Scope and focus of the follow up review

1.1 This is the report of the Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) implementation of agreed recommendations made in five earlier IGT reports publicly released between August 2009 and November 2010, each of which is listed below:

  • Review of the Tax Office's Administration of Public Binding Advice (publicly released 7 August 2009);
  • Review into the Underlying Causes and the Management of Objections to Tax Office Decisions (the Objections Review, publicly released 11 August 2009);
  • Review into the Non-lodgement of Individual Income Tax Returns (publicly released 16 October 2009);
  • Review into Aspects of the Tax Office's Settlement of Active Compliance Activities (the Settlements Review, publicly released 1 December 2009); and
  • Review into the ATO's Administration of the Superannuation Guarantee Charge (publicly released 24 November 2010).

1.2 An additional IGT report was publicly released during the abovementioned period, namely the Review into Delayed or Changed Australian Taxation Office Views on Significant Issues (the so-called 'U-turns' review). A separate follow up report on that review will be published.

1.3 In the five IGT reviews considered in this report, a total of 61 recommendations for improvement were made, of which 55 were directed to the ATO with the remainder for the Government to consider. The ATO agreed to implement 52 of the 55 recommendations directed to it in whole or in part. Table 1 below shows provides a breakdown of the recommendations made in each review and those which the ATO agreed to implement.

Table 1: Numbers of recommendations made in IGT reviews
Recommendations made IGT Reviews
Public Binding Advice Objections Non-lodgement Settlement Super Guarantee Total
ATO agreed recommendations (in whole, part or principle) 6 10 3 24 6 49
Recommendations made in part to the ATO (with which it agreed) and in part for the Government to consider 0 0 0 0 3 3
ATO disagreed recommendations 1 1 0 0 1 3
Recommendations made for Government to consider 0 1 3 0 2 6
Total 7 12 6 24 12 61

1.4 The main focus of this review was to investigate the extent to which the ATO had implemented the agreed recommendations.1 Throughout the review, particular attention was given to:

  • evidence of appropriate and effective implementation of agreed recommendations; and
  • ATO management policies, procedures, systems and reporting which support the implementation these recommendations.

1.5 In assessing the implementation status of particular recommendations, or the sub-part of a given recommendation (as appropriate), the IGT has generally used the following terms:

  • Implemented — the ATO has demonstrated that the particular agreed recommendation has been satisfactorily addressed either by completing all actions needed to implement the recommendation or partially completing all actions with an appropriate commitment to complete implementation in an appropriate timeframe.
  • Partly implemented — the ATO has commenced implementation and made substantial progress toward completion.
  • Action taken is consistent with agreed principle — the ATO did not agree to implement the recommendation but did agree with the principle underlying the recommendation and had taken action consistent with that agreed principle.
  • Action taken is consistent with aspiration — although the ATO did not agree to implement the action item, it had agreed to do so as an aspiration and had taken action consistent with that aspiration.
  • Action not taken to give effect to the agreed principle — the ATO has not taken action to give effect to the agreed principle which underlies the recommendation.
  • Issue subsumed by subsequent review — the systemic issue targeted by the original IGT recommendation has either been examined in a subsequent IGT review and recommendation has been made as a result or will be examined in a later review.
  • Not implemented — the ATO has not made satisfactory progress or is otherwise well short of implementing the agreed recommendation.

1.6 The ATO's response to this report of the follow up review is reproduced in Appendix 4.

1.7 For each of the five IGT reviews considered in this report, Table 2 below provides a breakdown of the recommendations with which the ATO agreed (in whole, in part, in principle or as an aspiration) by IGT review and by implementation status.

Table 2: Numbers of ATO agreed recommendations by implementation status and IGT review
Implementation status of ATO agreed recommendations IGT Reviews
Public Binding Advice Objections Non-lodgement Settlement Super Guarantee Total
Implemented 5 9 3 18 9 44
Partly implemented 0 0 0 2 0 2
Action consistent with agreed principle 0 1 0 1 0 2
Action consistent with aspiration 0 0 0 1 0 1
Issue subsumed by subsequent IGT review 1 0 0 2 0 3
Not implemented 0 0 0 0 0 0
Total 6 10 3 24 9 52

1.8 The ATO has responded to the 52 agreed recommendations by implementing, in whole or in part, 46 of these recommendations, taking action consistent with an aspiration to implement one of the action items and taking action consistent with the agreed principle underlying two of the recommendations as well as making related improvements in ATO administrative practices and approaches. Given the broad range of topics which were the subject of these reviews, and the number of agreed recommendations in each, there was great scope for significant improvements to be made for the benefit of taxpayers. The IGT considers that the ATO's implementation of agreed recommendations is a positive outcome and is welcomed.

1.9 The remaining three agreed recommendations have been subsumed by subsequent IGT reviews as the issues underlying those recommendations have been or will be examined in those reviews.

