implementation of the recommendations in that review has resulted in more than a doubling of the strike rates for ATO cash economy compliance activities (from 24 per cent to 50 per cent).8 This has resulted in significantly less taxpayers being unnecessarily targeted and thereby reducing their compliance costs.
Compliance approaches to small businesses and individuals
Conducting reviews of tax administration issues in the small business and individual market segments is challenging for my office due to the large number and range of taxpayers and the limited resources of my office. Accordingly, I have been selecting manageable areas for review by targeting specific ATO approaches that have caused the greatest concerns for these stakeholders. For example, I have previously conducted reviews into the ATO's cash economy benchmarking, superannuation guarantee charge and management of non‑lodgement of individual income tax returns.9
This year I examined three other key areas affecting individual taxpayers by conducting three separate reviews.
The first of these reviews, the income tax refund integrity program review10, was conducted due to the significant delays in processing tax returns during the 2011–12 financial year. In this regard, I had made a number of recommendations to streamline the ATO's governance processes to respond to unforseen workloads, adopt a differentiated approach to hardship applications, better distinguish potentially fraudulent taxpayers from those who may have mistakenly overstated refund claims and improve communication with taxpayers and tax practitioners.
The second of these reviews related to the use of data matching11 which was undertaken in response to stakeholder concerns regarding how the ATO collects, validates and makes use of third party data in compliance activities. While the review found that the ATO's use of data matching was generally effective, there were opportunities for improvement. Recommendations were made to formalise and improve the quality and timeliness of data matching projects, evaluate their effectiveness and re‑distribute resources based on such evaluations. Engagement and communication with taxpayers were also identified as requiring improvement so that taxpayers better understand the reasons for any discrepancies identified and have more streamlined processes to challenge incorrect data matching decisions.
The third review was the superannuation excess contributions tax (ECT) review.12 This review arose from a high degree of stakeholder dissatisfaction with the ECT regime. They contended that the regime was not operating as intended and imposed disproportionately adverse impacts on taxpayers.
In addition to a number of recommendations for the ATO to improve aspects of its administrative approach, I had also made two recommendations for Government's consideration, including whether the treatment of excess non‑concessional contributions should be aligned with previous changes to excess concessional contributions.13 As a result, in the May 2014 Federal Budget, the Government announced that it will introduce legislation which would enable taxpayers with excess non‑concessional contributions to withdraw those contributions and not incur the ECT.14
Stakeholders had been raising concerns with the ATO's administration of penalties over a number of years. A number of previous reviews, particularly the self assessment review, addressed a number of these concerns.15 However, given the level of concerns and their ongoing nature, it was appropriate to conduct a specific penalties review16 to more broadly examine the issues being raised.
The review observed that approximately 25 per cent of total penalties raised were later reduced due to unsustained penalty decisions. Accordingly, I made a number of recommendations for the ATO to improve its penalty decisions, guidance material and identification, collection and analysis of penalty information as well as taxpayer perceptions that penalties may be used as leverage to influence primary tax disputes. A recommendation was also made for Government to consider opportunities to improve the current tax penalty regime and encourage greater voluntary compliance. As a result of my report, the Government has announced its intention to consider these issues once the Tax White Paper process has finalised.17
'U‑turns' and the follow up review
Two other reviews have been completed and their reports transmitted to the Minister early in the 2014–15 financial year. These reports were derived from my earlier announced single follow up review which examined the ATO's implementation of agreed recommendations contained in six of my reports released between August 2009 and November 2010.18
During the course of the year, the above announced single review was split into two separate reviews in order to devote one solely to the persisting issues of so‑called ATO 'U‑turns' and the impact of a recent Federal Court decision.19 The other review20 examined the implementation of agreed recommendations in the other five reports released between August 2009 and November 2010.
Further comment on these reviews will be made after the Minister has released the reports.
Synchronised with the completion of the above reviews, earlier this year, a new work program of reviews was developed based on broad community consultation with taxpayers, tax practitioners and their representative bodies. On 10 April 2014, the reviews that will be conducted as part of this new work program were announced. These reviews are described below together with the stakeholder concerns that led to their selection.
Stakeholders have continued to raise concerns with the ATO's approach to debt collection, including delayed recovery action, disproportionate action when debts were pursued and the use of external debt collectors. Debt collection has also been a persistent source of complaints to the Commonwealth Ombudsman, accounting for 23 per cent of all ATO‑related complaints received by him in 2013, and has attracted substantial media attention.
The review will examine the concerns raised above as well as the ATO's approach to debt collection more generally, including the use of administrative and legislative instruments to secure payment (for example, garnishee notices, director penalty notices and freezing orders), the approach to insolvency action, the re‑raising of 'written‑off' debts, debt relief decisions and payment arrangements.
