5.1 This review1 had been prompted by concerns expressed by tax professionals and certain sectors of the community that the ATO had taken too long to come to grips with and satisfactorily resolve the tax issues associated with arrangements involving the payment of living-away-from-home allowances (LAFHAs) to foreign nationals. The review had been announced in October 2005 as one of three case studies culminating in the IGT's 2008 report on improvements to tax administration arising from case study reviews of the ATO's management of major, complex issues.2
5.2 In response to community information relating to the alleged abuse of LAFHAs by a labour hire organisation, the ATO commenced enquiries and investigative work in 1998 to gather information about these arrangements. Following further media reports in 1999 about foreign visitors failing to pay tax on income earned in Australia, ATO auditors prepared a project plan. Between 1999 and 2004 the ATO adopted at least five different strategies, including the mass application of Part IVA, test case litigation, a re-write of Miscellaneous Taxation Ruling MT 2030 and the release of further taxation rulings and determinations. The ATO never pursued a particular strategy to finality because of its inability to conclude and maintain a corporate position on how the law should apply. The ATO's audit project team appropriately escalated technical issues, but these took far too long to be resolved. Ultimately, the ATO sought to work with particular industry groups to develop self-regulatory guidelines.
5.3 Overall, the IGT's review found that the time frames for resolving the technical and compliance issues arising from the LAFHA project were excessive and not reasonable in the circumstances. The IGT concluded that the following factors contributed to the excessive timeframes:
- an inability to conclude in a timely manner a corporate position on how the law should apply;
- prolonged internal differences of opinion on the legal position and compliance strategies, sometimes at very senior levels;
- objective interpretation of the law clouded by attempts to deliver particular enforcement strategies;
- lengthy, delaying diversions to consider the potential application of Part IVA as a 'silver bullet' compliance strategy;
- on again off again test case strategies that were eventually abandoned (at the cost of more timely and objective resolution);
- plans to pursue one size fits all, anti-avoidance enforcement action against a large number of working holiday visa employees based on a view of the law that the ATO subsequently withdrew and on very little casework that examined the individual circumstances of those taxpayers receiving LAFHAs; and
- there was no single senior tax officer that had overall ownership of the technical and compliance issues until late in the dispute.
5.4 Taxpayers involved in the ATO's compliance processes incurred higher than necessary costs as a result of the ATO's protracted and prolonged timeframes. There were also instances where the taxpayers were treated unfairly, not only through the excessive timeframes in resolving the dispute, but also in the ATO's handling of various aspects of the disputes, contrary to the ATO's stated values.
5.5 The IGT made two key recommendations seeking to ensure that the ATO provides greater certainty to taxpayers on key technical issues relating to its administration of the LAFHA provisions. The ATO agreed with both recommendations, however it stated that implementation of recommendation 2 was subject to the outcome of recommendation 1. The status of implementation of the recommendations is set out below.
Key Recommendation 1
The Commissioner of Taxation should conclude a corporate view on whether the Tax Office should formally advise the Treasury, in accordance with Practice Statement CM 2003/14, that legislative change is required or not.
5.6 In response to the IGT recommendations the Tax Office wrote to Treasury on 28 May 2007, advising that in order to have Living Away From Home Allowances (LAFHAs) dealt with appropriately, changes to the LAFHA provisions are required. Treasury responded on 29 August 2007 with a discussion paper. The discussion paper canvassed a number of options for ATO consideration and discussion. The covering minute indicated 'particular interest in obtaining information and risk analysis of industry development that the ATO is able to provide.'
5.7 The discussion paper and options were considered and discussed with Treasury. The outcome was that while the issues were acknowledged, further information and risk analysis was requested.
5.8 Further Tax Office work was undertaken to review the Treasury discussion paper and a range of preferred and workable options were developed — see October 2008 LAFHA work shop talk book. The workshop also explored approaches for progressing the project. These included the undertaking of research to gather information and intelligence in respect of industry LAFHA practices.
5.9 A background briefing for Treasury on FBT issues for the purpose of identifying issues for consideration by the Australia's Future Taxation System3 review included reference to LAFHA as an area of FBT requiring reform.
5.10 Due to competing priorities and limited resources, the research was delayed.
5.11 However, work commenced in July 2009, with the aim of providing a greater understanding of commercial practices and arrangements including the quantum involved and the extent of LAFHA arrangements.
