Introduction

8.1 This review was prompted by concerns raised by large taxpayers on the following key issues:

  • the nature of the GST audit adjustments that have been reported by the ATO as being the results of its GST audit activity on large taxpayers;
  • the ATO's imposition of penalties and interest in large taxpayer GST audits; and
  • other issues concerning GST audits, including the ATO's approach to margin scheme valuation cases and to cases involving classification issues, the length of time of GST audits, ATO communication processes during GST audits and the training of GST auditors.

8.2 The first area reviewed was the nature of GST audit adjustments that had been reported by the ATO as being the result of its GST audit activity on large taxpayers. Sampling undertaken by the IGT showed that only 32 per cent of the dollar value of GST audit adjustments being reported for large taxpayers involved a positive net revenue gain. It also found that 42 per cent of the dollar value of all reported GST audit adjustments for large taxpayers arose as a result of unprompted voluntary disclosure. Neither of these results had been readily apparent from the GST audit results reported by the ATO.

8.3 The ATO's reports were therefore failing to provide a clear indication of the real contribution to revenue obtained through GST audit results. This situation appeared to have been compounded by the ATO's use of liabilities raised as a basis for reporting performance, unadjusted by the difference between liabilities and actual collections. One result of the ATO's failure to adequately identify the source and overall revenue outcomes of its GST adjustments was that it had not matched its identification of risks for large cases and the allocation of resources towards its compliance work with true outcomes from its compliance activities.

8.4 The second key concern examined during the review involved the ATO's imposition of penalties and interest in large taxpayer GST audits. In respect of penalties, the IGT review found that, although the overall level of penalties being charged to large taxpayers as a result of GST audits was low, there were a number of systemic issues adversely affecting the imposition of these penalties. For example, a number of cases were identified by the IGT where penalties were imposed even though the taxpayer had followed credible legal advice that the position they were adopting was correct. The review also found that the ATO's internal and external reports on penalties were limited in nature.

8.5 In respect of interest, the review found that the ATO was imposing high amounts of interest on taxpayers in cases where no GST revenue had in fact been lost. Furthermore, the review found that the ATO did not prepare reports on the actual general interest charge (GIC) imposed, remitted or ultimately collected in GST audit cases.

8.6 Timeframes for the finalisation of some GST audit cases was also found to be excessive. In some cases, this had been contributed to by a lack of adequate governance by the ATO of its planning and management of audit activities. Technical decisions were also found to be taking too long and communication with taxpayers regarding the commencement and finalisation of audits had not occurred in a number of cases.

8.7 In relation to margin scheme cases, the IGT identified examples where the ATO failed to provide taxpayers with both the reasons why their valuation was not accepted and also the alternative valuation amount obtained from the Australian Valuation Office (AVO).

8.8 Other areas identified as requiring improvement included:

  • ATO practices which change the GST classification of a product;
  • training of GST auditors;
  • ensuring that taxpayers and/or their advisers have access to the ATO decision maker for their case; and
  • the application of materiality guidelines in cases where Customs conducts GST audits on imported items.

8.9 The ATO agreed with 12 of the IGT's 14 recommendations included in the IGT's final report.1 The ATO, however, did not agree with the recommendation that it should administer the GIC so that full remission becomes the norm rather than the exception in cases of one-off revenue-neutral transactions and that any undesirable behaviour on the part of taxpayers in failing to account for GST on such transactions should be addressed via the penalty regime. The ATO considered that this course was not open to it under the law and therefore the IGT made a recommendation to the government that it should consult with the community on the need for legislative change.

8.10 The other recommendation not agreed to was for the ATO to review all GST audit cases for large taxpayers which had arisen from an unprompted voluntary disclosure where GIC was charged at the full rate, rather than at the lesser rate which appeared to represent ATO policy. The IGT made a number of subsidiary recommendations to address communication and other issues associated with GST audits and all were agreed to by the ATO.

8.11 The status of the recommendations and subsidiary recommendations which the ATO agreed to implement, in whole or in part, are set out below.

Key Recommendation 3.1

The Tax Office should ensure that there is greater transparency in the presentation of its GST audit results to the community by:

  • identifying those GST audit adjustments which have arisen from unprompted voluntary disclosures and those that have not;
  • identifying how much of reported GST audit adjustments which have not arisen from unprompted voluntary disclosures involve a net contribution to the revenue and how much of these adjustments involve revenue-neutral or other kinds of adjustments which do not; and
  • identifying the quantum of credit amendments made by taxpayers to prior year GST returns which the Tax Office has not included as GST audit adjustments.

ATO position

Implemented

ATO response

8.12 The Tax Office has implemented a range of procedures and enhanced its corporate reporting capabilities to improve its reporting of audit results, communication of audit findings and technical decisions.

8.13 In relation to dot point one, identifying those adjustments that have arisen from unprompted voluntary disclosures and those that have not, we are able to identify the case type against which adjustments are recorded. Any adjustment that is recorded against a voluntary disclosure case product is an unprompted voluntary disclosure. Any other adjustments, included prompted voluntary disclosures, are recorded against the case type that prompted them. An extract from the GST Report Against Plan (RAP) has been provided showing reporting of voluntary disclosures within the two categories: pre and post notification of audit commencement.

8.14 In identifying the revenue contribution made by audit adjustments and VDs, a report 'GST LAC Sticky, Wash, Timing Extract' provides a break up of audit adjustments and voluntary disclosures into the categories Sticky, Wash and Timing. This then enables identification of the amount of adjustments that contribute to the net revenue and the amount that is revenue neutral. This is also reported on within the RAP and has been provided.

8.15 Regarding dot point 3, we have worked with the GST Reporting and Data Services Team to produce a report which calculates the amount of credit adjustments made in or around the time the actual audit adjustment is made and the audit case is closed. We believe that this report provides a figure of the amount of 'related' credit amendments. We have tested the report for the quarter period 1 October 2008 to 31 December 2008 and believe the results provide an accurate picture of related credit amendments. Although we have produced and provided a report for the 2008-2009 period that specifically satisfies the requirements of the third dot point of this recommendation we have been, at this stage, unable to publish this report as the data is un-assured data. Following more recent discussions with the IGoT we have undertaken to continue to work on trying to get this data assured so that reporting of such credit amounts can be included in future GST reports.

IGT Conclusion — Partly Implemented

8.16 As indicated in the above response, the ATO has worked to improve its reporting capabilities for GST audit results. However, this recommendation was made for the ATO to ensure the transparency of GST audit results by publicly identifying, preferably in its annual report, all the items listed. During the course of this review, the ATO advised the IGT that it is investigating how this can be achieved. The recommendation therefore remains partly implemented.

Key Recommendation 3.2

The Tax Office should ensure that, for risk management purposes, it fully understands the nature of the GST audit results it is achieving for large taxpayer GST audits with a view to ensuring that the resources it allocates to these audits are being appropriately balanced against the risk management outcomes of these audits.