Terms of reference for this review were released on 26 May 2014.
Services and support for tax practitioners
Tax practitioners play a critical role in the Australian tax system, representing 70 per cent of all individual taxpayers and 90 per cent of all business taxpayers.21 An ATO survey has acknowledged that tax practitioner satisfaction with its services has dropped from 72 per cent in 2007 to 51 per cent in 2011.22 In recent years, concerns have also been raised with my office that the support and services provided to tax practitioners has been inadequate with specific concerns raised in relation to the ATO Portals, relationship managers, management of the lodgement program (including the 85 per cent on‑time requirement), tax practitioners risk differentiation framework and consultation groups for tax practitioners.
My review will examine these concerns as well as broader ATO initiatives and improvements which have been implemented in this area.
Terms of reference for this review were released on 26 May 2014.
Taxpayers' charter and taxpayer protections
Stakeholders have raised a range of concerns regarding the adequacy of the ATO's Taxpayers' charter23 and related taxpayer protections. These concerns included access to enforceable remedies for defective ATO administration, commitment to procedural fairness and, more broadly, adherence to the model litigant obligations.24 Stakeholders point to international developments regarding a 'taxpayer bills of rights' with enforceable remedies.25 The Commonwealth Ombudsman has also noted that in many cases the aggrieved taxpayers do not receive the desired remedy26 and certain taxpayer cases have garnered significant media attention.27
I had highlighted such protections and remedies as an emerging issue in last year's annual report. In this respect, momentum has been gaining in a number of jurisdictions. For example, recently the United States of America (USA) had adopted a bill of rights in line with recommendations from the USA's National Taxpayer Advocate.28
The key aim of the review will be to identify whether additional protections may be warranted and the forms such protections should take. The review is expected to commence in the new calendar year.
Concerns have been raised with the IGT regarding the additional and unwarranted costs arising from the ATO's compliance activities with respect to employers' obligations. Stakeholders have raised particular concerns with the ATO's determinations of contractor or employee status and taxpayers' access to avenues of appeal. Additional concerns include ATO feedback on employee complaints, incorrect assessments and the unwillingness of ATO staff to engage on issues.
This review will examine the ATO's conduct of employer obligation compliance activities, including those in relation to pay‑as‑you‑go withholding, fringe benefits tax, director penalty notices for super guarantee charge and the ATO's engagement with both employees and employers. Commencement of this review is expected in the new calendar year.
Following the announcement of the new work program, a request was received from the Parliamentary Committee for my office to assist with aspects of its Tax Disputes Inquiry. The Tax Disputes Inquiry was referred to the Committee by the Acting Assistant Treasurer, Senator the Hon Mathias Cormann on 2 June 2014.
The Committee will consider, amongst other things, 'whether a separate agency should manage ATO litigation, whether the ATO should have a separate appeals area or if current arrangements should continue'.29 In this regard, I have previously made a number of relevant recommendations in my 2011 Tax Forum Submission and 2012 ADR review.30 These recommendations include the need to establish a separate appeals area within the ATO.31
I was therefore pleased to accept the Parliamentary Committee's request and have commenced a review into the ATO's management of tax disputes with high wealth individuals and large businesses (tax disputes review), in keeping with the Committee's request.
This review is expected to be completed by March 2015.
I have previously noted that the reviews and other activities of my office result in both immediate and longer‑term improvements. Some of these improvements require administrative action to which the ATO generally responds within each review report. Other improvements require changes to policy and require the Government to make legislative changes over time.
This year, the Government has addressed a number of policy changes that I had recommended in my 2011 Tax Forum Submission and a number of previous reviews.
Tax complaints handling
In the May 2014 Federal Budget, the Government announced its intention to transfer the tax complaints function from the Commonwealth Ombudsman to the IGT. This announcement aligns with a recommendation made in my 2011 Tax Forum Submission for a centralised scrutineering function.32
I am pleased that the Government has entrusted my office to undertake this important function. One of the major tasks or challenges for my office in the coming financial year is to ensure sufficient staffing and infrastructure are established, within the budgetary constraints, so that the transfer is as seamless as possible and the taxpayer experience enhanced. These tasks will have to be undertaken whilst the reviews already underway are completed in a timely manner.
The new function will provide greater integration between single complaints and systemic tax administration issues. Such integration within one agency, with specialist tax knowledge and expertise, provides a single port‑of‑call for taxpayer complaints and opportunities to improve the administration of the tax system. It will also facilitate an increased focus on addressing the underlying causes of taxpayer complaints in a more responsive and timely fashion whilst avoiding duplication and minimising overall costs.
