Introduction

5.1 The IGT commenced his Review into Aspects of the Tax Office's Settlement of Active Compliance Activities (Settlements review) as a result of concerns raised by industry, tax practitioners, the public and the Parliament which related to the ATO's settlement of active compliance activities. Community criticism and media attention regarding the ATO's settlement activities reflected a range of perceptions, including a lack of transparency in the conduct of settlements, large taxpayers getting 'better deals' and settlement activities being used to 'quarantine' matters that might otherwise erode the ATO's public position on issues. The terms of reference for this review were announced on 12 October 2007.

5.2 The review examined information, systems and processes that related to the ATO's settlement activities of 15,637 active compliance cases over a five-year period (2003-04 to 2007-08 income years). The review examined the reasons for the ATO's departure from initial audit positions in settlement activities and why those settled positions were not reached earlier in the audit process. The review specifically examined files relating to 2,773 cases involving a total reduction of $3.6 billion to the ATO's initial active compliance position to agreed liabilities of $1.56 billion in settlement.

5.3 The IGT considered all stages of the ATO's settlement process and administration, including the impact of upstream processes on settlement activities in the context of the ATO's broader dispute management process. Whilst the ATO had a substantial framework of policies and procedures for the conduct and finalisation of active compliance activities, it could improve the transparency and taxpayer experience as well as minimise delays and taxpayer compliance costs.

5.4 The IGT found that the issues and potential improvements to the ATO's settlement processes fell into two broad categories being 'code of settlement' processes and 'active compliance' processes. For example, areas requiring improvement included communication of decisions, the robustness of initial ATO views and auditors' application of those views as well as auditors' decision making on primary tax and penalties.

5.5 As a result, the IGT recommended 24 'action items' which were aimed at improving:

  • the administration of settlement activities;
  • settlement and audit processes and their transparency; and
  • the correctness and consistency of audit and settlement decisions.

5.6 The report of this review was publicly released by the then Minister on 1 December 2009.

5.7 During this follow up review, the original ATO business lines were the subject of a restructure and renamed to reflect those changes. The main changes are noted below:

  • the Law and Practice (L&P) unit was subsumed into the Review and Dispute Resolution (RDR) business line; and
  • the Large Business and International (LB&I) and Small and Medium Enterprises (SME) business lines were reorganised into the Public Groups and International (PGI) and Private Groups and High Wealth Individual (PGH) business lines.

5.8 This chapter refers to the former names of the relevant ATO units and business lines for the benefit of consistency with the original IGT report.

Implementation of agreed action items

5.9 The original Settlements review report used an agreed 'action item' structure rather than a recommendation structure. The following section sets out these action items and examines the ATO's implementation of them. The ATO agreed to all action items, either in full or in principle.

Action item 1

With the aim of improving the quality of settlements recording, the Tax Office will complete a six-month body of work that commenced in February 2009 that focuses on putting in place 'immediate next step' improvements to raise the quality of settlement register recording (in terms of completeness and accuracy) and reporting to Parliament for the 2008-09 year.

ATO position — implemented

5.10 The ATO agreed with this action item and commenced the 'Standard Settlements Recording' (SSR) project which was completed prior to the public release of the IGT's initial Settlements review report. The key aims of the SSR project were to improve the accuracy, completeness and consistency of data recorded on the settlement register through standardisation of recording and reporting practice as well as the provision of supporting infrastructure for all ATO settlements. The project implemented the following 10 deliverables:

  • centralisation of the settlement recording function within each business line;
  • improved Statements of Compliance;
  • integrity measures on the timeliness of data recording post 1 July 2009;
  • reconciliation of Settlement Register data with source data on all settlements between 1 July 2008 and 30 June 2009;
  • ensuring all finalised settlements between 1 July 2008 and 30 June 2009 were recorded on the register;
  • establishing a reconciliation process for settlement records post 1 July 2009;
  • ongoing improvements to the settlements register;
  • engaging internal audit to review and assure the business line centralised recording processes;
  • comprehensive settlements reporting to compliance and law executives; and
  • reporting to the Technical Quality Assurance Forum (TQAF) at key milestones.

5.11 The ATO has also put in place processes to ensure future settlement data entry is timely, accurate and complete. Business line Settlement Coordinators are responsible for ensuring timely, accurate and complete data entry into the Settlements Register. In this regard, the Settlement Coordinators must complete both an integrity checklist for each entry within the Settlement Register (which also ensures that pre-settlement and settlement positions are recorded) and report on a quarterly basis to the L&P Settlements team.

5.12 The ATO's integrity checklist for Settlement Register states:

The primary accountability for the integrity and accuracy of the Settlement Register data for each business line (BSL) rests with the manager/team leader who completes the Statement of Compliance. As a secondary measure each business line has a Settlement Coordinator who is responsible for ensuring that processes are in place within their line to ensure that all settlements/agreements are captured on the settlement register in a timely and accurate manner. An integrity checklist for each settlement/agreement is to be completed and included in the settlement register.

The integrity checklist provides the mechanism for the Settlement Coordinator to confirm that all data has been entered in a timely manner and that details entered onto the settlement register have been signed off by the manager/team leader and correctly reflect the settlement activity. In most cases it would be reasonable to expect that the integrity checklist is completed within 14 calendar days of the settlement being recorded on the register. There will be occasions when exceptions to meeting this timeframe occur and the BSL Settlement Coordinator is to email the LIB Settlements Team if this occurs.

The primary entry of data on the Settlement Register can be undertaken by either the case officer responsible for the matter that has been settled or the BSL Settlement Coordinator.68

5.13 Additionally, the L&P Law Infrastructure Branch (LIB) team has an overarching monitoring and assurance role for entries on the Settlements Register which involves sampling to ensure their timeliness, accuracy and completeness against integrity measures. Results of this sampling are included in a quarterly and annual report to the ATO's Integrity Adviser.

5.14 Since the conclusion of the original review, the ATO has decommissioned the standalone Settlements Register as this settlement information is now recorded directly within the ATO's enterprise case management system, Siebel.

IGT conclusion — implemented

5.15 The IGT considers the ATO has implemented this action item.

Action item 2

With the aim of improving the integrity checks on data recording, the Tax Office will reduce the number of accountability points involved in the settlement registration process and centralise the settlement register's management within the Law Infrastructure Branch in Law and Practice.

ATO position — implemented

5.16 The ATO agreed with this action item and, in response, centralised the settlement recording functions within the Settlement Coordinator in each business line, thereby reducing the number of accountability points. The reduced accountability points are reflected in the 'Settlement register roles and responsibilities' page on the ATO's intranet.

5.17 The ATO has also advised that the 'Settlements Improvement Project' has addressed the following issues with respect to the number of accountability points:

  • an overarching governance framework, defining the accountabilities of business line Settlement Coordinators, National Program Managers, LIB Settlements team and the Assistant Commissioner, Law Practice Support (LPS);
  • a quarterly integrity and assurance reporting cycle on recorded settlements post 1 July 2009, to capture data integrity issues on a systematic and regular basis, and to report any concerns across the organisation at a high level;
  • a regular monthly (previously fortnightly) networking process for business line Coordinators to raise any concerns or questions concerning specific settlement data matters; and
  • a formal data integrity reporting mechanism between the Assistant Commissioner, LPS and the ATO's Integrity Advisor's office.

5.18 As mentioned earlier, the primary accountability for the integrity of Siebel system settlement data rests with the Settlement Coordinators within each business line who also complete an Integrity Checklist for each settlement recorded. This is supported by the random sampling of settlement cases by the LIB Settlements team and the reports to the Integrity Adviser.

IGT conclusion — implemented

5.19 The IGT considers the ATO has implemented this action item.

Action item 3

With the aim of improving management reporting on settlements, the Tax Office will increase the management reporting in relation to the settlement register information.