ATO position

Implemented

ATO response

8.17 The Tax Office has implemented the recommendation and evidence was provided to Internal Audit during the 31 March 2009 quarter status report cycle.

8.18 The GST Risk Management Sub Committee selects, approves and prioritises risks and the appropriate compliance treatment strategy. The GST Executive is satisfied that it focuses on appropriate risks and we have received feedback from Top 4 Advisers concurring that the integrity of business systems is one of the significant risks to GST compliance.

8.19 From July 2008 to March 2009, GST reviewed case selection methodologies and previous audit adjustments in the large and small/medium markets for our key registered GST risks.

8.20 Previous audit adjustments from the 2006-07 and 2007-08 financial years were reviewed in February 2009 for four key GST risks:

  • Integrity of Business Systems;
  • Financial Supplies — Meaning of Creditable Purpose;
  • Financial Supplies — Apportionment risks; and
  • International and Cross Border.

8.21 The outcome of the review was the identification of key risk attributes for each risk and how these attributes manifest across markets and industries.

8.22 A review of case selection methodologies and audit adjustments for key risks will be undertaken on a quarterly basis to inform current risk management activities.

8.23 The historical audit analysis, in addition to current intelligence and business knowledge ensures:

  • improved understanding of the risk (risk identification and assessment);
  • more targeted mitigation strategies (risk treatment); and
  • GST can appropriately allocate resources to areas of high risk.

8.24 In addition, GST is enhancing its compliance approach by introducing a more comprehensive case refinement activity and risk reviews prior to initiating audit activity in the large market:

8.25 The new approach is more strategic than previous years, is less obtrusive for clients and assists in appropriate targeting of audit activity.

8.26 The project outcomes and changes to our approach to active compliance in the large market have been discussed with the Corporate Taxpayers' Association as well as with stakeholders during our visits to Top 4 advisers in 2009. Initial feedback has welcomed the new approach.

IGT Conclusion — Implemented

8.27 This recommendation followed analysis undertaken in IGT's 2008 report2 which revealed the ATO's failure to fully analyse how its actual GST audit results negatively affects the processes it uses to determine which risks to address through future audit activity. It was also noted in the 2008 report that this finding had confirmed the results of other reviews3 which found that the ATO's overall risk assessment processes for GST were under-developed.

8.28 In response to these reviews, the ATO examined how the GST business line could maximise outcomes and a project team was established to review case selection methodologies and previous audit adjustments for four key risk areas in the large and Small to Medium Enterprise (SM&E) markets. The review was completed in 2009.

8.29 Following the completion of the internal review, a refined planning tool was introduced to enable senior management to better assess the results of its audit work and to use this understanding in determining how best to allocate resources against risk. The IGT has conducted a high-level review of the operation of this system which is the final step in an extended planning process for the allocation of resources against risk. The ATO's GST Risk Management Sub-Committee has responsibility for the completion of this process with final approval by the GST Executive.

8.30 Given the scope of this follow up review and the extended timeframes involved with the above planning process, the IGT has been unable to test the effectiveness of the new system. However, based on the above mentioned high-level review, the IGT considers that the ATO is taking appropriate action towards continual improvement in line with the recommendation. The IGT considers that the recommendation is implemented.

Key Recommendation 3.3

The Tax Office should provide the whole community with a consolidated statement or guide on how they can make voluntary disclosures and how they will be treated in terms of tax, penalties and GIC when they do so.

ATO position

Implemented

ATO response

8.31 In order to provide certainty to the whole community across all taxes, a fact sheet on making voluntary disclosure and what a taxpayer can expect when they make a voluntary disclosure has been finalised and published on the Tax Office website. The fact sheet provides taxpayers with information on who to contact, and how GIC and penalties apply to voluntary disclosures.

8.32 Prior to finalisation, the fact sheet was sent for consultation to the Active Compliance Working Group (includes representatives of Tax Institute of Australia, Corporate Taxpayers' Association, Accounting Institutes and some practitioners).

8.33 In addition to the fact sheet, Client Relationship Managers have been allocated to large market taxpayers. These Client Relationship Managers assist clients to meet their tax obligations, and facilitate voluntary disclosures by alerting clients to new risks, new Tax Office views and/or changes in legislation that may affect their business. They also assist taxpayers through the voluntary disclosure process. Systems reference data to measure the effectiveness of our Client Relationship Manager strategy has been established for the 2009-10 year.

IGT Conclusion — Implemented

8.34 In November 2009, the ATO released the guide Correcting your tax return or activity statement which provides taxpayers with detail on the manner in which a voluntary disclosure can be made, the type of information to be provided by the taxpayer and the resultant effect on tax, penalties and interest charges. The recommendation is therefore implemented.

Key Recommendation 4.1

The Tax Office should enhance its processes for the proper application of penalties in GST large taxpayer audits by:

  • issuing GST–specific guidance for its staff on the application of penalties which arise as a result of a GST audit;
  • ensuring that this guidance covers what kinds of disclosures will give rise to a reduction in penalties, when a disclosure will be considered to have been voluntary and when any voluntary disclosure will be considered to have been made before or after the start of an audit;
  • continuing to conduct periodic reviews of the extent to which penalties in large taxpayer GST audits are being applied appropriately; and
  • ensuring that, where a penalty is reduced after the issue of an audit report as a result of either an internal or external review process, feedback on the reasons for the reduction is provided to all Tax Office staff who were involved in the initial setting of the penalty.

ATO position

Implemented

ATO response

8.35 This recommendation was implemented when the final action item (a guiding principles document developed for GST audit staff) was published on the Tax Office intranet.

8.36 The Tax Office developed several strategies to implement the recommendation, including a new tax ruling, guidelines and training packages for GST auditors and the creation of a specialist penalty and interest area within GST.

8.37 The previous penalty ruling TR 94/4 has been withdrawn and specific guidance for the application of penalties is now contained in Miscellaneous Tax Ruling MT 2008/1. Guidance for staff on the remission of General Interest Charge (GIC) on 'revenue neutral' corrections is contained in Practice Statement Law Administration PSLA 2008/9 and this guidance has been supplemented by an update to the penalty and GIC letter templates to assist decision making.

8.38 As laws change, the Tax Office will update rulings and practice statements and work with externals and staff to ensure the changes are understood. For example, following Royal Assent of the new 'Safe Harbour' penalty provisions the Tax Office will review and update PS LA 2006/2 (Administration of shortfall penalty for false or misleading statements). This will involve workshops with external representatives and the Tax Office. It is expected that further guidance on when tax officers should remit penalties will be an outcome from the workshops.

8.39 To improve the application of penalties and GIC, a Penalty & Interest Practice team and a network of penalty and interest specialists has been established within GST. These officers conduct skilling workshops on penalty imposition and GIC remissions and provide timely advice and feedback to auditors on any errors identified.

