A2.1 The Second Commissioner's letter in response to the IGT's review is reproduced below.


Australian Government - Australian Taxation Office crest

SECOND COMMISSIONER OF TAXATION

Mr Ali Noroozi
Inspector-General of Taxation
GPO Box 551
Sydney, NSW 2001

29 June 2010

Dear Ali

Thank you for your final report "Follow-up review into the Tax Office's implementation of agreed recommendations included in the six reports prepared by the Inspector-General of Taxation between June 2006 and October 2008".

The ATO and Inspector-General share a common goal of improving the administration of the tax system. The ATO is committed to implementing the agreed recommendations of scrutineers. As noted in your report, the Audit Committee recently endorsed a number of initiatives to improve the monitoring of agreed recommendations.

We are pleased that you found that 38 of the 41 agreed recommendations have either been fully implemented (30) or partly implemented (8) (i.e. that substantial progress has been made and the ATO is actively pursuing completion).

In relation to 3 of the 30 fully implemented recommendations you have also indicated that you may wish to undertake future testing of the application of changes the ATO has put in place (recommendations 5 and 7 of the Review of Tax Office Management of Complex Issues – Case study on Service entities report and recommendation c(ii) of the Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues).

Your report also concludes that 3 agreed recommendations have not been implemented. They are:

  • Recommendation 8 from the Review of Tax Office Management of Complex Issues – Case study on Service entities report,
  • Key recommendation 2 from the Review of Tax Office Management of Complex Issues – Case study on Living Away from Home Allowance, and
  • Agreed Area E from the Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues.

Below are our comments relating to each of those conclusions.

Review of Tax Office Management of Complex Issues – Case study on Service entities

Key Recommendation 8 of this review recommended that all guidance of a significant nature and applying to a substantial segment of the taxpayer population is, to the maximum extent possible, embodied in a form which is legally binding. The ATO agreed with the broad principle underlying the recommendation.

The ATO has issued three practice statements to provide guidance for our staff on the ATO's advice and guidance framework.

We are satisfied that the current advice and guidance framework strikes the right balance between appropriate levels of guidance and appropriate levels of protection for taxpayers. In particular, we use the class, product and public rulings regimes to ensure that guidance which is of a significant nature and which applies to a substantial segment of the taxpayer population is embodied in a form of advice which is legally binding on the ATO. Individual taxpayers can also continue to seek a private binding ruling where they feel the need for specific protection.

We therefore consider this recommendation is implemented.

While we note your observations about the 2009 changes to the TaxPack, we believe it is a good example of the above principles in operation. Those aspects of 2009 TaxPack that were of a significant nature carry the status of a Public Ruling. The remaining sections of TaxPack carry the appropriate levels of protection for what is more general and less significant guidance.

Review of Tax Office Management of Complex Issues – Case study on Living Away from Home Allowance

Recommendation 2 recommends, in the absence of the ATO providing formal advice to Treasury or any legislative change, issuing a new public ruling to replace Miscellaneous Taxation Ruling MT 2030. Your report notes that implementation of this recommendation was subject to the outcome of recommendation 1. Recommendation 1 relates to concluding a view on whether the ATO should formally advise the Treasury that legislative change is required or not. The ATO has worked closely with Treasury in relation to this matter by providing information, considering a Treasury discussion paper and providing research we commissioned concerning industry LAFHA practices. We also provided background briefing to Treasury on areas for consideration by the Australia's Future Tax System Review which included reference to LAFHA as an area of FBT requiring reform. We note that recommendation 9 of the 'Australia's Future Tax System Review' will impact on the issues and that further work in this area now awaits the Government's response to that recommendation.

Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues

Recommendation E of this report concerns making publicly available the ATO's full agenda of significant technical issues under consideration. We agreed to this recommendation and had planned to use developments in our technology capability to implement it by August 2010. During the period since your review the ATO has transitioned all work of this nature onto the Siebel system and reporting functionality is still being developed. The ATO has had to assign resources to higher priority issues to ensure we can continue to effectively manage priority technical issues and public advice products through to resolution during this transitional phase.

There are also a number of other matters that we want to comment on:

Review of Tax Office Management of Complex issues – Case study on research and development syndicates

Key Recommendation 1 was that the ATO review whether settlements with taxpayers who were not fully informed should be unwound and remade. Your commentary concerning this recommendation considers the question of whether an investor was fully informed from the perspective of whether they had been told of the mediation. This was canvassed in the report when making the recommendation that the ATO review particular cases.

The ATO review was directed to the circumstances of each individual taxpayer. This focus is in keeping with the ATO guidelines which concern whether taxpayers know what they are doing when entering a settlement agreement.

The decision not to unwind the settlements in particular cases included a consideration of both their knowledge of the mediation and a wide range of matters including the degree of sophistication of the investors, their knowledge of the concurrent Zoffanies decision and whether they had access to specialist advisors. All taxpayers were considered to be sophisticated and had access to specialist advisers. It was also noted in the review that some cases in this group had in fact been settled on more favourable terms consistent with their specific individual circumstances.

The ATO individually notified the eight taxpayers of our decision not to reopen the settlements in late 2007. The ATO also posted information on its external website in December 2007 concerning the Inspector-General's recommendation, of the review and the ATO's decision.

The ATO considers that it has implemented this recommendation.

Review of the Tax Office's administration of GST audits for large taxpayers

In relation to Key Recommendation 4.4 part (iii) regarding GIC remission decisions for large taxpayer GST audits that are subject to adequate internal quality controls you concluded that the recommendation is not implemented because there remains the possibility that sizeable remissions of GIC could be occurring without appropriate senior scrutiny. The ATO has consistently maintained the view that the quantum of GIC in itself is not a factor taken into consideration for GIC remission purposes. We believe that we already have in place sufficient senior level scrutiny in such circumstances.

Report on improvements to tax administration arising from the Inspector-General's case study reviews of the Tax Office's management of major, complex issues

Recommendation F of this report relates to ensuring the prompt withdrawal of advice, if and when required. The ATO continues to strive to ensure this. While we do not agree with all of the Inspector-General's observations about the two examples cited, we acknowledge that we do not always manage this as well as we would like. Your report confirms for us that there continues to be room for improvement and provides some useful indicators as to the kinds of improvements on which we might focus.

We appreciate that your report acknowledges the assistance and cooperation of tax officers during the course of the review. Significant effort was applied by a large number of senior Tax officers owing to the breadth and depth of your review. We would also like to take this opportunity to thank you and your team for their professionalism and cooperation during the course of this review.

Thank you for opportunity to comment on your final draft report.

Yours sincerely

[SIGNED]

Jennie Granger
Second Commissioner Law