ATO position — implemented

5.20 The ATO agreed to this action item and developed a suite of additional settlement reporting mechanisms as part of its 'Settlements Improvement Project'. As a result, the reporting framework specifically requires the following reports to be generated:

  • the 'settlement quarterly report' which is a detailed summary of LIB data integrity sampling across a range of settlements recorded on the register each quarter, as validated by Integrity Checklists and National Program Manager certifications. These reports highlight each business line's compliance with specific integrity aspects of settlement data recording and identify systemic issues that need to be addressed either with a particular business line, or more broadly;
  • the 'custodian report' which is a high level summary from the Assistant Commissioner, LPS to the ATO Integrity Advisor. These reports assess each business line against the integrity measures of timeliness, accuracy and completeness in their settlement recording activities, together with a record of remedial action undertaken;
  • the 'special interest reports' which are ad hoc reports generated either by LIB Settlement staff identifying particular issues or specific requests from the Assistant Commissioner, LPS; and
  • regular summary reporting for the Second Commissioner's Senate Estimates briefings.

5.21 The ATO has provided the IGT with a sample of the above management reports generated from settlement register data. These reports included:

  • a 'settlement quarterly report';
  • a 'custodian report';
  • a 'special interest report'; and
  • two summary reports for the Second Commissioner.

IGT conclusion — implemented

5.22 The IGT considers the ATO has implemented this action item.

Action item 4

With the aim of improving understanding of respective roles and responsibilities for officers involved in settlement administration, the Tax Office will clarify accountabilities, roles and responsibilities in relation to settlement administration.

ATO position — implemented

5.23 The ATO agreed to this action item and implemented a Corporate Custodian role for settlements which has support from senior executive officers within each business line. The custodian role is responsible for the overarching integrity and assurance for settlement decision making and administration. The ATO has advised that this has led to a streamlining of settlement registration process in line with Action Item 2.

5.24 Furthermore, as mentioned earlier, the LIB assures the integrity of settlement register data (in the form of oversight and testing the integrity of Settlement Register data). The integrity checklist outlines that the primary responsibility for settlement registration rests with manager/team leader who completes the Statement of Compliance. 'Part B' of the Statement of Compliance requires the case officer to confirm that the settlement details have been completely and accurately recorded on the Settlement Register. This is consistent with the practice that the case officer is primarily responsible for entering this data on the Register at first instance.

5.25 The ATO has stated that these roles and responsibilities have been made overt in various Office Minutes, on its intranet and are regularly reiterated at monthly Settlement Coordinator conferences. The ATO has also published on its intranet website, material to improve officer understanding of the roles and responsibilities of various officers and teams in the settlement registration process.

IGT conclusion — implemented

5.26 The IGT considers the ATO has implemented this action item.

Action item 5

With the aim of improving the quality of settlements decision-making and administration, the Tax Office will promote an integrated approach to the identification, monitoring and actioning of quality issues arising with settlements decision-making and administration, and identify continuous improvement opportunities through Integrated Quality Framework (IQF) implementation.

ATO position — implemented

5.27 The ATO agreed to this action item. The ATO has advised that the LIB in consultation with business line representatives have designed the Integrated Quality Framework (IQF) model for the 'settlement product'.

5.28 The IQF for the settlement product was fully implemented and evaluated on 30 September 2010. At present, opportunities for improvement are centrally recorded by the Law Practice Management Unit. The improvement opportunities are prioritised with assistance from the Settlements Improvement and Assurance Forum and form part of the ATO's forward work program for Settlements. The Settlements Improvement and Assurance Forum also has a role in the implementation of this work program.

5.29 The ATO has provided documentation with respect to its settlement work program which describes 28 areas for improvement that were identified through the IQF. Since that program of work, the ATO's IQF processes have identified further areas for improvement, for example, ensuring the administrative soundness and transparency of settlements.69

IGT conclusion — implemented

5.30 The IGT considers the ATO has implemented this action item.

Action item 6

To facilitate improvements in dispute resolution (including the avoidance of disputes), the Tax Office will implement a framework for ongoing analysis of reasons for differences between initial Tax Office positions communicated to taxpayers and settled positions. The Tax Office will also implement mechanisms to drive improvements in upstream processes that are identified in this analysis. For cases ending in settlement this will include:

  • recording the initial Tax Office position communicated to the taxpayer and the settled position; and
  • analysis of the specific reasons why the settled position was not reached in the initial Tax Office position, with the aim of identifying improvements that would help to avoid the potential for disputes arising, including:
    • the specific reasons for the material differences between the two recorded positions (that is, an explanation of the reasons for the change in quantum between the positions); and
    • the specific reasons why the settled position was not reached in the initial Tax Office position (including reasons which fell outside of the Tax Office's control, such as taxpayers' failure to provide requested information).

ATO position — agreed in principle

5.31 The ATO agreed in principle with this action item due to the ATO's system limitations at the time. However, the ATO has taken the actions described below to address the aim of this action item.

5.32 First, the ATO has developed clearer guidance for officers via various guides published on its settlements intranet page including 'ATO's pre-settlement position', 'What is not a settlement' and 'Settlements register user guide'. The ATO expects ongoing improvement to these resources and additional guides over time.

5.33 Secondly, the ATO has replaced the Settlements Register with corresponding functionality in Siebel and is expected to provide better data capture for end-to-end case analysis. Organisational capacity to undertake more robust analysis of reasons for differences in pre and post settlement amounts is also expected to develop over time once the new system is bedded down. However, the ATO has noted that it does not consider increasing organisational capacity to analyse settlement variations on an individual case-by-case basis to be a priority at this time.

5.34 Thirdly, the implementation of the IQF for settlements now facilitates greater analysis of decisions across business lines and, over time, will add to the ATO's corporate capacity to better understand the reasoning behind the variance between pre and post settlement amounts with a view to identifying opportunities for improvement.

5.35 Lastly, new corporate reporting (for example, those reports mentioned earlier in relation to Action Item 3) should provide an increased degree of analysis and identification of improvement opportunities over time. The ATO also expects that other reports that follow from Settlement Register's integration into the Siebel system, including the implementation of the IQF and the dispute risk indicator process (being undertaken by the Dispute Resolution Project within L&P), should increase the ATO's capacity to both undertake more rigorous examination of pre and post settlement positions and to better inform business lines undertaking similar data reviews.

5.36 The ATO has also advised that it reports on settlement variances from the original audit position (by market segment and component liability) and monitors and investigates trends or anomalous results where appropriate. This data is primarily used for regular Senate Estimates briefing reports. Where there is significant variation, the relevant settlement cases are investigated in order to determine the reasons for the variances and to ensure the integrity of the outcome.

IGT conclusion — action taken is consistent with agreed principle

5.37 The IGT considers that the ATO has taken action in line with the agreed principle. The IGT recognises that the ATO has made significant progress in relation to recording the pre-settlement position communicated to the taxpayer and the settlement position, however, it appears that the level of analysis is currently limited. Importantly, the ATO does expect the level of analysis to increase over time and the IGT supports that continued expansion.

Action item 7

Entries on the settlement register should clearly record the evidentiary basis for asserted compliance with paragraphs 25 and 26 of the Code of Settlement Practice.

ATO position — implemented

5.38 The ATO agreed in principle with the action item as the Settlement Register, at the time, had technical limitations which prevented the entry of data relating to compliance with paragraphs 25 and 26 of the Code of Settlement Practice (Code). The ATO had also advised the IGT that compliance with the Code was already met by the Settlement Submission template which all case officers are required to complete.

5.39 Since the initial review, the ATO's Settlement Register has been incorporated into the Siebel system. As a result, all documents relating to the settlement are now attached to the Siebel system. These documents include records of discussion, settlement submissions, settlement deeds, statements of compliance and integrity checklists. Additionally, the settlement process may be conducted within the overarching case type, for example the audit or objection case. Accordingly, all preliminary material and the history of the case are available for decision makers or reviewers.