8.40 GST active compliance staff undertook penalty workshops in 2007, 2008 and March 2009.

8.41 Audit decisions, including penalty decisions, continue to be subject to internal quality control and review in the form of:

  • a six monthly review of application of penalties in the large market;
  • bi-annual technical quality reviews where large active compliance audits are included in sample of cases; and
  • implementation of Integrated Quality Framework (IQF) from April 2009 which has assisted in standardising quality approaches, particularly in regard to continuous improvement of case assessment and reporting.4

8.42 Since the establishment of the Penalties and Interest Practice we have seen a steady improvement in the application of penalties by GST auditors:

  • There has been a 50 per cent reduction in objections against penalty impositions since the workshops were conducted in 2007.
  • The number of penalty decisions overturned on review has reduced by 42 per cent since the quarter ended 30 June 2007 and the number of penalty only litigation cases has also reduced by more than 50 per cent since the workshops.
  • The number of penalty objections overturned on review has reduced by 61 per cent since the quarter ended 30 March 2008.
  • The number of penalty only litigation cases has reduced by a further 18 per cent since 30 June 2008.

8.43 To ensure GST auditors are made aware of any changes that are made to their decision regarding the application of penalties, they receive feedback on objection and appeal decisions. When a GST review officer is allocated a case it is mandatory for the compliance officer to be advised. The proposed objection decision is sent to the compliance officer and any feedback from the compliance officer is considered by the review officer. If a decision is overturned in part or in full, the reasons for that decision are given to the compliance officer and their manager. This feedback loop also applies to litigation cases. Procedures are in place where at litigation the compliance officer is advised when the litigation case is received and also when the litigation case is finalised.

IGT Conclusion

Part i) — Implemented

8.44 In response to the IGT's recommendation, the ATO has provided its staff with an appropriate GST-specific guidance document on the application of penalties arising from GST audits. Importantly, the document separately deals with the remission of penalties in respect of statements made during the three separate periods 1 July 2000 to 31 July 2001, 1 August 2001 to 31 March 2004 and post 1 April 2004.

8.45 The guidance is available to staff via the ATO internal website and provides linkages to other supporting materials.

Part ii) — Implemented

8.46 The ATO has provided staff with a guidance document titled Guiding principles to Voluntary Disclosures that summarises the core principles found in the ATO's miscellaneous tax ruling on shortfall penalties and voluntary disclosures (MT 2008/35). A review of these documents, together with other support material available on the ATO's internal website, revealed an appropriate level of guidance in accordance with this part of the IGT's recommendation.

Part iii) — Implemented

8.47 This part of the recommendation was made so that the ATO would continue the work it had completed during the 2006/07 year involving an internal review of the application of penalty policy in large GST audit cases. The focus of the 2006/07 review had principally been on whether internal processes for levying penalties had been correctly carried out.

8.48 During the course of this follow up review, the IGT requested the ATO to indicate how it undertakes a periodic review in line with the recommendation. In response the ATO provided a report, prepared every 6 months for the GST Executive setting out actions taken to ensure the continuous improvement of penalty and GIC decisions for GST audits for large taxpayers. This document is the product of the monthly quality improvement and assurance reports prepared following a sample test of cases using the ATO's Integrated Quality Framework (IQF) system.6

Part iv) — Implemented

8.49 In response to the IGT's original report in 2008, the ATO has introduced new processes and procedures to enhance the provision of feedback to auditors where a penalty is reduced.

Feedback regarding penalty reduction following an internal review process

8.50 In February 2009, an internal practice note7 was introduced to formalise the responsibilities of staff regarding the provision of feedback following an internal review process (such as an objection). These responsibilities have also now been incorporated into a revised staff procedural manual.

8.51 To facilitate the provision of feedback a new procedure has been introduced whereby a case summary template containing the reasons for a decision, including where penalty is reduced, together with other feedback. The template is provided to the relevant audit officer and his or her manager who then has 48 hours to raise any concerns. Any disputes that arise can be escalated.

8.52 Once a finalised objection decision is reached a further case summary template is completed and sent to the auditor containing any further feedback. A checklist listing steps in the above processes is completed by the review officer and reviewed by a team leader.

8.53 The IGT reviewed files evidencing the above processes and procedures in operation.

Feedback regarding penalty reduction following an external review process

8.54 A somewhat different process is undertaken where an external review has occurred, such as through litigation. The initial template referred to the audit officer, and his or her manager, contains only limited details of the case including the amount of tax disputed and the basis of the claim. This is completed and provided by the review officer upon allocation of a case.

8.55 The next step is for the audit officer to be invited to attend an 'Introduction' strategic internal litigation committee (SILC) meeting8 where relevant feedback is provided. However, it is noted that the procedural manual only specifies that the original decision maker (that is, the audit officer) should be invited. The manual then states that participation of the original decision maker at future SILC meetings 'can be considered' on a case-by-case basis. This indicates that there is scope for an auditor not to receive feedback through the 'Decision SILC' which occurs within 24 hours of a decision being handed down by a Court or Tribunal.

8.56 Upon completion of a case, be it through the Court or Tribunal handing down its decision or because of the withdrawal of a case, a second template is referred to the audit officer and his or her manager. This template is essentially the same as the second template used following an internal review process, but includes the result of the Court or Tribunal case. A checklist is completed by the review officer evidencing completion and referral of the template to the relevant auditor.

8.57 The IGT reviewed files evidencing the above processes and procedures in operation.

Key Recommendation 4.2

Not Agreed to by the Tax Office (refer to Appendix 3)

Key Recommendation 4.2A

The Inspector-General recommends that the Government consults with the community on the need for legislative changes which have the effect of requiring or allowing the Tax Office to:

  • adopt a default position of fully remitting the general interest charge in GST audit cases which result in adjustments that involve no net loss to the revenue such as wash transactions, cases involving documentation issues and cases where GST has been paid by the wrong entity; and
  • where warranted, address any undesirable behaviour on the part of the relevant taxpayer in relation to failing to account for GST on such transactions through a form of penalty.

ATO position

This recommendation is for Government.

IGT Conclusion

8.58 This recommendation was made to Government in the IGT's 2008 report.

Key Recommendation 4.3

Not Agreed to by the Tax Office (refer to Appendix 3)

Key Recommendation 4.4

The Inspector-General recommends that the Tax Office enhance its processes for ensuring that GIC imposition and/or remission decisions in large taxpayer GST audits are being made appropriately and consistently by:

  • issuing detailed GST–specific guidance for its staff on GIC remissions which arise as a result of a GST audit;
  • ensuring that large taxpayer GST auditors are appropriately trained on the Tax Office's guidelines for GIC imposition and remission; and
  • ensuring that GIC remission decisions for large taxpayer GST audits are subject to adequate internal quality controls.

ATO position

Implemented

ATO response

8.59 This recommendation was fully implemented with the completion of GIC workshops for GST auditors on 16 July 2009.

8.60 GIC matters are closely aligned with penalty matters and as with the application of penalties in GST, the Tax Office embarked on several complementing strategies to implement the recommendations. These included a new ruling, practice statements, guidelines, training packages for auditors, a GIC calculator and the creation of a specialist penalty and interest area within GST.

