The July 2005 IGT Review

4.1 Prompted by concerns raised with the Inspector-General from industry and tax practitioners, a review was undertaken into the time taken by the Tax Office to complete audits of businesses. The focus of the review was on the Tax Office's practices and approaches that could lead to excessive audit timeframes and result in undue impacts on businesses. In summary, the Inspector-General sought to determine whether the Tax Office was striking an appropriate balance between minimising the adverse impact on business and the risk to the revenue.

4.2 An examination of sample cases during the review revealed that there were certain projects and isolated cases where the Tax Office took far longer to finalise audits than it should have. These projects and cases typically involved matters of complexity and involved delays in decision-making on technical or strategic issues.

4.3 In addition, the sample cases revealed that the general interest charge (GIC) had not been remitted for periods of Tax Office inactivity in many cases. Supporting this finding, the Inspector-General noted that the Tax Office did not have a system in place requiring auditors to identify these periods of inactivity for the purposes of correctly remitting the GIC upon the finalisation of audits.73

4.4 However, the Inspector-General found that the Tax Office was actively seeking to improve the way it managed its audit programme to minimise audit timeframes. In particular, there was an increased management focus on reducing audit timeframes through the implementation of revised internal reporting and internal structural changes, exploration of refinements to existing audit approaches and consideration of increased usage of forward compliance agreements.

4.5 In July 2005, the Inspector-General's report was publicly released and included a number of recommendations. The Tax Office agreed with these recommendations and referred to a number of measures that were to address the concerns raised in the 2005 report, including:

  • the deployment of two senior Tax Office staff to model expert case management in the most complex cases74;
  • the implementation of a practical approach to auditing substantiation issues in the GST area;
  • the establishment of a new Tax Office case management system.75

Implementation of recommendations

Key Recommendation 1

The Inspector-General recommends that the Tax Office:

  1. continues to expeditiously resolve those audits experiencing significant delays; and
  2. fully implements appropriate governance processes to ensure that, in future, the resolution of technical and strategic issues encountered during audits is expeditiously resolved in a manner that provides all parties with adequate opportunity to understand the relative merits of the other's views.

Tax Office Position

4.6 The Tax Office has a strong active case management process including routine 'call over' processes. The new Siebel CASE management system has clear review points, case cycle times and detailed management reporting. Aged case analysis is showing a reduction in the age of cases with SES76 case leaders appointed in many areas.77

4.7 Implementation of Siebel CASE included enterprise-wide business processes and procedures for all active compliance products to ensure technical issues are identified and appropriately managed. Resolution of technical issues, including appropriate discussions with clients and technical experts, is addressed through these new enterprise-wide arrangements.

4.8 All active compliance staff are now using the one case system. The effectiveness of the arrangements is monitored through the Active Compliance Steering Committee.78

IGT Analysis

Case Management

4.9 Following the release of the Inspector-General's report into audit timeframes in 2005, the Tax Office has introduced a number of initiatives aimed at improving the management of audits so as to reduce audit timeframes. One of the major initiatives is the implementation of Siebel CASE which involves the replacement of the Tax Office's 180 case management systems with a single computerised system. Implementation of Siebel CASE is still in the early stages and this is widely acknowledged by the Tax Office:

Whilst it was originally anticipated that the Change Program and the introduction of Siebel would hopefully also assist in the active management of aged cases, to date this has not been the case. Due to Siebel reporting limitations the introduction of Seibel has actually been a deterrent to the active management of aged cases. This is due to Seibel's inability to provide an accurate aged case report based upon the case allocation date.79

4.10 Notwithstanding the above problems, fieldwork undertaken by the Inspector-General revealed that a number of interim arrangements have been put in place to assist the Tax Office to actively manage cases. Primarily, this centres around the preparation of the annual Compliance Sub-plan Productivity Report which outlines the performance of the Compliance Sub-plan, as well as individual business lines, in achieving compliance cycle times.80 The report is reviewed by the Tax Office's Active Compliance Steering Committee.

4.11 The 2006-07 productivity report indicates that the Compliance Sub-plan completed 89 per cent of its work within the Tax Office's compliance cycle times. This is compared to 90 per cent for the corresponding 2005-06 report and 76 per cent for the 2004-05 report. The result for 2006-07 is slightly lower than the previous financial year largely, according to the Tax Office, because of the need to devote resources to the implementation of Siebel.81

4.12 The Inspector-General notes, however, these headline figures are heavily influenced by large volumes of compliance correspondence action, rather than audits. The following 2006-07 Tax Office cycle time analysis is indicative.

Compliance Sub-plan Cycle Time Analysis 2006-0782
Work category Total number of cases finalised Number of cases finalised within cycle time Percentage of cases finalised within cycle time
Correspondence 777,187 753,772 97%
Field 43,148 26,436 61%
Internal Review 52,717 37,495 71%
Telephony 130,139 71,508 55%
Total 1,003,191 889,211 89%

4.13 Within the context of the original 2005 review, the Inspector-General considers that the 'Field' category of compliance action is the most relevant. As indicated above, the analysis of cycle time performance for Field is only 61 per cent for 2006-07. The Inspector-General notes that the level of performance has not changed over the last three years.83

4.14 The Tax Office has demonstrated significant improvements in audit completion times in respect of large business compliance in both the Large Business & International business line (LB&I) and the GST business line. The Inspector-General notes that improvements were most needed in the large business sector and therefore these gains are important. Nevertheless, overall performance against Tax Office benchmarks appears to be relatively low and static.