IGT conclusion — implemented

5.40 The IGT considers the ATO has implemented this action item.

Action item 8

Revised and improved user documentation will be made publicly available and required to be followed by Tax Office officers in relation to the following:

  • what does and does not constitute a matter appropriate for consideration for settlement (that is, when is it appropriate for the Tax Office and taxpayers to settle a matter), including the principle that settlements would not generally be appropriate where the Tax Office concedes a material change to its precedential view or the application of the precedential view to the facts and evidence of the case in question — this should be done by quicker and less costly means, such as allowing the objection and subsequently updating the precedential view, rather than through settlement;
  • practical guidance for application of settlement criteria, such as 'genuine uncertainty as to the proper application of the law to the facts' (this will form part of any assessment by the Tax Office as to whether settlement of a case is appropriate);
  • settlement terms in settlement deeds should relate only to the subject matter that affects the basis on which the quantum is settled and any obligation to comply in future in relation to that particular subject matter (and not broad commitments to being compliant taxpayers on non-related matters generally, agreeing to raise all potential tax-relevant transactions with the Tax Office in the future, nor matters under dispute but which do not directly affect the basis on which the quantum is settled); and
  • the Tax Office will revise PS LA 2007/5 and 2007/6 to provide improved linkages and reference points to the Code of Settlement Practice.

ATO position — implemented

5.41 The ATO agreed with this action item. In response, the ATO published a number of documents on the internal 'Settlement' intranet page as guidance for staff dealing with settlement cases. These documents include:

  • what is not a settlement;
  • determining the ATO pre-settlement position;
  • an improved Statement of Compliance certificate;
  • a more robust settlement submission template; and
  • the settlement register user guide.

5.42 The ATO has noted that following the IGT review, linkages were added to material available on the intranet which provides guidance on specific sections of the Code.

5.43 The ATO has also published on the intranet a 'Guide for Determining Settlement Parameters for Compliance staff'.70 The guide quotes the Code in relation to what is and is not appropriate for settlement. The guide also provides extensive guidance to officers in determining litigation risk and the reduction in primary tax for settlement purposes. The guide provides a range of criteria to take into account when determining litigation risk including legal risk, which encompasses uncertainties in relation to law interpretation and factual analysis.

5.44 The ATO has not made the above guidance material publically available as it was of the view that it was of low priority. However, the ATO advises that it is now undertaking a project to reform their internal and external settlement documentation, with the aim of improving the clarity of guidance and to align the documentation with the ATO's Dispute Management Plan. As part of this project, the ATO advises that it will consult externally during July 2014 on what material it should make publicly available, amongst other issues.

5.45 The ATO has also restructured its management of technical issues as a result of the ATO's 'Transforming tax technical decision making project'. This project resulted in a replacement of a 'precedential view', as a determinative factor for the escalation of technical issues to senior technical officers, with a wider risk management framework to the management of technical issues.

5.46 Other significant changes arising from this project also included the movement of senior technical officers from the ATO's Centres of Expertise into its compliance teams as well as the updating of its procedural instructions for escalating technical issues. For example, PSLA 2004/471, which previously required escalation of precedential issues to the Centres of Expertise and the Tax Counsel Network, was replaced by PSLA 2012/172 which sets out the requirements to engage tax technical officers within the ATO's Law and Practice Group.

5.47 To assist staff, the ATO has also published on its intranet the 'Guide to managing high risk technical issues' to support the PSLA 2012/1 and advised its compliance officers of the revised escalation requirements in an internal communiqué published on the ATO's Work Processes intranet site.

IGT conclusion — partly implemented

5.48 Whilst the ATO has undertaken work consistent with the aims of this action item, the IGT considers that three aspects of this action item remain unaddressed at present.

5.49 First, whilst the ATO's internal documentation describes what does not constitute a settlement, its description of matters that are appropriate for settlement is limited. Furthermore, no other guidance exists for ATO officers which describe matters appropriate for settlement.

5.50 Secondly, whilst PSLA 2007/5 Settlements73 and PSLA 2007/6 Guidelines for settlement of widely-based tax disputes74 both refer to the Code in general terms, they make limited references and linkages to the Code.

5.51 Lastly, the ATO's internal guidance material is not publicly available.

5.52 Notwithstanding these remaining aspects, the ATO has commenced a project to redraft its settlement documentation and externally consult on that documentation. Accordingly, where the consultation process allows interested parties to surface and raise issues for ATO's consultation and appropriately actioned, including the identification of any areas for further clarification, this action item may be implemented at that later time.

5.53 The IGT may reconsider this issue if stakeholders raise concerns with the guidance on settlement matters following the outcomes of the abovementioned consultation process.

Action item 9

Templates for settlement deeds will be amended to ensure fairness and consistency of treatment in certain settlements over time, so that taxpayers have an option to reopen a settled case where the Tax Office subsequently changes its view of the law on which the settlement was based, in a way that would have achieved a better outcome for the taxpayer, subject to the following conditions:

  • this applies to settlements that resolved only one matter in dispute (and not multiple issues — 'global settlements');
  • the taxpayer has requested that the settlement be reopened;
  • the timeframe is limited to the relevant amendment period; and
  • the settlement was concluded after the public release of this report.

ATO position — implemented

5.54 The ATO agreed with this action item and conducted extensive consultations with internal staff and external parties (via the Legal Practitioners Working Party (LPWP) sub-group of the National Tax Liaison Group (NTLG)) in response. Based on consideration of all the relevant implications and external feedback, the ATO concluded that there was no clear consensus on settlement deed wording that would give effect to the IGT recommendation. Therefore, the ATO will continue to monitor and report on the types of cases where settlement agreements are sought to be reopened by taxpayers.

5.55 The ATO has provided guidance to staff to assist with seeking the support from Law and Practice officers. The guidance, contained in an office minute on the ATO's Settlements intranet page (from the First Assistant Commissioner, Law and Practice, to Deputy Commissioners and Settlement Network members (27 June 2012)), directs staff to contact the Settlements LPS Team mailbox prior to making a response to, or otherwise providing advice to, a taxpayer regarding any proposals to re-open a settlement.

IGT conclusion — implemented

5.56 The action item envisaged that the agreed amendment to the settlement deed be the mechanism which provides fairness and consistency of treatment in those circumstances where the ATO changes its view of the law on which a settlement was originally based. As a result, taxpayers could access a better outcome by reopening the settlement in those circumstances.

5.57 The ATO has confirmed that it will re-open settlements in the circumstances as set out in the envisaged action item, but that the standard wording in its model settlement deed due to the above difficulties in obtaining broad agreement on the wording is not the best place to achieve that outcome at this time based on consultation.

5.58 Notwithstanding these difficulties, the ATO has advised that it will continue to support the action item by publicly affirming in its revised settlement code that settlements may be re-opened where taxpayers are seeking to address the unfairness, as outlined in the action item. Accordingly, the IGT considers that the ATO's commitments of public affirmation have addressed the original recommendation's intention.

Action item 10a

Although the Tax Office has existing mechanisms aimed at providing a quality of taxpayer experience and ensuring probity of the settlements process, there remains room for further improvement. The Tax Office will develop and implement mechanisms to:

  • improve the taxpayer experience in relation to the settlement process and access to settlement by providing a 'circuit breaker' or 'reference point' for taxpayers with the aim of:
    • drawing on significant alternative dispute resolution and settlement experience; and
    • providing a fresh set of eyes for decisions to access the settlement process or disputes arising in the settlement process.

ATO position — implemented

5.59 The ATO agreed to this action item. In response, the ATO's Dispute Resolution project team developed and improved the ORCLA75 intranet pages to support an integrated approach to dispute resolution which seeks to resolve disputes as early as possible. Relevant ORCLA pages include:

  • integrated approach to dispute resolution;
  • engaging with the taxpayer;
  • clarify an issue;
  • value in proceeding to litigation; and
  • case conferencing.

5.60 The ATO has also developed a litigation risk tool which requires case officers and their manager to assess whether alternative approaches to dispute resolution would be beneficial in appropriate cases. The ATO has advised that this process has been implemented across all business lines and is supported by numerous ORCLA pages.

5.61 One such ORCLA page titled 'Case Conferencing' outlines the role of ATO facilitators. These officers are to be independent of the matter in dispute and their role is to guide the parties through their discussion ensuring the participants focus on the purpose of their work together. Their purpose may be to resolve or clarify an issue.