5.12 The research was completed in early 2010 and a copy of the research results was formally provided to the Treasury in May 2010.
5.13 The key findings of the research are:
- The law is unclear and not aligned with the policy intent.
- There is a high degree of confusion in the community as to how the law operates.
- There is a high degree of community concern with the ATO's administration of the law.
- There is a strong community perception of unfairness and an uneven playing field.
- There is deliberate and growing exploitation of the law as it currently stands.
- LAFHA is the cause of a growing cost to revenue demonstrated by the practices of some and the figures currently to hand which we consider are very likely to be understated.
5.14 Recommendation 9 of the Review into Australia's Future Tax System (the Review) is to transfer the incidence of the taxation of fringe benefits from the employer to the employee. This will have a direct impact on the issues identified in our research. However, the Government has not directly responded to this recommendation and has stated that
'In the coming months we will have more to say on a number of other areas considered by the review…'4
5.15 In light of the Government's pending response to the Review it is considered that further work in this area await the Government's response.
IGT Conclusion — Partly Implemented
5.16 The IGT's 2007 report made two recommendations aimed at ensuring that the ATO provides greater guidance and certainty to taxpayers on the key technical issues relating to its administration of the LAFHA provisions.
5.17 Following the release of the IGT's 2007 report, the ATO prepared a minute to Treasury recommending that both parties 'engage' with a view to progressing a full review of the LAFHA provisions. The ATO noted that the provisions were:
'…problematic for the Tax Office, Tax professionals and employers…'5
5.18 However, in terms of the IGT's recommendation, the minute to Treasury did not comply with Practice Statement CM 2003/14.6 For example, the minute did not include a 'comprehensive' assessment of all internal and external impacts affecting the issue. Furthermore, an option to note that the advice is qualified or incomplete due to a lack of preparation time was not taken up by the ATO.7
5.19 In August 2007, the Treasury prepared a paper to facilitate further discussion with the ATO and requested further information, including risk analysis of industry developments.
5.20 In 2008, the ATO canvassed a number of options to progress the project and a background briefing on FBT issues, including LAFHA, was prepared for Treasury to assist with identifying issues for consideration by the Australia's Future Tax System Review.8 However, the ATO indicates that other priorities then took over and the project was delayed until it was recommenced in July 2009.
5.21 This research was completed and approved in April 2010 and a copy of the research results and key findings was formally provided to the Treasury the following month. The ATO minute concluded that the ATO would await the Government's pending response to recommendation 9 of the Australia's Future Tax System Review.
5.22 Further work by the ATO in accordance with IGT's recommendation is therefore dependent on the Government's actions. The IGT's recommendation therefore remains partly implemented. The IGT will continue to monitor the progress of this matter.
Key Recommendation 2
In the absence of the Tax Office providing such formal advice to Treasury or any legislative change, then the Tax Office should issue a new public ruling to replace Miscellaneous Taxation Ruling MT 2030. The new public ruling should provide community-wide guidance and certainty on the Tax Office's interpretation, administration and practical application of the LAFHA provisions, and should include clarification of the key technical issues arising from this review such as:
- usual place of residence;
- meaning of the term 'additional';
- factors the Tax Office would take into consideration in determining what was 'reasonable' for the purposes of a LAFHA including guidance on methods which would be acceptable to the Tax Office; and
- causation between employment and entitlement to receive a LAFHA, in particular, whether there is a requirement for a pre-existing employee/employer relationship for a LAFHA entitlement.
5.23 Since the Tax Office is continuing to pursue recommendation 1, recommendation 2 has not become applicable.
IGT Conclusion — Not Implemented
5.24 As indicated in the above response, recommendation 2 has not yet been considered. The IGT notes that even today MT 2030, which was issued in 1986, continues to represent the ATO's view on LAFHAs despite its numerous identified shortcomings. This remains a source of frustration, not only for taxpayers and their advisers, but also for the tax officers themselves.
1 Review of Tax Office's management of complex issues – Case Study on living-away-from-home allowances (publicly released May 2007).
2 The final report was released in May 2007.
3 The Henry review of the Australian taxation system.
4 Joint Press Release by the Prime Minister and Treasurer of 2 May 2010.
5 ATO Minute to Treasury 28 May 2007 (page 4).
6 PS CM 2003/14 Provision of formal ATO Advice to Treasury.
7 See paragraph 18 of PS CM 2003/14 which provides this option.
8 The Henry review of the Australian tax system.