Incremental changes to the system

1.10 Each review, while addressing a discrete area of tax administration, yields both direct and incremental improvements. Although direct improvements may be more readily observed, the full benefit of a review may not always be immediately apparent. Examples of this include a broad cultural shift towards better engagement and dispute resolution across the ATO that had its origins in the IGT's Objections review and the increased adoption of the facts and evidence worksheet to enhance evidence gathering and decision making arising out of the Settlements review.2

1.11 Incremental changes of this kind underlie a number of IGT reviews and may permeate through other areas of the ATO's administration in the longer term when taken with other complementary activities undertaken by the IGT. As a result, such changes establish enduring improvements to the administration of the tax system.

Broader impact of IGT recommendations

1.12 While this review focuses on the implementation of agreed recommendations, systemic issues may persist where the ATO has disagreed or only agreed in part with the IGT's recommendations for improvement.

1.13 In some cases following disagreement, the ATO has undertaken improvement activities which are informed by IGT recommendations although those activities may not have been attributed as such. For example, the ATO's recently implemented independent review process for large business audits3 follows recommendations made earlier in IGT reviews into the ATO's administration of large business audits and later in the use of early and alternative dispute resolution as well as comments made by the IGT in his Submission to the 2011 Tax Forum.4

1.14 Moreover, in certain cases where the ATO has disagreed with an IGT recommendation, the IGT has noticed that other bodies have adopted and reiterated these recommendations to the ATO. Examples of where this has occurred include:

  • Recommendation 114 in the Australia's Future Tax System review which reiterated the IGT's recommendation that the ATO disclose Treasury material on which it has relied to determine the purpose or object of the law or policy intent;5 and
  • Recommendation 9 in the Joint Committee of Public Accounts and Audit (JCPAA) Report 410 Tax Administration which reiterated the need for greater transparency in the ATO's reported timeframes on the processing of private rulings.6

1.15 The adoption of IGT recommendations by other bodies highlights the important role of the IGT's work to improve tax administration for the benefit of all Australians. Furthermore, it illustrates the broader impacts of the IGT's reviews and provides opportunities for the ATO to revisit and reconsider IGT recommendations with which it has previously disagreed. Such an approach should assist to minimise the risks of systemic issues re-emerging.

Re-emergence of systemic issues

1.16 It should be acknowledged that in certain cases, underlying systemic issues which have been the subject of IGT reviews, may re-emerge or appear to re-emerge. This may be due to a number of factors, including where the ATO has not fully implemented the recommendations or where the ATO has implemented the recommendation faithfully but the underlying systems, policies or law had subsequently changed. In such cases where the IGT considers that there would be broad community benefits in doing so, a new review may be undertaken.

1.17 An example of such action occurred following the completion of the IGT's Review into the Tax Office's Administration of Public Binding Advice7 which, amongst other things, sought to provide greater taxpayer clarity on the Commissioner of Taxation's (Commissioner) approach to general administrative practice (GAP). The stakeholder concerns regarding a particular aspect of that review, namely GAPs, continued to persist and ultimately lead to a direction from the then Assistant Treasurer that the IGT undertake a further review on changed or clarified ATO views—the so-called 'U-turns' review.8

1.18 The follow up of the ATO's implementation of recommendations from the so-called 'U-turns' review will be published in a separate report. This is due to a large number of stakeholders who approached the IGT with ongoing concerns in this area during the course of the follow up review. Moreover, a legal challenge9 that had been launched in relation to the ATO's administration of so-called 'U-turns' and related administrative processes warranted a separate reporting of the follow up for that review.

1.19 Concerns have also been raised with respect to a number of other themes, including the ATO's administration of penalties,10 audit timeframes11 and litigation.12 In the case of penalties, the IGT conducted a specific review that examined the issues across all ATO business lines (BSLs).13 In respect of audit timeframes and litigation issues, these were examined within the context of broader reviews focusing on specific BSLs14 or other ATO approaches.15

Re-calibration of implementation actions

1.20 Tax laws and tax administration are constantly evolving to respond to the changing legal and economic environment within which they operate. Moreover, they may also be affected by a range of other factors including international developments, changes in technology and the ATO's own internal management decisions. As it is not possible to account for or predict all eventualities at the time of the original review, the ATO may need to re-calibrate its implementation of IGT recommendations, where necessary, and work with the IGT in doing so. In this respect, the IGT is able to provide insight on changing stakeholder and environmental concerns in a timely manner to assist in the ATO's re-calibration of its implementation where required.

1.21 One example which may give rise to a need to consider re-calibration of implementation work relates to the recommendations made in the IGT's LB&I16 and SME17reviews. Since those recommendations were made the ATO has redistributed the responsibility for administering the compliance of publicly listed and privately held companies and replaced its Large Business and International (LB&I) and Small to Medium Enterprises (SME) BSLs with the Public Groups and International (PGI) and Private Groups and High Wealth Individuals (PGH) BSLs.