5.62 An ATO 'Settlement Process Map' also outlines the various steps in the settlement process as well as opportunities for alternative dispute resolution.76

5.63 The ATO further identified a range of 'circuit breaker' mechanisms whereby ATO officers not involved in the original compliance activity or objection can assist with the process, including the following processes and services:

  • The independent review process is available to large corporate taxpayers where there is disagreement with all or part of the ATO's Statement of Audit Position. The review entails a senior officer from the RDR business line, having not been involved in the audit process, to review the technical merits of the issues in disagreement.77 This process is consistent with Recommendation 9.3 of the IGT's Report into the Australian Taxation Office's Large Business Risk Review and Audit Policies, Procedures and Practices (LB&I Review)78 for large taxpayers by the ATO's RDR officers.
  • The ATO's in-house facilitation service is used to assist taxpayers and ATO officers to 'identify issues in disputes, develop options, consider alternatives, and attempt to reach an agreement'.79 This follows a successful pilot of the service consistent with Recommendation 3.6 of the IGT's ADR Review. Taxpayers, advisers and ATO officers may access this service via email.80
  • The early assessment and resolution process is followed where smaller taxpayers seek review in the AAT.
  • 'Trigger points' identified in audit processes also require ATO officers to consider possible alternative dispute resolution approaches, such as direct discussions, negotiations or mediation.

IGT conclusion — implemented

5.64 The IGT considers that the ATO has implemented this action item.

Action item 10b

Although the Tax Office has existing mechanisms aimed at providing a quality of taxpayer experience and ensuring probity of the settlements process, there remains room for further improvement. The Tax Office will develop and implement mechanisms to:

  • prevent inappropriate use of settlements by implementing a probity check with the aim of:
    • minimising unnecessary cost and delay by providing 'real-time' assurance of the probity of settlements and the use of the settlement process;
    • ensuring that material changes in the Tax Office position are communicated to relevant taxpayers;
    • ensuring that entry into settlement is appropriate;
    • drawing on significant experience in settlement matters; and
    • providing a fresh set of eyes on significant probity decisions in the settlement process.

ATO position — implemented

5.65 The ATO agreed to this action item. The ATO's Law Practice Management Unit has been investigating opportunities, through the Siebel system, to identify cases where either the settlement did not proceed or negotiations are ongoing. The ATO considers that once this reporting is in place it will be able to make details of these cases available to business lines for use in the ATO's IQF process.

5.66 The ATO is also currently revising the Siebel system procedures to ensure that 'communication of material changes to the ATO's position' are emphasised in those procedures. Changes to these procedures will also be scheduled for discussion at the Settlements Improvement and Assurance Forum and in an upcoming review of the Code.

IGT conclusion — implemented

5.67 Action item 10b sought to prevent inappropriate use of settlements by making improvements to the probity of the settlement process with reference to specific issues. Since the original review, the ATO has undertaken a body of work aimed at improving the quality of decision making in compliance activities and resolving disputation which is consistent with the observations and recommendation made in subsequent IGT reviews. For example, the ATO's 'Transforming tax technical decision making project, mentioned earlier in relation to Action Item 8, resulted in senior technical officers moving from the Centres of Expertise into compliance teams. As noted in relation to Action Item 10a, the ATO has also deployed independent review, in-house facilitation and early assessment and resolution.

5.68 The IGT considers that communication of such material changes to ATO positions assists taxpayers and reduces informational disadvantage, whereby the true ATO position on the matter is not fully known to them. In this respect, the ATO has advised that it is further revising the Siebel system procedures and taking steps to ensure this aspect is emphasised.

5.69 PSLA 2011/27 Matters the Commissioner considers when determining whether the Australian Taxation Office (ATO) view of the law should only be applied prospectively also requires ATO officers to consider a range of factors when deciding whether a changed ATO view should be only applied prospectively. The application of this practice statement has been examined in a separate IGT follow up review.81

5.70 Accordingly, the IGT considers that the ATO has implemented this action item.

Action item 11

The Tax Office will develop and implement a redesigned business model dealing with disputes over tax liabilities as an end-to-end process, including improving the linkages between settlements and its upstream and downstream processes.

ATO position — implemented

5.71 The ATO agreed to this action item. In response, the ATO's Objections Review Project delivered a working model for the end-to-end dispute resolution process, including improved linkages between settlements and its upstream and downstream processes.

5.72 In line with the recommendations of the National Alternative Dispute Resolution Advisory Council82 and the strong support and encouragement of the then Attorney-General, the ATO developed and published its Dispute Management Plan (DMP) in October 2012.83 This is a public document which outlines the ATO's principles and approaches to all disputes, not just those relating to tax liabilities. It provides high-level principles which support an end-to-end dispute resolution approach.

5.73 The principles contained in the ATO's DMP are applied through specific ATO staff guidelines published in the ORCLA.84 These guidelines require ATO officers, particularly those dealing with objections, to attempt to:

  • resolve the dispute at early as possible;
  • come to a common understanding of each parties' view of the facts and law; and
  • confine the issues subject to ongoing dispute.

5.74 The ATO's intranet page, 'Integrated approach to dispute resolution', also recognises these objectives:

As an organisation, our objective is to reduce the time we take to resolve disputes and lower the costs both for the taxpayers and the ATO. We aim to avoid, minimise and resolve disputes as early, cooperatively and collaboratively as possible by adopting dispute management principles, strategies and techniques.

Early engagement and direct negotiation are our primary means of avoiding, minimising and resolving disputes early, resulting in a more responsive end-to-end dispute management. It is envisaged that these actions would create a positive experience for taxpayers making them less likely to object or litigate and would encourage their future voluntary compliance.

Successful dispute management begins with timely identification of emerging disputes during the original decision making point, such as an audit or private ruling. This ensures that points of contention, which may lead to ongoing disputation, are identified and resolved, or narrowed, when and as they arise.

Each downstream activity from the original decision point involves additional costs and prolongs uncertainty. Actions taken at any point in the process have the ability to influence these additional costs. Consequently, early dispute resolution is to be considered in each component of the end-to-end process, which is before:

  • making the original decision
  • making the objection decision, and
  • during litigation.

Our intent of resolving disputes at the earliest stage possible is also supported by the Civil Dispute Resolution Act 2011 (Cth) which is aimed at ensuring prospective litigants, including government agencies and their clients, take genuine steps to resolve disputes prior to litigation.

5.75 Furthermore, the ATO's Siebel system assists in recording the end-to-end management of disputes as it records most information regarding disputes. The Siebel system's reports, however, are currently only produced for high level statistics and not granular case details.

5.76 The ATO has also developed the Objections Cube which is used to facilitate analysis of the drivers of objections by examining upstream processes, such as the audit decision and how the decision was reached.

5.77 The ATO performs 'case debriefs' at the conclusion of every independent review held in the LB&I business line whereby the independent reviewers give feedback to the original compliance teams with a view to improving original compliance decisions. Outcomes of such debriefs have highlighted the need for compliance officers to improve the quality of evidence gathering and more effectively address the taxpayer's contentions before original compliance decisions are finalised. As a result, the ATO advises that it will trial the embedding of ATO officers with litigation experience within LB&I compliance teams to assist those teams in more effectively considering and gathering relevant evidence.

5.78 The ATO also conducts early assessment and resolution activities for LB&I cases prior to being heard in the AAT. Although improvement opportunities have been captured during these activities, the ATO has advised that there is currently no feedback process in place.

5.79 In addition, as noted in Action Item 10a, the ATO makes 40 trained facilitators available at the request of taxpayers or ATO officers if other direct means of discussing and resolving a dispute have failed.

IGT conclusion — implemented

5.80 The IGT considers the ATO has implemented this action item.

Action item 12

Before entering and during settlement negotiations, the Tax Office will ensure that it discloses changes to its approach which would reduce the range of settlement points and not allow taxpayers to labour under misconceptions about their likely 'out of pocket' liability.

ATO position — implemented

5.81 The ATO agreed to this action item. In response to the IGT's action item, the Dispute Resolution project team developed and improved the internal ORCLA pages to support an integrated approach to resolve disputes as early as possible. Relevant pages include:

  • integrated approach to dispute resolution;
  • engaging with the taxpayer;
  • clarify an issue;
  • value in proceeding to litigation; and
  • case conferencing.

5.82 The ATO has also developed the litigation risk tool that requires case officers and their manager to assess whether alternative approaches to dispute resolution would be beneficial in appropriate cases. The ATO advised that this process has been implemented across all business lines and is supported by numerous ORCLA pages.

