Review of Tax Office's management of complex issues - Case study on service entity arrangements

Key Recommendation 1

Before it decides on an approach to any compliance issue, the Tax Office should test how well it has met its obligations, in a self assessment system, to provide adequate and contemporary guidance to taxpayers on the relevant issue. The Tax Office should introduce formal processes and procedures to ensure that it tests itself against this obligation before finalising the approaches that it will adopt to the relevant issue. It should not tolerate any internal culture which ignores the need to provide such adequate and contemporary guidance to taxpayers.

Key Recommendation 4

The Tax Office should acknowledge, in a public statement, that it has changed its view on how to calculate the amount of a service entity fee that will be deductible with effect from the date of issue of TR 2006/2 and its accompanying booklet on 12 April 2006. It should confirm that this change will be applied prospectively from that date and that this prospective application will include a 12 months period of grace for taxpayers to adjust their service entity arrangements.

The Tax Office should, in this public statement, outline the consequences (including those relating to the remission of penalties, interest and prior year tax adjustments) that this change in view has for all taxpayers with service entities, including:

  • taxpayers who are currently subject to prior year audits of service entity arrangements;
  • taxpayers who have entered into prior settlement arrangements with the Tax Office in relation to their service entities; and
  • taxpayers whose service entity arrangements will be subject to audit after 30 April 2007.

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

Key Recommendation 4.2

The Inspector-General recommends:

  • that the Tax Office's existing policy on wash transactions should be altered so that full remission of GIC on a one-off wash transaction error becomes the norm rather than the exception;
  • that the Tax Office should issue a specific policy to reflect that it will generally fully remit GIC in cases where a wrong entity has accounted for the GST; and
  • that the Tax Office addresses any undesirable behaviour on the part of the relevant taxpayer in relation to failing to account for GST on one-off wash transaction errors or other similar transactions which involve no revenue loss through the existing penalty regime rather than the GIC regime.

Key Recommendation 4.3

The Tax Office should review all large taxpayer GST audit adjustment cases which have involved unprompted voluntary disclosures where GIC has been charged at the full rate with a view to re-setting the GIC rate in these cases to the bank bill rate, being the rate which generally represents Tax Office policy.