New ATO oversight arrangements

1.22 Since November 2010, the IGT has worked with the ATO to develop a new process to provide assurance that agreed IGT recommendations have been effectively implemented. In contrast to the IGT's follow up review process, the ATO's Audit and Risk Committee will now monitor implementation of external scrutineer recommendations to ensure timely execution of implementation. This Committee is informed by quarterly updates from the relevant BSLs and ATO's Internal Audit group through reports on the status of implementation. When BSLs advise that recommendations have been implemented, Internal Audit undertakes a high-level assessment of the implementation of recommendations by comparing the BSL provided evidence against the implementation plans. The Committee is then informed of the number of recommendations accepted as implemented following this assessment.

1.23 To improve the transparency of the ATO's implementation of agreed IGT recommendations, amongst other things, the ATO has recently started to communicate these to the public. This is done primarily on the ATO website where each of the IGT's reviews, from November 2010 onwards, are listed together with the status of implementation of each agreed recommendation as well as short commentary on the action it has undertaken.18

1.24 The IGT welcomes these ATO oversight arrangements to ensure that agreed recommendations are appropriately implemented. Moreover, the IGT considers that public communication of this implementation serves to instil greater confidence in the ATO as a more transparent administrator. These arrangements should also ensure that any issues which emerge in implementation are raised and discussed with the ATO's Audit and Risk Committee in a timely manner and that matters are resolved before implementation is finalised.

1.25 Accordingly, there is a reduced imperative for IGT follow up reviews of this kind. However, the IGT will continue to engage with the ATO in the following ways to ensure that these ATO oversight arrangements are effective.

1.26 First, the IGT provides the ATO with feedback on proposed implementation plans before the ATO commences action to implement the agreed recommendations. As part of this process, the IGT highlights potential risks and areas requiring further consideration as well as providing insight on the intent of the recommendation and the issues to be addressed. Working together in this way, the ATO is better able target its actions to address the underlying issues causing stakeholder concern in a practical and more effective manner for the benefit of both taxpayers and the ATO.

1.27 Second, through relationships with taxpayers, tax professionals, industry and professional associations and academics, the IGT is well placed to receive feedback on stakeholder experiences when dealing with the ATO in more sensitive or specific areas of concern. This feedback may be conveyed to the ATO in a more timely manner to augment its processes or, where the ATO has taken action to implement agreed recommendations, enhance these actions to address any ongoing taxpayer concerns.

1.28 Third, where the IGT considers that there would be benefits in a future follow up review, he reserves the right to do so. This is not expected to be commonplace. However, a follow up review may be conducted where, for example, stakeholders raise concerns with the ATO's implementation, where implementation may no longer be appropriate owing to the changing tax administration, economic environment, or otherwise where it is observed that the specific systemic issue that was sought to be addressed by a particular review appears to have re-emerged.

1.29 Accordingly, in view of the foregoing, this follow up review is not a full audit of the ATO's implementation of the agreed recommendations. The IGT has primarily relied upon the materials provided by the ATO and, where appropriate, ATO senior management representations obtained through the review process.

1 For completeness, Appendix 1 reproduces the recommendations the Australian Taxation Office (ATO) did not agree to and Appendix 2 reproduces those made for Government to consider.

2 Inspector-General of Taxation (IGT), Review into the Underlying Causes and the Management of Objections to Tax Office Decisions (2009) p 25; IGT, Review into Aspects of the Tax Office's Settlement of Active Compliance Activities (2009) p 26.

3 Australian Taxation Office (ATO), Independent Review of Large Business and International Statement of Audit Position (January 2014).

4 IGT, Report into the Australian Taxation Office's Large Business Risk Review and Audit Policies, Procedures and Practices (2011) p 45; IGT, Review into the ATO's use of Early and Alternative Dispute Resolution (2012) p 107; IGT, Submission to the 2011 Tax Forum (2011).

5 Australia's Future Tax System (Ken Henry, Chairperson), Final Report (AGPS, 2009) p 654; IGT, Review of the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters (2008) Recommendation 2, p 9.

6 Joint Committee of Public Accounts and Audit, Parliament of Australia, Report 410 Tax Administration (2008) p 107; IGT, 'Revenue Bias in Private Rulings Review', above n 5, p 11.

7 IGT, Review into the Tax Office's Administration of Public Binding Advice (2009).

8 IGT, Review into Delayed or Changed Australian Taxation Office Views on Significant Issues (2010) (the so-called 'U-turns' review').

9 Macquarie Bank Limited v Commissioner of Taxation [2013] FCA 887; Macquarie Bank Limited v Commissioner of Taxation [2013] FCAFC 119.

10 IGT, Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities (2005).

11 IGT, Review into Tax Office Audit Timeframes (2005).

12 IGT, Review into the Tax Office Management of Part IVC Litigation (2006).

13 IGT, Review into the Australian Taxation Office's Administration of Penalties (2014).

14 For example, audit timeframes were examined in: IGT, 'Large Business Audit Review', above n 4; 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).

15 Aspects of the ATO's approach to litigation were examined in: IGT, 'Alternative Dispute Resolution Review', above n 4.

16 IGT, 'Large Business Audit Review', above n 4.

17 IGT, 'SME/HWI Audit Review', above n 14.

18 ATO, Access, Accountability and Reporting — Inspector-General of Taxation (January 2013).