5.83 The ATO has also stated it has released an internal communiqué to active compliance staff stating requirements with respect to taxpayer engagement, escalation of issues, ongoing communications and early dispute resolution.

IGT conclusion — implemented

5.84 The IGT considers the ATO has implemented this action item. The IGT also notes that further integration of these principles into the ATO's Work Process, in addition to the ORCLA, may also be beneficial.

Action item 13

The Tax Office will extend to all multiple taxpayer or 'leveraged' active compliance cases, implementation of the agreed recommendation C in the IGT's fourth report of its major, complex issues review (namely to undertake adequate field work to identify the issue and to differentiate categories of taxpayers' circumstances, and to test the quality of Tax Office information that was provided to taxpayers to help them meet their obligations before a compliance strategy is designed and commenced). 'Leveraged' active compliance cases are those cases that involve the same compliance concern or technical issue — such as groups of cases that are the subject of a particular Tax Office active compliance project.

ATO position — implemented

5.85 The ATO agreed to this action item. The ATO has stated that the IGT's action item has been embedded into its active compliance work processes and also inserted into the companion documents to the Corporate Management Practice Statement (CMPS) for Risks & Issues. In this regard, the ATO has published a revised 'risk owner expectations' policy on the Work Processes intranet site to reflect this recommendation. The communiqué requires all risk owners of major compliance activities to ensure:

  • adequate field work is undertaken to identify the issue and differentiate categories of taxpayers' circumstances;
  • direct communication takes place with affected taxpayers and/ or their advisers;
  • regular reappraisal is made of compliance and revenue risk and costs; and
  • the quality of information provided to taxpayers to help them meet their obligations is tested before a compliance strategy is designed and commenced.

5.86 The communiqué also advised risk owners to 'be prepared to demonstrate compliance with these expanded expectations'.85

5.87 The ATO has also updated its Risk Treatment Plan template86 which is to be used by Risk Owners and Risk Managers to, amongst other things, specify any different types of 'risk participants' and consider whether different 'treatment methods' should be applied. Appendix 1 of the Risk Treatment Plan template contains a quality review checklist sourced from a previous IGT review.87 The checklist requires ATO officers to consider what and how it will communicate to taxpayers, and to ensure they consider different risk treatment options for different levels of identified risk. The checklist also requires ATO officers to anticipate taxpayer behavioural responses and the evidence to support such views in designing its compliance risk assessment tools.

IGT conclusion — implemented

5.88 The IGT considers that the ATO has implemented this action item.

Action item 14

In multiple taxpayer or 'leveraged' active compliance cases, the Tax Office will ensure that the Centres of Expertise or Tax Counsel Network assures the correct application of the view to the facts (representative of the types of facts involved) before issuing amended assessments.

ATO position — implemented

5.89 The ATO agreed in principle with this action item. The ATO considers that satisfactory measures are in place to meet the intent of this action item.

5.90 As mentioned earlier in Action Item 8, a number of senior technical officers in the Centres of Expertise and Tax Counsel Network had been moved into compliance teams and PSLA 2004/4,88 which previously required escalation of precedential issues to the Centres of Expertise and the Tax Counsel Network, was withdrawn. The engagement of tax technical officers within Law and Practice is now governed by PSLA 2012/189 which applies a wider risk management framework to the management of technical issues.

5.91 The ATO has advised compliance officers of the revised escalation requirements in an internal communiqué published on the ATO's Work Processes intranet site. Furthermore, the ATO reiterated the requirement to consider each case on its merits in another communiqué to Compliance officers which has also been published on the Work Processes intranet site.

5.92 The ATO advises that it seeks to differentiate 'treatment methods' in order to account for different types of 'risk participants' as part of the updated Risk Treatment Plan template90 which is used by Risk Owners and Risk Managers.

IGT conclusion — action taken is consistent with agreed principle

5.93 The IGT considers that the ATO has taken action to improve its differentiation of compliance treatments between differing types of taxpayers within multiple or 'leveraged' active compliance cases consistent with the intent of the original recommendation.

Action item 15

Although the Tax Office has processes and policies that require officers to communicate changes to the Tax Office's view, the Tax Office will ensure that any changes to its view are transparently communicated to affected taxpayers and their representatives.

ATO position — implemented

5.94 The ATO agreed in principle with this action item and advised the IGT that it is confident that adequate processes are now in place to meet the recommendation.

5.95 The ATO has also stated that the work continues in the implementation of the IGT's recommendations arising from the Review into Delayed or Changed Australian Taxation Office Views on Significant Issues (the so-called 'U-turns' review) which will further enhance its focus on ensuring changes of view are effectively communicated to affected taxpayers in a timely manner.

IGT conclusion — issue subsumed by subsequent IGT review

5.96 The scope of this recommendation has been subsumed by the IGT's follow up of the U-turns review. Recommendations 2 and 4 of that review sought to develop ATO practices to deal with a change of the ATO view.

5.97 Accordingly, the 'U-turns' follow up review will consider the underlying issues raised by this action item.

Action item 16

The Tax Office will improve discipline surrounding the requirement for a sound evidentiary basis for active compliance decisions on primary tax and penalty decisions, including improvements in:

  • determining the material facts and the relevant evidence;
  • testing conflicting facts and evidence; and
  • determining the strength of relevance and admissibility of the facts and evidence.

ATO position — implemented

5.98 The ATO agreed with this action item and implemented a facts and evidence worksheet. On 27 February 2012, the ATO released an office minute mandating the use of the facts and evidence worksheets for particular cases for each business line for both the substantive tax decisions and administrative penalty decisions.

5.99 The ATO has stated that officers involved in the relevant classes of cases are both trained or continue to be trained to ensure they are aware of the need to maintain good facts and evidence handling practice and related recording. Additional training and on-the-job coaching is ongoing to reinforce the ATO's expectations of staff (particularly those moving from high volume work areas to more complex case work) and best practices for identifying and recording facts and evidence.

5.100 The ATO has also stated that ongoing quality checks are required to make sure that facts and evidence are being appropriately recorded in the Siebel case management system across all active compliance areas. This is due to IQF reports that revealed that some 'bedding down' is required to ensure outcomes are delivered.

5.101 The ATO has also rationalised and simplified work processes on penalty guidance for staff. However, IQF statistics reveal that penalty decisions require ongoing attention to assure their quality is appropriately maintained or otherwise addressed.

5.102 The ATO's requirements for the use of the facts and evidence worksheet are set on a business line by business line basis. Each business line also sets specific circumstances as to when officers must use the worksheet.

IGT conclusion — implemented

5.103 The IGT considers that this action item has been implemented. The IGT notes, however, that the facts and evidence worksheet is not mandated for all compliance activities, but only those compliance activities prescribed by each business line. Each business line uses different criteria, and whilst most business lines mandate the worksheet's use for lower volume, higher complexity and higher risk compliance activities, there does not appear to be a consistent principle across the business lines. Extracts of each business line's criteria are contained in Appendix 3.

5.104 The IGT may reconsider this issue if stakeholders raise concerns with the evidentiary basis for compliance decisions in future.

Action item 17

The Tax Office will ensure that compliance case management systems and IQF processes reinforce Tax Office rules for auditors to cite the correct Tax Office precedential view in all compliance cases.

ATO position — implemented

5.105 The ATO agreed with this action item and advised the IGT that it considers that satisfactory measures are in place to meet the intent of this action item through the implementation of the Siebel system initiatives and the IQF for active compliance.

5.106 The ATO has also confirmed that the function to ensure correct citation of Active Compliance cases now rests in the ATO law database. This means that when a case officer discovers a precedential ATO view, the respective citation can then be exported to the Siebel system case. However, the Siebel system itself does not automatically assure the citation of precedential ATO views in active compliance cases. The ATO has advised that whilst the LB&I business line has not detected any instances of case officers incorrectly citing the ATO view, some of these instances were identified in the Indirect Tax (ITX) and SME business lines.

