1.1 This is a report of the Inspector-General of Taxation's (IGT) follow up review into the Australian Taxation Office's (ATO) implementation of agreed recommendations arising out of the Review into delayed or changed Australian Taxation Office views on significant issues (the so-called 'U-turns' review) which was publicly released by the Minister on 17 March 2010.
Background to the 'U-turns' review
1.2 The 'U-turns' review was commenced on 10 March 2009, following a direction from the then Assistant Treasurer and in response to concerns raised by stakeholders on perceived ATO delayed or changed approaches on significant interpretative matters or past administrative practices.
1.3 The IGT found that, in certain circumstances, taxpayers were justified in their perceptions of changes in ATO views or practices at that time. Moreover, it was found that it was not the case that one binding ATO advice clearly changes another binding advice. The most common instance was disagreement between the ATO and taxpayers in relation to a previous ATO view or practice, or an industry view of which the ATO was aware and seemingly accepted, that was not in conformity with a subsequent ATO view.
1.4 The IGT observed that taxpayers were not as concerned with the perceived change as they were with its retrospective effect. Where the ATO is perceived to change or clarify its existing views with retrospective effect, taxpayers can incur significant unexpected costs. In some quarters, the IGT observed that this caused a substantial erosion of confidence in the ATO as a fair administrator and had driven a reluctance to work with the ATO on significant issues.
1.5 A number of recommendations were made which aimed to strike an appropriate balance between providing protection for taxpayers, where the ATO had facilitated or contributed to taxpayer views or practices inconsistent with subsequent ATO views, and preventing a laissez-faire situation where any position could arguably be justified in an area of uncertainty prior to the ATO releasing a formal view.
1.6 The IGT also found that underlying some of the concerns outlined above was the manner in which the ATO engaged with the taxpaying community while developing its views on technical issues. While there were many positive aspects of the ATO consultation processes, the IGT also identified significant scope for improvement in certain areas, particularly in relation to the use of technical discussion papers which, when properly framed and targeted, provide the ATO with a better understanding of arrangements and issues of concern to the community.
1.7 Accordingly, further recommendations were made to the ATO with the aim of:
- reducing delays in identifying compliance concerns and finalising its position on those concerns;
- improving the tone and manner of technical discussion papers on issues of compliance concern; and
- providing interim technical advice to both compliance/audit officers and taxpayers on issues where a final position may take some time in development.
1.8 Of the five recommendations made in the report, one was made to the previous Government for consideration (Recommendation 1) and four were directed to the ATO. The ATO agreed with all recommendations directed to it.
Conduct of the follow up review
1.9 The IGT considers that it is important to assess the implementation of IGT recommendations to which the ATO has agreed. Historically, such assessments of the effectiveness of the ATO's implementation have been by way of follow up reviews. However, since November 2010, the IGT has worked with the ATO to develop a new process. The implementation of recommendations of all external scrutineer bodies with which the ATO has agreed are considered by the ATO's audit committee which reviews draft implementation plans and assures itself that the plans have been executed effectively. The audit committee is informed by quarterly updates from the relevant ATO business lines and its internal audit group through its reports as to the status of implementation. The first IGT review to be subject to this new oversight process was the Review into the ATO's administration of private binding rulings.1
1.10 As the 'U-turns' review predates the above oversight process, it is necessary for the IGT to undertake this follow up review to examine the effectiveness of the ATO's implementation of the agreed recommendations. This follow up review is conducted pursuant to subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act 2003).
1.11 Throughout the follow up review, particular attention was given to:
- evidence of appropriate and effective implementation of agreed recommendations;
- ATO management policies, procedures, systems and reporting which support the implementation of these recommendations; and
- where relevant, the ATO's communication to taxpayers of the changes brought about by the implementation of the recommendations.
1.12 The IGT commenced the review by providing the ATO with an opportunity to first present materials that supported and evidenced the implementation of the agreed recommendations. The IGT reviewed the relevant materials, liaised with ATO senior officers and engaged with external stakeholders to gain a further understanding of the impacts of ATO improvements.
1.13 During the course of this review, taxpayers, tax practitioners and their representative bodies raised a range of ongoing concerns with tax administration in this area. Fresh concerns were also raised as a result of a court decision which brought into question the effectiveness of some of the implemented recommendations. As a result, this review is not purely a follow up review as it has had to address these concerns.
1.14 To assist with the IGT's consideration of issues, the IGT convened a working group comprising key taxpayers, tax practitioners and senior ATO officials (the Working Group), many of whom had assisted in the 'U-turns' review. The IGT greatly appreciates the generosity of the members of the Working Group in freely giving their time and expertise. Their involvement has significantly enhanced the outcomes of this follow up review.
1.15 The Working Group considered external stakeholders' concerns regarding the ATO's management of potential 'U-turn' issues and canvassed potential solutions in a frank and confidential manner. It should be noted, however, that the views expressed in this report are not necessarily those of individual members of the Working Group. The views were finalised by the IGT after much deliberation and based on input received and discussions with the ATO as well as external stakeholders.
1.16 In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation (Commissioner) was provided with an opportunity to make submissions on any implied or actual criticisms contained in this report.