8.61 As previously mentioned the Penalty & Interest Practice team and a network of penalty and interest specialists were established to provide advice to auditors on penalty and GIC matters. Further guidance to staff is facilitated by:

  • Compulsory approvals by the Penalty and Interest Network of certain penalties and interest decisions. All interest decisions must be approved by a Penalty and Interest Network representative. Where the audit has exceeded its expected completion date and a decision is made not to remit on the basis the taxpayer contributed to that delay, this decision must be authorised by a Senior Executive Officer.
  • Practice Statement Law Administration PSLA 2006/8 provides guidance to Tax Officers by outlining the circumstances the Commissioner considers it appropriate to partially or fully remit interest accrued during shortfall periods.
  • Internal guidance products issued for staff also include:
    • Practice Statement Law Administration PSLA 2008/9 was issued 5 May 2008 and provides guidance to Tax Officers by outlining the circumstances the Commissioner considers it appropriate to partially or fully remit the GIC payable in respect of underpaid GST where a GST 'revenue neutral' correction is made;
    • Interest charge remission support tool — designed to guide auditors through a hierarchy of questions in order to determine the appropriate remission decision;
    • 'Questions and Answers' — designed to assist in the administration of PS LA 2006/8;
    • Interest decision 'standard text' to ensure consistency;
    • Periodic articles / instructions via GST Technical Alerts delivered to all GST staff;
  • A GIC calculator, which facilitates the calculation of GIC remission using calendar dates has been trialled within GST and results are currently being reviewed.

8.62 Interest decision making and remission workshops were held for GST officers in 2007, 2008, February/March 2009 and again in June/July 2009 to improve quality and consistency of interest remission decisions.

8.63 Effectiveness of the above mentioned strategies will be reviewed by our Integrated Quality Framework teams.

IGT Conclusion

Part i) — Implemented

8.64 In response to the IGT's recommendation, the ATO has provided its staff with a number of products and support tools. For example, practice statement PS LA 2008/99 which deals with the remission of GIC policy for GST revenue neutral corrections. The ATO also refers to guidance on the remission of shortfall interest charge (SIC) and GIC which is included in practice statement PS LA 2006/810.

8.65 During the course of the follow up review, the IGT discussed the issue raised in the original recommendation — that guidance should be issued in a GST-specific document to better assist officers carrying out GST audits. In reference to the above materials, the ATO indicated that although it was originally agreed that a GST specific document would be produced, this was overtaken by a whole of ATO approach in certain circumstances.11

8.66 However, having reviewed the materials that are now available for ATO staff, the IGT considers that there is adequate guidance for this part of the recommendation.

Part ii) — Implemented

8.67 During June and July 2009, the ATO conducted a series of facilitated workshops focusing on GIC imposition and remission. The workshops were conducted around Australia and around 400 tax officers attended. The course was developed in response to the IGT's recommendation and included an examination and discussion of audit case studies.

8.68 Following a review of the relevant training materials by the IGT, it is considered that this part of the recommendation is implemented.

Part iii) — Not implemented

8.69 As part of its procedure, all GIC remission decisions arising from an audit must be reviewed by the ATO's Penalty and Interest Network (PIN). A review of audit cases by the IGT evidenced this process in operation.

8.70 However, a concern raised in the IGT's original report12 regarding the ATO's processes for reviewing GIC remission decisions for large taxpayer audits remains. In particular, the ATO's processes still do not require either auditors or PIN reviewers to ascertain the actual total amount of GIC initially imposed or the amount involved in any remission. A Senior Executive Service Band 1 (SES1) officer (or above) is required to review cases where the audit adjustment is $1 million or more, however, there is no set procedure to be followed and the matter of considering the actual dollar amount for GIC is at the discretion of the reviewer.

8.71 The ATO confirmed during the course of this review that the amount of GIC posted on a taxpayer's account is calculated automatically following data entry by the ATO Operations staff. There is no formal quality check of the accuracy of the amount of GIC posted.

8.72 Therefore, there remains the possibility that very sizeable remissions of GIC could be occurring without appropriate senior scrutiny and so the recommendation remains not implemented.

Key Recommendation 5.1

The Inspector-General recommends that the Tax Office takes steps to:

  • ensure that taxpayers are supplied with reasons why their valuations do not meet Tax Office requirements as soon as possible during the course of a GST audit involving a margin scheme valuation issue and that these reasons include the alternative valuation amount the Tax Office has obtained from the Australian Valuation Office, whether that amount is set out in a 'critique' or in a full valuation; and
  • ensure that disputes on margin scheme valuations are confined to the difference between what the Tax Office considers to be an acceptable valuation amount and what the taxpayer contends is an acceptable amount.

ATO position

Implemented

ATO response

8.73 This recommendation was implemented on 1 March 2010, when the GST Determination MSV 2009/1, became effective. This determination ensures that any disputes on margin scheme valuations are confined to the difference between what the Tax Office considers to be an acceptable valuation amount and what the taxpayer contends is an acceptable amount.

8.74 Audit Guidelines and advice for Tax Office staff in the margin scheme audit method were updated to ensure auditors engage the Australian Valuation Office to provide a critique in situations where it is considered that the Valuation utilised by the client is non-compliant. The AVO then undertakes the critique and determines whether the taxpayer has provided an approved valuation for the property transaction.

8.75 In cases where the AVO has been engaged to review the taxpayer valuation and it has been determined to be non complying, a copy of the AVO full critique is provided to the taxpayer. The critique will identify areas within the taxpayer's valuation which are not in accordance with professional standards and/or assumptions used by the valuer in determining the value of the property that are doubtful or unsubstantiated. On occasions, there may be sufficient information within the taxpayer valuation for the AVO to be able to provide an alternate valuation range as part of their critique. However this is not requested or required at the initial critique stage. In order to provide an alternate valuation in every instance, full valuations would need to be obtained from the AVO. A full valuation takes more time, is more costly and is not considered appropriate in every instance. A full valuation will be obtained by the Tax Office if any further valuation provided by a taxpayer in response to a formal MSV 2009/1 notification, is found not to be a complying valuation.

8.76 Prior to the introduction of MSV 2009/1 on 1 March 2010, taxpayers were provided with the opportunity to provide an alternative complying valuation and advised of the consequences if they did not. That is, the cost base would be calculated on the consideration paid for the property in accordance with the Tax Office view contained in paragraph 16A of GSTR 2000/21.

8.77 To assist taxpayers, their advisers and valuers to meet their obligations, the Tax Office:

  • has consulted with the Australian Property Institute on the development of an agreed set of guidelines for valuers undertaking valuations for the application of the margin scheme;
  • issued a fact sheet for property sellers titled Valuations for the Margin Scheme which was released as NAT 73397-04.2010 in April 2010;
  • developed a Margin Scheme guide that was released as NAT 15145-02.2010 in February 2010; and
  • published a detailed explanation of what is required for margin scheme valuations (this document is to be linked to the Australian Property Institute website).