5.107 The ATO had also stated that its LPS team had in place a rolling program of research and analysis concerning ATO precedential views. Initial work under this program had reviewed a number of precedential documents relevant to commonly visited webpages on the Register of Private Binding Advice. However, as previously mentioned, the ATO has changed the way it deals with significant technical issues as a result of the ATO's more recent re-organisation of its technical resources and re-engineering of supporting internal ATO processes. Consequently, the ATO no longer uses the term 'precedential view' as a determinative factor in allocating its technical resources. The ATO now takes a broader risk based approach in this respect.

IGT conclusion — implemented

5.108 The IGT considers the ATO has implemented this action item. As noted in other IGT reviews, the new ATO risk based technical decision-making arrangements were expected to take some time to implement fully. Accordingly, the IGT may re-examine this issue in future where concerns are raised with the technical discipline of ATO auditors.

Action item 18

During the review, the Tax Office improved its ability to record:

  • by liability component (such as primary tax, losses, penalties and interest) and by Tax Office functional area (such as LBI, GST and ATP), the liabilities raised against taxpayers before the formal settlement processes were triggered under the code;
  • by liability component and by Tax Office functional area, the settled position; and
  • the specific reasons for the material differences between the two positions (those differences which underlie the difference in quantum between the two positions).

It also improved its ability to analyse the reasons for difference between the liability components actually imposed pre-settlement and those finally imposed. In light of the above, the Tax Office will facilitate public understanding of the revenue impact of settlement cases, by publicly reporting on an ongoing basis (for settled cases):

  • the aggregated amounts of liability actually imposed pre-settlement and that finally imposed, by liability component (such as primary tax, losses, penalties and interest) and by Tax Office functional area (such as LBI, GST and ATP); and
  • a summary of key findings of its analysis for the differences between the liability components actually imposed pre-settlement and those finally imposed.

ATO position — implemented

5.109 The ATO agreed to this action item and has advised that it continued to enhance the regular analysis and reporting of settlement data as well as the identification of opportunities to improve its dispute resolution processes. In this respect, the ATO has completed the Settlements bi-annual report for the period July-December 2009 (2009-10) and included settlement information in Annual Reports from 2009-10.91 This information includes a summary on settlements which provide a market segmentation breakdown of pre-settlement liabilities compared with settled liabilities. However, these summaries do not indicate the components of these liabilities by primary tax, losses, penalties and interest as envisaged by the action item. Furthermore, whilst the ATO analyses the main reasons for settlements and provides commentary each year, this information is not always presented in the Annual Reports.

5.110 The ATO publication, Your Case Matters, also describes tax and superannuation litigation trends. The second edition of Your Case Matters contains a breakdown of settlements according to its components (primary tax, penalties, interest, credits and notional tax on losses) in addition to a market segmentation breakdown.92 The third edition of Your Case Matters contains a year by year breakdown of pre-settlement positions, and variances.93 It does not indicate the amounts that are attributable to primary tax, losses, interest and penalties. The market segment breakdown only distinguishes between micro businesses, individuals and 'other', and only breaks down figures by the number of settlements, not the variation amounts.94

5.111 The shortcomings noted above by the IGT in relation to the reporting improvements made to date, have been raised with the ATO and management have advised that the next edition of Your Case Matters will address these outstanding matters.95

IGT conclusion — implemented

5.112 The IGT recognises that the ATO has made considerable headway in relation to the action item's objective. Given the ATO's commitment to address the residual shortcomings identified above, the IGT considers that this action item has been implemented. The IGT notes that the public reporting of such information may be provided via website and need not be limited to a particular publication.

Action item 19

Publicly reporting a more comprehensive and detailed picture of the net contribution to revenue of compliance actions by the Tax Office is hindered at present by the following.

  • The regulatory framework around the running balance account and the resulting Tax Office data framework make it difficult to track, over time, active compliance liabilities for taxpayers.
  • The current data recording structures do not identify amounts raised through active compliance activities at the entry and exit points for the data (for example, the Tax Office estimates that between 40 and 60 per cent by number of all objections are self-amendments rather than disputed liabilities raised in active compliance activities — whether the liabilities raised were as a result of active compliance activities or not is not recorded in objection cases).
  • The current priorities of the Change Program are focused on delivering new transactional processing arrangements, which is a substantial body of work. The Tax Office advises that its reporting tools and processes will evolve over time once the new transactional arrangements have been bedded down.

In recognition of the above, the IGT will, at least two years after this report, review the Tax Office's progress towards the goal of internally recording and publicly reporting, by market segment, the aggregate amounts of tax (with losses specifically identified) reduced from original Tax Office compliance-raised liabilities for each category of case including objections, appeals (including those resolved by withdrawing from litigation or entering consent orders) and settlements.

ATO position — implemented

5.113 The ATO agreed to this action item as aspirational due to system and process limitations as well as other Change Program demands at the time. In response to the IGT's action item, the ATO has advised that the item is part of a regular ongoing review process and addressed in that manner without the need to consider it as a separate initiative as such.

IGT conclusion — action taken towards aspiration

5.114 The IGT considers that the ATO has taken action consistent with the aspiration of the action item as the 2009-10 and 2010-11 Commissioner of Taxation Annual Reports provide a breakdown of settlement cases by market segment, pre-settlement position, settled position and variance.96

5.115 It should also be noted that the ATO reporting aspects has been considered in other reviews, for example, in the recent penalties review.97 Substantial analysis was undertaken in that review to provide a comprehensive and detailed picture of the sustainability of penalty decisions and their revenue impact and assessed in that context.

Action item 20

With the aim of promoting early and comparatively less costly resolution of disputes and providing the Tax Office with reasonable assurance that the taxpayer is not hiding any relevant facts, the Tax Office will replace the wording 'full and true disclosure of all relevant facts' in its model settlement deed with wording that makes the settlement conditional upon the taxpayer having revealed all material facts known by them at the time of settlement and requiring them to disclose any further material facts which may become known after the execution of the deed of settlement.

ATO position — implemented

5.116 The ATO agreed with this action item. In response, the ATO held consultations through its key legal and tax practitioner forums. In this regard, comments were sought from the LPWP and the NTLG. In addition, a discussion paper was presented at the October 2010 LPWP meeting.

5.117 The ATO has advised that although external stakeholders appeared comfortable with 'true and correct' disclosures, there was significant concern with an ongoing obligation to disclose into the future. Furthermore, initial consultation raised questions about the efficacy of a model deed approach. The ATO's L&P unit considered a principles-based approach to designing settlement deeds, which was not supported by internal stakeholders.

5.118 The ATO sought internal legal advice on aspects of this action item, particularly with respect to the ongoing disclosure clause. Detailed information was provided by LSB, including extensive recommended changes to the wording used in the model settlement deed.

5.119 The ATO published the final model deed with the relevant wording extracted as follows:

The taxpayer warrants that to the best of its knowledge and belief it has made a true disclosure of all relevant and material facts to the Commissioner which relate to the issue, prior to entering into this deed.98

IGT conclusion — implemented

5.120 The IGT considers the ATO has implemented this action item.

Action item 21

During the review, the Tax Office improved its linkage between the active compliance and debt collection functions by involving its debt collection function in the active compliance design of project-based compliance activities. The Tax Office has improved its guidance to those officers tasked with approving active compliance decisions. It has also improved its independent checks to ensure that there is appropriate evidence to support the decision. Although these improvements have been made, there remains room for further improvement in relation to the following circumstances and tension points in administration that may arise in active compliance activities.

  • Taxpayers may 'disengage' from the Tax Office, or refuse to communicate with the Tax Office in whole, or for a period. In these circumstances, the Tax Office will need to determine a course of action on the best available evidence. This may result in the issuing of an assessment and the raising of a tax liability that may be in excess of an amount that would have been raised if the taxpayer had not disengaged from the Tax Office and had provided the best evidence available to them.
  • In the absence of taxpayer engagement, debt collection action is generally appropriate to collect the liability.
  • Where taxpayers seek to re-engage with the Tax Office during debt collection action or earlier, the Tax Office's processes should accommodate this re-engagement where taxpayers are seeking to provide better evidence in reducing the liability amount. However, taxpayers may perceive unfair Tax Office treatment when debt collection action is being taken at the same time as taxpayers are seeking to provide this evidence. This perception is likely to be compounded where taxpayers become aware that the Tax Office is considering settlement to resolve the dispute.
  • Delays in determining objections may mean that debt collection action is taken on liabilities that are based on evidence that is not as accurate as evidence that has been provided by taxpayers in the objection.
  • The Tax Office's functional separation of debt collection and tax liability dispute resolution may also result in missed opportunities to successfully re-engage with the taxpayer to resolve the matter efficiently. These missed opportunities may increase costs, by pursuing a debt that may be in excess of that ultimately determined, and promote perceptions of unfair treatment in the circumstances.