In assuming this new function, my office will continue to build upon its established consultation approach and relationships both within Australia and overseas to identify and address matters affecting the tax system, the ATO, taxpayers and their advisers.
Policy initiatives following IGT recommendations
A number of other Government and policy initiatives have also been announced this year, addressing recommendations made in a number of my previous reviews. These include:
- making superannuation fairer by allowing taxpayers to withdraw excess non‑concessional contributions and not incur the ECT as noted earlier33;
- the formation of a committee composed of officials from the Treasury and the ATO as well as private sector experts 'to refocus discussions at a higher, more strategic level to address new and emerging challenges in tax policy and law design' (see recommendation 5.1 of my self assessment review)34; and
- assisting small business owners to more efficiently meet their superannuation guarantee obligations by transferring the Small Business Superannuation Clearing House to the ATO (see recommendation 3 and discussion of options in my superannuation guarantee charge review).35
The Federal Parliament
As representatives of the Australian community, the members of Parliament are well‑placed to identify the concerns affecting their constituents. Through annual public hearings, matters of concern in tax administration are raised with me directly. I am grateful to them for assisting my office in this way.
The Inspector‑General of Taxation Act 2003 (IGT Act) also provides for Parliamentary bodies to make requests for reviews to be undertaken on certain topics36, an example of which is the request I have received this year in relation to the Tax Disputes Inquiry.
I would also like to 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 my office and appreciate that matters can be shared with on a strictly confidential basis without waiving their rights such as legal professional privilege.
Public sector stakeholders
The Commonwealth Auditor‑General and the Commonwealth Ombudsman also scrutinise the ATO from their perspectives. As part of our planning processes, we have consulted during the course of this financial year to avoid any potential overlaps. Naturally, the transfer of the Ombudsman's tax complaints function to the IGT office may change this consultation process significantly. However, it is anticipated that our agencies will continue to cooperate on matters of mutual relevance and interest.
My office has also continued to develop and foster relationships with other government agencies including the Attorney‑General's Department, Commonwealth Small Business Commissioner, the Tax Practitioners Board, the Australian Financial Security Authority and the Australian Securities and Investments Commission.
The relationships with these government bodies have ensured that my office is aware of whole‑of‑government initiatives when identifying improvements to the tax system. I appreciate the assistance that my office has received from these agencies.
I also thank the ATO and its personnel for their professional assistance. Communication between our respective offices has been frank, open and has led to improvements to the tax system.
It should always be appreciated that a degree of tension exists between an administrator and the scrutineering function which, professionally managed, is entirely appropriate to maintain the community's confidence in the scrutineer's independence. The independence of the IGT as a consulting scrutineer is crucial. It is therefore important to ensure the constructive relationship with the ATO is maintained, balanced and professional in approach.
Lastly, I thank the Treasury as a partner in this relationship and also the Treasurer, the Acting Assistant Treasurer and their staff for their support.
Tax systems do not exist in isolation and frequently interact with events and developments in other jurisdictions.
Internationally, my office has continued to engage with a number of overseas revenue and scrutineering bodies including the New Zealand Inland Revenue Department, the United Kingdom's Her Majesty's Revenue and Customs, the USA's National Taxpayer Advocate and the Canadian Taxation Ombudsman. Such engagement provides useful insights into common tax administration issues and may result in the development of innovative solutions in the Australian context. I will continue to build and foster these relationships in the years to come.
My office also communicates with the Organisation for Economic Co‑operation and Development (OECD) and examines its research, insights and findings for a broader international perspective.
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.
The IGT Act established an independent statutory agency to review:
- systems established by the ATO to administer tax laws; and
- systems established by tax laws in relation to administrative matters.
The IGT seeks to improve the administration of tax laws for the benefit of all taxpayers. This is to be achieved by identifying systemic tax administration issues and providing independent advice to Government and the ATO on how these issues may be overcome or alleviated.
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 stakeholders including taxpayers, tax practitioners and their representatives, the Commonwealth Ombudsman, the Commonwealth Auditor‑General and the Commissioner of Taxation.
Appendix 1 — Expenses for outcomes
1. Ordinary annual services (Appropriation Bill No. 1).
|Average staffing level (number)||9||9|
Appendix 2 — Agency resource statement
|Ordinary annual services1|
|Total net resourcing and payments for the IGT||2,656||2,516||140|
1. Appropriation Act (No. 1) 2013–14 and Appropriation Act (No. 3) 2013–14.
2. Includes an amount of $0.03 million for the Departmental Capital Budget. For accounting purposes this amount has been designated as 'contributions by owners'.