8.78 Prior to the implementation of MSV 2009/1 on 1 March 2010, in circumstances where we considered a 1 July 2000 property valuation to be invalid the Commissioner was required to adopt the original cost for the purposes of the margin scheme. It was recognised that this may produce an outcome which was inconsistent with the intent of the margin scheme.

8.79 MSV 2009/1 provides for the resolution of valuation disputes between a taxpayer and the Tax Office. The determination allows the Commissioner to substitute a value for the calculation of the margin scheme and applies retrospectively. The taxpayer will be supplied with a copy of the valuation obtained by the Commissioner. Feedback from the Institute of Chartered Accountants, Australian Valuation Institute, National Tax Liaison Group sub committee and the Property and Development Working Group including Tax Institute of Australia and Property Council of Australia on the draft Margin Scheme Valuation Determination was considered when drafting this determination.

8.80 With the finalisation of the determination, feedback providers were briefed and notification was provided by E Link (a Tax Office initiative for communicating real time updates to tax agents electronically), and to industry associations. This recommendation has been implemented.

IGT Conclusion

Part i) — Implemented

8.81 This recommendation followed the IGT having identified a number of GST audits involving margin scheme valuation issues where the ATO had failed to adequately inform taxpayers of the requirements that such valuations needed to be met in order to be considered acceptable by the ATO. Part of the reason for this was because the ATO practice was to provide only extracts of 'critiques'13 from the AVO.

8.82 In October 2009, the ATO released a new determination14 in relation to the requirements for making valuations for the purposes of applying the margin scheme. The determination commenced on 1 March 2010. The ATO has accordingly revised its guidelines for ATO staff to now notify taxpayers in writing of the reasons for not accepting a taxpayer valuation as a ATO approved valuation and to provide taxpayers with a full copy of an AVO critique (or AVO valuation where obtained). As part of this notification, taxpayers are asked to:

  • address the concerns raised in the critique/valuation report;
  • rectify these areas of concerns;
  • obtain a new valuation for ATO consideration; or
  • use one of the other valuation methods available via the determination.

8.83 If the taxpayer does not produce a ATO approved valuation within eight weeks (or any extended time which the Commissioner may allow) the determination now enables the Commissioner to substitute a valuation.15

8.84 Consultation leading up to the release of the determination was undertaken with industry by the ATO. The determination is a relatively recent development. Accordingly, the IGT has not had the opportunity to review the administration of it in practice. The ATO has advised the IGT that quality assurance of these practices will be undertaken using its IQF quality assurance system.

8.85 A number of residual concerns were raised by stakeholders with the IGT during the course of this follow up review, including whether an appropriate form of valuation will be obtained in all cases by the ATO.

8.86 The IGT also notes that the Government has recently agreed to introduce a package of GST reform measures to both clarify the law surrounding the margin scheme and to simplify compliance. The Government's intention is for these measures to apply from 1 July 2012.16

8.87 The IGT considers that this part of the recommendation is implemented. As noted previously, the IGT will maintain a watching brief over the ATO's administrative practice in this area.

Part ii) — Implemented

8.88 This part of the recommendation was made following the IGT identifying a ATO practice of challenging and invalidating taxpayer valuations using AVO critiques and then using the original purchase price of a property, even from many years earlier, as a basis for adjustment under the margin scheme. This has now been addressed for assessments issuing from 1 March 2010 with a new legislative determination that has been issued.17 The new determination provides the Commissioner with an alternate method to obtain a valuation, in specified circumstances, ensuring that GST is only payable on the value added to the real property after the commencement of, or entry into, the GST system.

8.89 As mentioned in the first part of IGT's analysis for this recommendation, the determination is a relatively recent development and the IGT has not had the opportunity to review the administration of it in practice.

8.90 The IGT considers that this part of the recommendation is implemented. As noted previously, the IGT will maintain a watching brief over the ATO's administrative practice in this area.

Key Recommendation 5.2

Because of competitive winners/losers as a result of different GST classifications in the market place, the Tax Office must review its current approaches to ensure binding GST decisions in relation to new products coming onto the market are made and communicated quickly into the market to ensure that there is improved through-the-chain certainty, better compliance and lower costs.

ATO position

Implemented

ATO response

8.91 This recommendation was implemented on 30 June 2009, when the Food classification database and classification decision tool to help taxpayer to classify food and beverages for GST went live on the Tax Office website.

8.92 To provide further certainty and communicate changes in GST classifications, a Food Classification Working Party with external stakeholders was established in November 2007. The working party is currently meeting biannually. The purpose of the working party is to resolve food and beverage classification issues for GST purposes. Its main agenda items include:

  • lack of clarity regarding interpretation of the law;
  • different opinions in relation to classifications.

8.93 Independent of the working party, the Tax Office developed tools to provide certainty to taxpayers about their food and beverage products as well as the following to assist taxpayers to classify their new food and beverage products:

  • a 'Food classification' database to replace the existing 'Detailed food list' — this is an on-line database accessed via the Tax Office website and updated more efficiently as new products come on the market;
  • an on-line 'Food classification' decision tool which will assist taxpayers classify food and beverage products that do not appear in the 'Detailed food list' or 'Food classification' database; and
  • a 'Food classification' flow chart has been included in the GST food guide.

8.94 Details of the tools will be communicated to the industry forum and a communiqué published on E Link and an article will be published in the Tax Agents' Magazine.

IGT Conclusion — Implemented

8.95 The ATO response refers to the release of a binding Food classification database18 and a non-binding Food classification decision tool19 that were both introduced on to the ATO website in July 2009. The introduction of the database to provide binding decisions for taxpayers regarding food products has been a welcomed development in line with the recommendation. On this basis, the IGT has determined that the recommendation has been implemented. The IGT also notes that legislation has been introduced20 to include indirect tax rulings in the general rulings regime from 1 July 2010.

8.96 The ATO has advised the IGT that the binding status of the above mentioned database will be affirmed with it being officially labelled as a public ruling on the ATO website prior to 30 June 2010.

Key Recommendation 5.3

The Inspector-General recommends that the Tax Office:

  • expeditiously resolves GST large taxpayer audits experiencing significant delays;
  • clarifies in a public statement its position on when a GST audit has started and the circumstances in which this will occur orally or by letter;
  • takes steps to ensure that technical decisions which impact audits are made without delay; and
  • should review, in consultation with taxpayers and their representative associations, the existing benchmark times to complete GST audits and should also work with other countries to develop appropriate approaches to comparing benchmark times to complete a GST/VAT audit.

ATO position

Implemented

ATO response

8.97 The Tax Office has implemented the recommendation.

8.98 The Tax Office is continually addressing the causes of delays to taxpayer audits and related technical decisions and we have put in place specialist areas and processes to improve communication with, and provide greater certainty and clarity for the taxpayer. We are also continuing to examine comparative cycle times and benchmarks with other jurisdictions. These strategies have had a significant positive effect on our management of audits.