Where assessments are issued in the above circumstances, the Tax Office will aim to promote future voluntary compliance behaviours and avoid the potential for perceptions of unfair treatment, by ensuring that it:

  • clearly explains to the taxpayer why it is raising such assessments and the role that the available evidence has played in the decision, and gives an indication of which further evidence would likely affect the taxpayer's liability;
  • ensures that tax officials (including debt collection officers) are alert to signals that the taxpayer is seeking to re-engage on the liability issues by providing better material evidence;
  • where the taxpayer seeks to re-engage on the liability issues by providing better material evidence, explores this re-engagement as an opportunity to efficiently and effectively resolve the dispute; and
  • quickly reassesses the liability on the basis of this further evidence (for example, as a fast-tracked objection, or as the audit area reconsidering the basis for liability and withdrawing the amendment and reissuing another, where appropriate) before further debt collection action is taken.

ATO position — implemented

5.121 The ATO agreed to this action item and has scoped and designed improved work practices and procedures to manage the interaction between the debt function and the active compliance function. This work covers collecting debts raised from active compliance activities.

5.122 To inform the design of practices and procedures between these functions, the ATO conducted a pilot between the SME and Debt business lines. The SME business line arrangements were also expanded to introduce a formal quarterly forum which provided a whole-of-active compliance opportunity to improve the open and active exchange of information, including case-based information and better practices. These practices include a reference to situations where taxpayers seek to re-engage with the ATO after active compliance assessments are raised.

5.123 The Debt business line and the Active Compliance group, which includes the ATO's business lines responsible for the compliance function, worked to agree revised protocols and working principles by developing an overarching Memorandum of Understanding (MOU). The ATO provided an intranet link to Joint Compliance — Debt Instruction — Debt Collection and Dispute Resolution (Compliance — Debt instruction) outlining the improvements sought by the action item:

As tax officers, we need to be mindful that disengaged taxpayers may want to re-engage with us to clarify matters and resolve a dispute after an Active Compliance amended assessment issues.

Where we have raised assessments, including default assessments, where taxpayers have become disengaged during the audit process, we will:

  • clearly explain to the taxpayer why we raised such assessments and the role that the available evidence has played in the decision, and give an indication, where possible, of what further evidence would likely affect the taxpayer's liability
  • ensure that Compliance and Debt officers are alert to signals that the taxpayer is seeking to re-engage with us about their liability by providing better material evidence. Taxpayers may approach Compliance or Debt officers or team leaders.
  • where a taxpayer seeks to re-engage with us about their liability by providing better material evidence, we must explore this re-engagement as an opportunity to efficiently and effectively resolve the taxpayer's dispute, unless we have good reason to believe the approach is not genuine or there is a risk assets will be dissipated, and
  • where possible, aim to quickly reassess their liability on the basis of any further credible evidence they supply.99

5.124 The ATO issued the completed agreed protocols, practices, procedures and processes to its staff, including senior executives, as well as publishing them on its intranet. In addition, the ATO advised that a workshop with representatives from the debt and active compliance functions was held in December 2010. Key outcomes of the workshop were:

  • establishment of the active compliance/Debt network;
  • intelligence and strategic information and tools to be shared across active compliance areas and Debt;
  • debt to be considered at the earliest stages of active compliance activity;
  • auditors to be provided with advice and assistance regarding Debt to assist in 'closing the gap';
  • all active compliance audit finalisation letters to include a 'debt paragraph'; and
  • auditors to actively use existing protocols, principles and procedures to manage the debt following an audit, including putting payment arrangements in place where appropriate and early referral of cases to Debt.

5.125 The ATO has also updated internal staff instructions to require ATO officers to consider the interaction between the debt and active compliance functions, such as the use of 'collection deferral requests, particularly in cases where payment conversations are taking place as part of ongoing compliance action.'100

IGT conclusion — implemented

5.126 The IGT recognises that the ATO has undertaken work consistent with the aims of this action item and therefore considers the ATO has materially implemented this action item. However, the IGT has some residual concerns as to the process for staying debt recovery action where a reconsideration of additional relevant evidence provided by a taxpayer who has re-engaged after the issue of amended assessments arises. The IGT may reconsider this issue in the IGT's Review into the ATO's Approach to Debt Collection.

Action item 22

Where there are significant internal or external signals that the Tax Office's existing precedential view may need to be at least reviewed, the Tax Office will require officers to escalate the matter to the Centres of Expertise or Tax Counsel Network for their decision.

Where there are significant internal or external signals that the Tax Office's existing compliance approach (for example, its approach to calculating an arm's length amount for a particular set of circumstances being reviewed in a number of cases) may need to be at least reviewed, the Tax Office will require officers to escalate the matter to the appropriate senior tax official (for example, the SES Risk owner) for their decision.

If there is a change to that existing precedential view in a given compliance approach, the Tax Office will ensure:

  • it fully informs those known impacted taxpayers at the earliest possible time; and
  • it undertakes quick, complete and transparent rectification action with those known taxpayers where appropriate.

Examples of 'significant internal or external signals' would include:

  • a tribunal or court decision which materially affects the basis for the Tax Office's view of the tax law — such as a decision on trust law which may affect treatment of income under Division 6, or a tribunal decision which indicates the tribunal's preferred approach to findings of fact; and
  • internal reconsideration of a Tax Office approach to a compliance issue that indicates a need to materially alter the approach for a particular factual matrix.

ATO position — implemented

5.127 The ATO agreed to this action item. In response, it incorporated a document into its active compliance work processes, Key Active Compliance requirements relating to: Taxpayer engagement, escalation of issues, on-going communications and early dispute resolution, ('Key Active Compliance requirements'). This document requires ATO staff to comply with Action Item 22 and indicates that compliance will be checked through the IQF process.

5.128 The ATO has confirmed that their escalation processes are in place and mandatory for all staff. The requirement to escalate technical issues and possible changes to the ATO view are also outlined in other ATO documents, such as the ORCLA pages 'Working together' and 'Guide to managing high risk technical issues',101 as well as practice statements such as PSLA 2012/1,102 PSLA 2003/3103 and PSLA 2011/27104 which require tax technical experts from the Tax Counsel Network to be engaged on a risk basis or where a precedential view is to be changed.

5.129 As noted earlier, an ATO organisational restructure took place after the conclusion of the Settlements review which resulted in the relocation of several Centres of Expertise and Tax Counsel Network officers to the active compliance business lines. As a result the engagement of tax technical officers within Law and Practice is now governed by PSLA 2012/1105 which applies the ATO's wider risk management framework to the management of technical issues.

IGT conclusion — partly implemented

5.130 This action item sought to ensure that lower level officers who applied senior technical officers views would quickly alert those technical officers and seek their reconsideration of views where there were signals that those views may not be sustainable. What was sought to be avoided were the costs and long delays in escalating issues to senior technical officers as they may not have been made aware of the need to reconsider their views on issues unless there was significant disputation involved, such as litigation. Substantial delays raise the risk that lower level officers may apply a senior technical officer's view to taxpayers' arrangements which is later altered after reconsideration. The IGT considered it important for the ATO to alert taxpayers of the alteration and take action and rectify the application of the previously held view, in circumstances where that view would not have been applied if the view was reconsidered shortly after significant signals indicated that the view was unsustainable.

5.131 Although the ATO no longer uses the term 'precedential view' as a determinative factor in escalating issues to senior technical officers, it does continue to escalate issues to those officers using a risk based approach. Notwithstanding this change in terminology and the factors relevant to escalation, the IGT considers the principles underlying this recommendation remain relevant.

5.132 The IGT considers that the ATO has partly implemented this action item for the reasons described below.

5.133 The IGT considers that the ATO has implemented the requirement to escalate such matters for senior technical officer review through the various ORCLA pages and practice statements referred to above.