2 Inspector-General of Taxation (IGT), Review into the Australian Taxation Office's management of transfer pricing matters (2014).
3 IGT, Review into the ATO's compliance approaches to small and medium enterprises with annual turnovers between $100 million and $250 million and high wealth individuals (2012).
4 IGT, Tax Forum — Next Steps for Australia (2011).
5 Australian Public Service Commission, Capability Review: Australian Taxation Office (2013).
6 IGT, Review into aspects of the Australian Taxation Office's use of compliance risk assessment tools (2014).
7 IGT, Review into the ATO's use of benchmarking to target the cash economy (2012).
8 Australian Taxation Office (ATO), 'Commissioner and Minister Senate estimates briefing — October 2012 Cash Economy — Benchmarking, data matching and e-marketing' (CCH Parliament, Political Alert, 23 January 2013) p 1.
9 Above n 7; IGT, Review into the ATO's administration of the Superannuation Guarantee Charge (2010); IGT, Review into the non-lodgement of individual income tax returns (2009).
10 IGT, Review into the Australian Taxation Office's compliance approach to individual taxpayers — income tax refund integrity program (2014).
11 IGT, Review into the Australian Taxation Office's compliance approach to individual taxpayers — use of data matching (2014).
12 IGT, Review into the Australian Taxation Office's compliance approach to individual taxpayers — superannuation excess contributions tax (2014).
13 Above n 12, recommendation 2.1, pp 31-32.
14 Mathias Cormann, 'Superannuation Excess Contributions Tax' (Media Release, MC39/14, 13 May 2014).
15 IGT, Review into improving the self assessment system (2013); See also IGT, Review into the Tax Office's administration of penalties and interest arising from active compliance activities (2005), IGT, Review into aspects of the Tax Office's settlement of active compliance activities (2009), IGT, Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices (2011), above n 7 and above n 3.
16 IGT, Review into the ATO's administration of penalties (2014).
17 Mathias Cormann, 'Inspector-General of Taxation Report into the Australian Taxation Office's Administration of Penalties' (Media Release, MC 70/14, 8 July 2014).
18 See IGT, New IGT Work Program for 2011–12 (4 April 2011)
19 IGT, Follow up review into delayed or changed Australian Taxation Office views on significant issues (not yet released); Macquarie Bank Limited v Commissioner of Taxation  FCA 887.
20 IGT, Follow up review into the Australian Taxation Office's implementation of agreed recommendations in five reports released between August 2009 and November 2010 (not yet released).
22 Chant Link & Associates, Tax Agent Services Survey 2011 (27 May 2011) p 25.
23 ATO, Taxpayers' charter: What you need to know (2010).
24 Legal Services Directions 2005 app B made under s 55ZF of the Judiciary Act 1903.
25 National Taxpayer Advocate (USA), 2011 Annual Report to Congress (2011); National Taxpayer Advocate, 2013 Annual Report to Congress (2013); European Commission, 'A European Taxpayer's Code' (Consultation paper, TAXUD.D.2.002 (2013) 276169, 2013); Asia-Oceania Tax Consultants' Association, 'Model Taxpayer Charter to promote greater fairness in taxation across the world' (Media release, 13 May 2013).
26 Commonwealth Ombudsman, Taxation Ombudsman Activities 2006 (2007) p 6.
27 7:30 ABC TV (9 April 2012) referred to in John Bevacqua, 'Redressing the imbalance — challenging the effectiveness of the Australian taxpayers' charter' (2013) 28 Australian Tax Forum 377, p 398; 7:30 ABC TV, 'Tax office stands accused of bullying behaviour' (1 November 2012) referred to in Greg Hoy, ''Draconian' ATO accused of bullying taxpayers' (2 November 2012).
28 Internal Revenue Service, 'IRS Adopts "Taxpayer Bill of Rights;" 10 Provisions to be Highlighted on IRS.gov, in Publication 1', (Media release, IR-2014-72, 10 June 2014).
29 House of Representatives Standing Committee on Tax and Revenue, 'Inquiry into Tax Disputes launched' (Media Alert, 6 June 2014).
30 IGT, Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution (2012).
31 Above n 4, p 17; ibid, recommendation 6.1, p 107.
32 Above n 4, pp 18-19.
33 Above n 13; above n 14.
34 Steven Ciobo, 'The Tax Institute 29th National Convention' (Speech delivered at the 29th National Convention, Tax Institute of Australia, Hobart, 28 March 2014); above n 15.
35 Arthur Sinodinos AO and Bruce Billson, 'Life made easier for small business' (Joint Media Release, 9 January 2014); above n 9.
36 Inspector-General of Taxation Act 2003 s 8(3)(d).