8.99 A working party was established to review existing information on cycle times and aged cases to identify principal causes for case delays and aging, determine if strategies underway are sufficient to address causes and make any required recommendations to the LAC exec. Following a review of the information that we had from our own internal sources, it was decided to seek external opinion also. On 13 August 2008 a workshop was held with internal and external stakeholders. The external invitees included Telstra, Visy, Deloittes, EY, KPMG, PWC and Greenwoods & Freehills. This was then followed up with a phone conference on 11 November 2008. The result of this was the paper — Improving GST Large Market Active Compliance.

8.100 GST Case Leadership Team was established to identify the causes of aged audit cases and to work with stakeholders to treat the causes. The Case Leadership Team assists with significant cases one on one as well as undertaking formal case call overs. The main causes of aged cases identified included:

  • poor planning and active case management;
  • delays in gathering Information;
  • poor handovers when there is a change of auditor;
  • delays in obtaining internal advice;
  • poor practices in the use of our case management system.

8.101 Treatment strategies included:

  • active Case Management skilling for all Large Market Audit teams and the publication of a Practice Note on Active Case Management;
  • training on appropriate use of formal information and access powers which has been delivered to GST compliance officers;
  • training on negotiation and influencing skills and communication skills which has been delivered to GST compliance officers;
  • GST Case Leadership intervention in cases where there is a delay in the provision of internal advice;
  • improved procedures and practices for using the case management system; and
  • monthly a review is undertaken of cases that are going to become aged within the next thirty days and then strategies are put in place to, where possible, finalise the case before it becomes aged.

8.102 GST reduced delays in resolving large taxpayer audits by monitoring all 'aged' cases and alerting audit teams to cases which were approaching the end of their cycle time. In addition, a range of strategies have been put in place to ensure large market audit cases are actively managed and the causes of delays are addressed. For example:

  • Every Large Market case that has exceeded cycle time is referred to Case Leadership. The main causes are identified and treatment strategies are developed in conjunction with stakeholders.
  • Significant Large Active Compliance (LAC) cases are called over by GST Case Leadership at least every 6 months. These call overs involve SES officers, the audit team leaders, auditors and internal Tax Office specialists.
  • Monthly reports are prepared for the Large Active Compliance Executive team on audit cases over 100 days past cycle time. Blockers are identified and strategies to move cases forward developed. This high level focus maintains accountability and resolves issues as quickly as possible.

8.103 Procedures are also in place that makes it mandatory for auditors to confirm, in writing, when an audit commences and is finalised. This expectation has also been published on the Tax Office website under the heading 'GST Audits and Reviews — Tax Audit Timeframes'. Checks will be undertaken as part of the Integrated Quality Framework process.

8.104 An escalation process has been put in place to reduce delays on technical decisions which impact on audit decisions.

  • Interpretative Assistance has a service standard of 21 days to provide advice to the compliance officer or if the issue is referred to a Centre of Expertise or Tax Counsel, a turnaround timeframe is negotiated.
  • Case Leadership monitors these escalations on a monthly basis and follows up on cases that have exceeded the 21 day turnaround time.
  • Interpretative Assistance has also adopted the Active Compliance strategies of reviewing cases monthly and conducting formal call overs.

8.105 The strategies have resulted in a significant decrease in aged cases in the large market:

Chart 8.1: LAC Audit (3.4.3 only) Aged cases by month 2008-2010

Chart 8.1: Aged cases by month 2008-2010

Benchmarks for audit case cycle times have been examined for appropriateness:

8.106 We consulted with taxpayers and advisors via the Corporate Tax Association, meetings with the Top Four advisers and during a workshop conducted on Case Timeframes/Cycle Times. While audit timeframes was an issue for most external participants it was not the major issue for many of them. In some cases they were looking for the Tax Office to extend the cycle time of an audit to take account of the issues facing a business. The main concerns raised by taxpayer representatives and advisers were:

  • lack of understanding of their business;
  • lack of discussion about the reasons for information requests;
  • lack of discussion around audit activity timelines;
  • lack of clarity about the process for clarifying technical issues that arise;
  • consideration of materiality of risk; and
  • lack of communication around commencement, the issues and progress of audits.

8.107 These concerns have been addressed and are discussed under Subsidiary Recommendation 5.3.

8.108 The Tax Office conducted an international benchmarking exercise on audit cycle times with the tax authorities in the United Kingdom, New Zealand and Canada. This has opened dialogue with these jurisdictions and all countries are interested in continuing to share information on cycle times and other performance measures. It is not possible to provide an absolute comparison between the various tax authorities due to the differences in audit approach. However, it was found that the cycle times being met by overseas jurisdictions are very similar to Australia (180-405 days). The conclusion reached is that in most cases cycle times are appropriate and areas for improvement include active case management, communication and negotiation. Our Learning and Development plans have focussed on these areas with large market audit staff attending debriefs and workshops.

8.109 In addition to the above strategies, a restructure of GST business line in July 2009 has established a Compliance Improvement Business Excellence and Relationships section that brings together expertise in Interpretative Assistance, Case Leadership, Penalty and Interest Practice, Quality, Compliance Support and External Relations to enable compliance areas to manage their business more effectively.

IGT Conclusion

Part i) — Implemented

8.110 As indicated in the above chart (chart 8.1) there has been a continued decline in the numbers of aged cases in the large market.

8.111 As indicated in the ATO's above response, procedures and systems are in place to enable the monitoring of the progress of cases. Part of this includes monthly reviews and the re-setting of milestones to move cases that are experiencing delay towards completion.

Part ii) — Implemented

8.112 The ATO has included in paragraphs 60 and 61 of Miscellaneous Taxation Ruling MT 2008/321 an appropriate clarification of its position on when a GST audit has started and the circumstances in which this will occur orally or by letter.

Part iii) — Implemented

8.113 The ATO has introduced a process to address any delay in the finalisation of any technical decision which affects the progress of an audit. This process is managed by ATO executives who monitor the progression of requests by auditors for technical assistance from technical divisions. Any request that exceeds the 21-day corporate timeframe (or a negotiated timeframe where relevant) is then followed through by the ATO executive. To assist ATO executives, reporting is maintained by the ATO's Interpretative Assistance group.

Part iv) — Implemented

8.114 As indicated in the ATO's response, a benchmarking exercise with overseas tax authorities was conducted in 2008 and the conclusion reached was that in most existing cases cycle times are appropriate. The ATO has advised the IGT that a decision has been made not to undertake any further benchmarking exercise at this time.

Subsidiary Recommendation 5.1

The Inspector-General recommends that large taxpayer GST auditors should always confirm the date of commencement and finalisation of an audit in writing. If advice of the commencement or finalisation of an audit is given orally this advice should be confirmed in writing within a reasonable time thereafter.

ATO position

Implemented

ATO response

8.115 The Tax Office has implemented the recommendation and evidence was presented to Internal Audit in the 30 June 2008 quarter status report.

8.116 To provide certainty to taxpayers and to ensure the taxpayer is afforded the opportunity to make a disclosure, clarification on when an audit commences has been published on the Tax Office website and in the update to the Large Market Compliance booklet. This public statement has also been communicated to taxpayers via external forums such as the Corporate Tax Association.