5.134 The abovementioned Key Active Compliance requirements document requires officers to inform taxpayers of changes to ATO views or approaches and undertake appropriate rectification action. This document is accessible from two supporting policies106incorporated within two work procedures107 via a hyperlink under the heading 'Further information'. In one of these procedures, there are more than 30 documents listed as further information. It is unclear whether officers must read and comply with the contents of any further information listed in these procedures. Furthermore, no evidence has been provided to indicate that the IQF process has checked compliance with these requirements.

5.135 Practice Statement PS LA 2011/27108 may address ATO views which change a previous ATO facilitated industry practice. However, the practice statement will not address those circumstances in which views or compliance approaches were previously advanced during compliance activities, but are now changed due to signals (such as those set out in the action item above) that the previous ATO view was unsustainable. As noted in the original IGT review, such circumstances may arise during ATO compliance projects involving audits of multiple taxpayers on the same tax issue. Furthermore, the operation of this practice statement is the subject of IGT follow up review which will be reported separately.

5.136 The IGT is of the view that the links to the Key Active Compliance requirements document do not appear to be incorporated within the procedural requirements specified in the relevant ATO work procedures and that compliance with these requirements is not monitored. Accordingly, the IGT considers that the ATO has not implemented part of this recommendation.

Action item 23

The Tax Office will move towards implementing its good communication practices across all its active compliance cases, including:

  • clearly explaining to taxpayers the role that the evidence has played in the decision, including, in relation to conflicting material evidence, the reasons why certain evidence was preferred; and
  • in circumstances where taxpayers fail to provide material evidence, explaining to taxpayers the impact that not providing the information will have on the compliance decision in their particular case, and following a reasonable opportunity for taxpayers to respond, quickly finalising these cases.

ATO position — implemented

5.137 The ATO agreed to this action item. The ATO advised that it has embedded the IGT's action item into its active compliance work processes ahead of finalising the integrated approach to early dispute resolution. Leaders in active compliance were instructed to conduct activities in accordance with the action item. New practices and procedures were addressed through the Active Compliance Steering Committee. The ATO has also made significant progress in this area through the roll out of 'Active Case Management' training for compliance staff.

5.138 The ATO has advised that the IQF has been designed to assess compliance with its endorsed processes.

IGT conclusion — implemented

5.139 The IGT considers that the ATO has implemented this action item.

Action item 24

Although the Tax Office has processes and policies concerning valuations, there remains room for further improvement in resolving disputes over valuations. The Tax Office will, within one year, examine recent settled cases that involved disputes over valuations, in order to:

  • identify the relevant facts, the events that indicated the dispute was imminent, how the dispute was resolved and why the dispute was ultimately settled;
  • identify early dispute resolution opportunities; and
  • develop and test strategies that will minimise the time and cost to both the taxpayer and the Tax Office in resolving disputes over valuations.

ATO position — implemented

5.140 The ATO agreed to this action item and provided all data from the settlements register concerning settlements over disputed valuations for the 2009-10 year to the Active Compliance Capability Leader and the Disputes Resolution Project team.

5.141 The ATO held consultations between the Active Compliance Capability Leader and the Disputes Resolution Project team with two external experts on valuations who provided advice on early dispute resolution and endorsed the ATO's drive in the audit stage to resolve valuation disputes and on resolving the key matters 'not agreed'.

5.142 The ATO has stated that on the basis of the above advice from an experienced tax-valuation expert, all team leaders managing valuation disputes in active compliance will be required to pursue appropriate agreements on relevant matters with taxpayers before active compliance audit cases are finalised to minimise time and cost to both the taxpayer and ATO.

IGT conclusion — issue subsumed by subsequent IGT review

5.143 The area of valuations and taxpayer concern continued to persist in relation to ATO practices. As a result, the IGT announced a review into valuations. Accordingly, the scope of this recommendation has been subsumed by the IGT's Review into the ATO's Administration of Valuation Matters.


68 Australian Taxation Office, internal document, Updated Integrity Checklist attached to Office Minute dated 9 August 2010 from Acting AC, LIB to NPMs regarding the Settlements Improvement Project.

69 ATO, 'Quality Improvement and Assurance — Biannual Report', internal ATO document, 12 May 2011.

70 ATO, 'Guide for Determining Settlement Parameters for Compliance Staff', internal ATO document, 4 December 2013.

71 ATO, Referral of Interpretative Issues to Centres of Expertise for the Creation of the Precedential ATO View, and Early Engagement of Internal Technical Specialists in Active Compliance Cases, PS LA 2004/4, 17 October 2007, withdrawn 18 May 2012.

72 ATO, Management of High Risk Technical Issues and Engagement of Officers in the Tax Counsel Network, PS LA 2012/1, 10 April 2012.

73 ATO, Settlements, PS LA 2007/5, 21 February 2007.

74 ATO, Guidelines for settlement of widely-based tax disputes, PS LA 2007/6, 21 February 2007.

75 Online Resource Centre for Law Administration

76 ATO, 'Settlement Process Map (v5.4)', internal ATO document.

77 ATO, 'Independent Review of Audit Position', above n 3.

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

79 ATO, Facilitation Process (March 2014).

80 ibid. For further details about the ATO's in-house facilitation pilot refer to recommendation 3.6 in IGT, 'Alternative Dispute Resolution Review' above n 4.

81 IGT, 'Follow up Review of the Review into Delayed or Changed Australian Taxation Office Views on Significant Issues', (unpublished at time of drafting).

82 The National Alternative Dispute Resolution Advisory Council was an independent non-statutory body established in October 1995 that provided expert policy advice to the Attorney-General on the development of alternative dispute resolution and promoted its use until its conclusion in late 2013.

83 The DMP was updated in January 2014.

84 Online Resource Centre for Law Administration.

85 ATO, 'Risk Owner Expectations', internal ATO document, September 2013.

86 ATO, 'Risk Treatment Plan (template)', internal ATO document, February 2014.

87 IGT, Review into Aspects of the ATO's use of Compliance Risk Assessment Tools (2013) app 12.

88 ATO, 'Referral of Interpretative Issues to Centres of Expertise for the Creation of the Precedential ATO View, and Early Engagement of Internal Technical Specialists in Active Compliance Cases', PS LA 2004/4, 17 October 2007, withdrawn 18 May 2012.

89 ATO, Management of High Risk Technical Issues and Engagement of Officers in the Tax Counsel Network, PS LA 2012/1, 10 April 2012.

90 ATO, 'Risk Treatment Plan (template)', above n 86.

91 See pages 31, 106, 93 and 58 of the 2009-10, 2010-11, 2011-12 and 2012-13 Annual Reports, respectively. These reports are available from ATO Website.

92 ATO, Your Case Matters 2012 (2nd ed, 2012), p 9.

93 ATO, 'Your Case Matters 2013 (3rd ed, 2013), p 8.

94 ibid.

95 ATO, communication to the IGT, April 2014.

96 Commissioner of Taxation, Annual Report 2009-10 (2010) p 31; Commissioner of Taxation, Annual Report 2010-11 (2011).

97 IGT, 'Penalties Review' above n 13.

98 ATO, Model Settlement Deed (December 2013).

99 ATO, 'Joint Compliance — Debt Instruction — Debt Collection and Dispute', internal ATO document, undated.

100 ATO, 'Overarching Principles: Active Compliance and Debt', internal ATO document, January 2014.

101 ATO, 'Guide to managing high risk technical issues', internal ATO document, undated.

102 ATO, 'Technical Issues Management Practice Statement', above n 89.

103 ATO, Precedential ATO View, Practice Statement PS LA 2003/3, 23 April 2014, para [13].

104 ATO, Matters the Commissioner Considers when Determining whether the Australian Taxation Office (ATO) View of the Law Should only be Applied Prospectively, Practice Statement PS LA 2011/27, 13 January 2014, para [33].

105 ATO, 'Technical Issues Management Practice Statement', above n 89.

106 'Engaging with taxpayers' and 'Settlements'.

107 'Dispute risk procedures' and 'Integrated approach to dispute resolution'.

108 ATO, 'Prospective Application of the Law Practice Statement', above n 104.