8.117 Procedures are also in place that make it mandatory for auditors to confirm in writing when an audit commences and is finalised. Assurance checks to confirm the process is being followed are being undertaken as part of the Integrated Quality Framework process which commenced in April 2009.

IGT Conclusion — Implemented

8.118 Procedures are in place requiring auditors to confirm in writing when an audit commences and is finalised. This includes confirmation in writing within seven days where taxpayers initially receive oral notification. The ATO tests cases using its IQF quality assurance system to ensure these practices are followed.

8.119 Sample testing of cases by the IGT demonstrated adherence to this practice.

Subsidiary Recommendation 5.2

The Tax Office should ensure that GST auditors facilitate access by large taxpayers who are subject to a GST audit to the key technical decision makers involved in their case and also ensure that the large taxpayers are made aware of the senior officer they can escalate issues or concerns to.

ATO position

Implemented

ATO response

8.120 The Tax Office has implemented the recommendation and evidence was presented to Internal Audit in the 30 June 2009 quarter status report.

8.121 Taxpayers can escalate issues or concerns to a senior officer. The Audit Management Plan prepared at the commencement of an audit provides details of the senior contact officer. Procedures have been implemented whereby compliance officers also advise taxpayers that they will be provided with access to key technical decision makers as required. To provide assurance these procedures are being followed, a question has been added to the Client Feedback Questionnaire and a specific check will be undertaken as part of Integrated Quality Framework assessments.

8.122 The Client Feedback Questionnaire is generally forwarded to a client after an audit interaction.

8.123 This data will provide a benchmark to measure the success of our strategies to improve compliance collaboration between the Tax Office and taxpayers.

IGT Conclusion — Implemented

8.124 As indicated in the above response, the ATO's Audit Management Plan, which is provided at the initial meeting for taxpayers subject to an audit, includes contact details for both the case officer and a senior contact officer. Sample testing of cases demonstrated adherence to this practice.

8.125 Regarding access to ATO technical decision makers, the above response specifically refers to the Audit Management Plan which provides for details of the senior contact officer to be included (being the person to whom concerns may be escalated about the progression of the audit). However, this is not the ATO's technical decision maker. Sample testing of Audit Management Plans by the IGT demonstrated that details of technical decision makers are not included as such. However, the IGT notes that the accompanying guide to audit management plans states that taxpayers can expect audit officers to:

'… facilitate access to the Tax Office technical decision maker to discuss your views on the technical issues if required.' [emphasis added]

8.126 This guideline indicates that the recommendation is implemented in principle and has outlined the position here to ensure that taxpayers are also aware.

Subsidiary Recommendation 5.3

The Inspector-General recommends that the Tax Office takes steps to:

  • ensure that auditors better understand the businesses they are auditing by providing more training on business process and activity and on how to focus on issues that involve a real net gain to the revenue;
  • ensure that auditors understand that businesses may want to exercise their legal rights to correct their GST liabilities for previous years in cases where they have overpaid and that such claims are not, per se, evidence of an attitude of non-compliance with the GST law; and
  • ensure that GST auditors are in all cases provided with individual feedback on the results of the cases they have audited, in terms of the final outcome of cases after they have gone through the appeal process.

ATO position

Implemented

ATO response

8.127 The Tax Office has implemented the recommendation and evidence was accepted by Internal Audit in the 31 March 2009 quarter status report.

8.128 As with several other key recommendations, the Tax Office embarked on several complementing strategies to implement this sub recommendation. These include training packages, liaison with industry and other external bodies, intelligence gathering and feedback processes for appeal cases.

8.129 The Learning and Development plan governing the training needs of Large Active Compliance auditors has been updated taking into consideration the recommendations in the Review. Some examples of GST's strategies include:

  • Large Active Compliance continues to deliver training on Financial Supplies and Property and Construction issues such as margin scheme.
  • A project to improve GST's Client Relationship Management has provided a more structured approach towards assisting large taxpayers to meet their tax obligations. Teams are given responsibility for particular industries and Client Relationship Managers are required to assist compliance officers in developing and maintaining industry knowledge. Client Relationship Managers provide specific advice about the client's business to audit teams and encourage full and frank communication between the auditors and clients on audit process and progress.
  • Knowledge Centre Gatekeepers are in place to brief compliance officers on industry/commercial practices both prior to and during an audit, as required. The purpose of knowledge centres is to capture industry-based knowledge and experience and to provide audit assistance with technical issues, risk areas, audit techniques and common business practices across different industries and focus areas.

8.130 The ATO continues to collect industry and business knowledge through external forums such as industry meetings, Top Four accounting firm visits, National Tax Liaison Group meetings and other meetings/industry contacts. GST has also formed projects on subjects such as motor vehicle holdbacks, developing significant expertise in this area.

8.131 For example, a Property Taskforce has been established to:

  • understand the property sector across all markets;
  • bring together people experienced in property issues;
  • collaborate and co-design a strategic approach to compliance; and
  • identify and treat risks.

8.132 The intelligence function informs risk managers about behaviours in market segments and threats to revenue, community confidence and other planned objectives. Within GST risk owners, managers and decision makers use this information to assess levels of risk and develop appropriate treatment strategies. GST risk owners are responsible for the development of case treatment pools based on parameters identified through intelligence and risk scoping activities. The intelligence gathered assists auditors to better understand compliance drivers and behaviours and the case selection methodology targets cases on a prioritised basis.

8.133 The Inspector General of Taxation expressed concern that Tax Office auditors may have viewed corrections by businesses of their GST liabilities for previous years where they have overpaid as evidence of an attitude of non-compliance with the GST law. The Tax Office does not consider that all retrospective claims for Input Tax Credits are indicative of non-compliance. If a taxpayer or their adviser proposes a new apportionment methodology for claiming Input Tax Credits, the Tax Office will examine the methodology to determine whether it is fair and reasonable. For example, guidance on what is fair and reasonable for financial supply issues, including detailed examples, is outlined in GSTR 2006/3. We are also working with the Retirement Village Industry to develop principles for fair and reasonable apportionment methodologies.

8.134 In the past, GST Large Active Compliance did not undertake risk reviews and therefore such an examination of an apportionment methodology was undertaken as an audit. We acknowledge that this may have created a perception that retrospective claims were considered evidence of non-compliance. Now, any such examination or review of apportionment methodologies will be undertaken as a risk review.

8.135 Protocols have been developed to ensure feedback on objection and appeal decisions are provided to compliance officers. When a GST review officer is allocated a case it is mandatory for the compliance officer to be advised. The proposed objection decision is also sent to the compliance officer and any feedback from the compliance officer is considered by the review officer. If a decision is overturned in part or in full, the reasons for that decision are given to the compliance officer and their manager.

8.136 Processes have also been put in place to ensure that compliance officers and their team leaders are advised:

  • when an audit case has gone to litigation;
  • the outcome of litigation; and
  • of court outcomes via technical bulletins, adverse decision reports and decision impact statements.

8.137 As noted at recommendation 4.1 internal analysis of closed litigation cases completed between July and November 2009 shows that in 89 per cent of cases the compliance officer had been notified of the outcome of litigation.

8.138 The compliance officer may also be involved in the litigation process, for example, if the litigation team needs some clarification as to the facts presented in the audit. All of these procedures ensure that feedback is provided at a strategic level to all compliance areas and is provided to the compliance officer responsible for the case.

IGT Conclusion

Part i) — Implemented

8.139 Following a request for further details regarding the strategies referred to in the above response, the ATO provided the IGT with a report containing statistics of the amount of training provided to GST Large Active Compliance (LAC) auditors nationally as well as a list of the training courses conducted.

8.140 Secondly, details were also provided that outlined a new structured approach introduced in 2009 to enable the ATO's client relationship managers (CRMs) to better capture, record and then pass on to auditors the intelligence gathered during client engagements. As part of this approach, new procedures have been introduced for CRMs to complete. In addition, the recording of intelligence and interactions has been enhanced through new capability in the ATO's systems.22

8.141 Thirdly, reference was also made to a review and reallocation of the network of GST directors who each have a particular industry specialisation. ATO audit staff refer to these directors for assistance as required.

8.142 These continuing efforts to increase the level of auditor's understanding and knowledge of particular industries is encouraging and therefore IGT considers that the recommendation is implemented. This work could be further enhanced with the ATO arranging structured training conducted by experts in industry or from leading advisers who are in a position to provide ATO auditors with a first hand appreciation of the issues faced by taxpayers.

Part ii) — Implemented

8.143 As indicated in the ATO's response, risk reviews are now undertaken instead of audits where a taxpayer or their adviser proposes a new apportionment methodology as part of a retrospective claim to correct an entitlement to input tax credits (ITCs). This step has been taken in response to the IGT's original report which found that the ATO's reappraisal of apportionment methodologies (following a taxpayer's retrospective ITC claim) had created a perception that the ATO viewed this as evidence of non-compliance.

8.144 It is noted that the ATO's above response acknowledges that its previous approach may have created that perception.

Part iii) — Implemented

8.145 As discussed in recommendation 4.1 (part iv), the ATO has introduced new processes and procedures to enable the provision of more information to GST auditors. This includes providing the original auditor with the result of a Court or Tribunal case. The IGT reviewed files that evidenced these changes in operation.

Subsidiary Recommendation 5.4

The Inspector-General recommends that tolerance or materiality levels are aligned across both Australian Customs Service and Tax Office administration of GST.

ATO position

Partly implemented

ATO response

8.146 There have been some technical and practical issues in aligning materiality/threshold levels across the Australian Customs x Office has been working with Customs and Border Protection and Customs Brokers and Forwarders Council of Australia (CBFCA) on a 'common sense' solution which has ramifications as to the interpretation of section 13-20 of the Goods and Services Tax Act 1999 (relating to GST payable on taxable importations).

8.147 The opportunity to align tolerance and materiality levels across the Australian Customs and Border Protection Service and the Tax Office (beyond that which has already been achieved) is limited by the incompatibility of the Customs & Border Protection Service and GST Systems and mode of inputting data into those systems; that is, the lodgement of an import declaration per each importation on the Customs and Border Protection's Integrated Cargo System as opposed to the aggregation of transactions for a given period that are recorded in a Business Activity Statement and lodged on the Tax Office's system.

8.148 Notwithstanding this, the progression of the underlying issue is now being managed by the GST Interpretative Advice Significant Issues Team in consultation with Customs and Border Protection and Transport Industry representatives. To this end, a 'co-design' meeting involving all stakeholders was held on 19 May 2009, to progress the development of a preferred option for addressing the current problems being experienced by Importers / Customs Agents. The Meeting established a preference for an 'agreed rates' approach to form the basis of a proposed Legislative Determination, and resolved that the Tax Office would provide an opinion as to its appropriateness under the GST Law. This opinion will rely heavily on industry information to be sourced from Transport Industry Representatives.

8.149 The co-design meeting also identified the benefit of aligning the start date of the Legislative Determination with that currently being proposed for measures that will amend the Value of Taxable Importation provisions of the GST Act.

IGT Conclusion — Partly Implemented

8.150 During the course of this review, the IGT sought an update and the ATO advised that discussions continue with Customs with regard to aligning materiality levels. The subsidiary recommendation therefore remains in progress and partly implemented.


1 Review of the Tax Office's administration of GST audits for large taxpayers (publicly released June 2008).

2 Review of the Tax Office's administration of GST audits for large taxpayers — at page 26.

3 See: Deloitte, Final Report: Review of the GST Large Corporate Compliance Program and Appendix prepared for the Australian Taxation Office, 23 March 2005 and also Australian National Audit Office, Administration of Goods and Services Tax Compliance in the Large Market Business Segment — Australian Taxation Office, Audit Report No. 13 2005/06, 18 October 2005.

4 IQF is a real time review of end to end processes for current audits, measuring for example, administrative soundness, transparency, correctness, appropriateness to clients' requirements and circumstances, consistency and timeframes. The aim of the IQF system is to ensure that tax officers are following correct procedures, in addition to ensuring the quality of penalty decisions.

5 MT 2008/3, Shortfall penalties: voluntary disclosures – this updated the ruling that was in place during the conduct of the IGT's 2008 review.

6 IQF is the ATO's principal corporate means of testing and assuring the quality of work including the application of penalties.

7 GST Practice Note 2009-01 Post audit reviews.

8 The SILC process involves a number of strategic litigation meetings held between tax officers involved with the litigation. The first such meeting is the 'Introduction' SILC meeting which is held at the outset of an appeal.

9 PS LA 2008/9, GST 'revenue neutral' corrections.

10 PS LA 2006/8, Remission of shortfall interest charge and general interest charge for shortfall periods.

11 As evident from the ATO's continued use of PS LA 2006/8 which is a document covering both income tax and GST.

12 IGT's 2008 report Review of the Tax Office's administration of GST audits for large taxpayers — at paragraph 4.142.

13 In most cases, the ATO does not obtain a full independent valuation and therefore obtains a critique from the AVO. This provides the ATO with a preliminary view of the client's valuation processes for risk assessment purposes. The critique identifies those areas which the AVO considers that the taxpayer's valuation is inadequate. The IGT recognises that a critique will not always provide an alternative valuation amount.

14 A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1.

15 The Commissioner's ability to now substitute a valuation is referred to in part ii) of this recommendation.

16 Assistant Treasurer Media Release No. 95, 11 May 2010.

17 A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009/1.

18 This is currently referred to as the Detailed food list on the ATO website.

19 This classification decision tool has replaced the 'Food Classification Flow Chart' referred to in the Evidence supporting the ATO position section.

20 Tax Laws Amendment (2010 GST Administration Measures No. 2) Bill 2010 has been passed by the Senate without amendment and now awaits Royal Assent.

21 Titled Shortfall penalties: voluntary disclosures.

22 Including the ATO's Siebel case management system.