4.15 Most Tax Office business lines also have their own case management reporting systems to monitor the progress of cases. However, a review of these systems by the Inspector-General revealed that the level of reporting is patchy and for some business lines quite limited. For example, in providing the Inspector-General with the relevant report for the Tax Office's Micro Enterprises & Individuals (ME&I) business line, the Tax Office stated (in respect of the average cycle times of cases):

… we are unable to provide this data for Siebel cases as…the functionality to report on this is yet to be available.84

4.16 A further example of the paucity of management information available to Tax Office management is that the current systems (including Siebel) do not have the facility to exclude from their statistics any additional processing time arising from a taxpayer's delay in forwarding requested information.85 In terms of accurate corporate reporting, this limitation must be addressed.

4.17 Furthermore, there is a distinct lack of meaningful reporting passed on regularly to the Tax Office's senior management.86 Requests made by the Inspector-General for reports on the trends in the cycle times of audits for Tax Office business lines could not be satisfied. Surprisingly, this form of case management reporting is not undertaken in every compliance business line in the Tax Office. Such gaps in reporting remain a concern to the Inspector-General.

4.18 However, the Tax Office has advised the Inspector-General that it has just released a sophisticated electronic management reporting system (the Executive Information System) that will monitor and report case cycle times. Reporting is provided on a monthly and year-to-date basis in respect of each segment of all business lines as well as for the Compliance Sub-plan itself.

4.19 An additional feature of the Executive Information System (EIS) is its accessibility from the team leader level right through to the Commissioner. EIS provides the user with an ability to drill down to the transactional layer of information, in other words, past management reporting through to source data, allowing the user to perform unstructured analysis. Put simply, this system represents a significant improvement in the regular provision of information regarding cycle times to the Tax Office's senior management, providing it is regularly accessed.

4.20 A review of EIS could not be undertaken by the Inspector-General because of its recent introduction. In addition, the Tax Office advised the Inspector-General that it is still in the process of resolving data entry issues and therefore the information currently available in the EIS is not necessarily accurate.87

Case Leadership and the Call Over Process

4.21 In late 2004 the Tax Office introduced the Case Leadership process to focus on aged cases and to mentor and provide support to team leaders and auditors handling cases containing technical and strategic issues that affect case finalisation. In summary, the Case Leadership process now involves three Deputy Commissioners (as Case Leaders) and a number of 'Special Advisers':88

  • reviewing cases that have exceeded their cycle time;
  • identifying the main causes of delays;
  • resolving strategic, technical and procedural 'blockers';
  • providing high-level technical advice in a timely manner; and
  • providing feedback to appropriate areas and staff to improve Active Compliance capability.

4.22 Fieldwork undertaken by the Inspector-General has also seen Special Advisers assist team leaders by:

  • making specific interventions from an early stage in some of the more complex, sensitive and potentially difficult cases or issues;
  • attending risk review workshops for selected cases to enhance the planning of compliance action;
  • providing guidance and counsel in managing technical issues and the progression of cases; and
  • providing guidance on areas for overall skill development within the Tax Office.

4.23 The Tax Office has also established a small number of Case Leadership positions that intervene primarily in cases from a pool of work identified by a set range of criteria. Currently this work involves significant interventions in a range of High Wealth Individual (HWI) and Small to Medium Enterprise (SME) matters. These Case Leaders also report to the Second Commissioner (Compliance).

4.24 One of the main tools of Case Leadership is the call over review process. On a six-monthly basis, Special Advisers conduct call overs of current casework (audits and risk reviews).89 Call overs look at the overall management of current casework, technical issues and risks and help to identify opportunities to progress the case. The call over process also provides the opportunity for the Special Advisers to commit to providing ongoing assistance to an auditor with a difficult case. Fieldwork undertaken by the Inspector-General's staff revealed that this provision of ongoing assistance was a common practice amongst the larger audits. In fact, the fieldwork revealed that some matters did not require call overs because Special Advisers were attached to the cases.

4.25 On a six-monthly basis, the three Deputy Commissioner Case Leaders provide the Commissioner of Taxation and the Second Commissioners (Compliance) and (Law) with a progress report of Case Leadership together with an analysis of areas in which improvement is required.

4.26 Fieldwork undertaken by Inspector-General's staff revealed that a number of audit team leaders undertake monthly call overs of their team's work. However, this is not a set practice except in LB&I and is varied with some team leaders simply maintaining verbal contact with case officers together with continual monitoring of the progress of cases via the Siebel CASE system.

4.27 A review of sampled statistics and audit cases by the Inspector-General has indicated that the Case Leadership and the call over processes are contributing to a reduction in audit timeframes in the large business sector.90 The review also demonstrated that these processes address technical and strategic blockers that arise during audits. For example, the monthly call over for one sample case led to the deployment of a specialist to work with the audit team through the strategic issue of Tax Office access to taxpayer records. In addition, the majority of audit cases sampled included the holding of workshops with technical or industry specialists to establish the Tax Office's position.

4.28 Notwithstanding significant improvements in audit timeframes in the large business sector, the Inspector-General's sampling of cases revealed that some aged audits in GST and LB&I remain unresolved despite having been through the call over and Case Leadership processes. However, it would of course be unrealistic to expect 100 per cent achievement of benchmark timeframes.

Business Line specific initiatives — Large Business & International

4.29 On 13 October 2005 the then Commissioner of Taxation announced a significant commitment to reduce audit timeframes with the introduction of a revised approach to complete large business91 audits within two years.92 The Tax Office's commitment to this initiative was evident with the Commissioner also announcing a new ground for remission of the general interest charge (GIC) and the shortfall interest charge (SIC):

For audits commencing after 1 July 2005, we will remit interest charges to the base rate for the period the audit extends beyond two years.93

4.30 Following on from this initiative, the Tax Office released on 30 August 2006 the Large business and tax compliance booklet designed to provide large business taxpayers with a point of reference when dealing with the Tax Office. The booklet also incorporates a two-page 'Large business end-to-end audit process plan' mapping out the various steps that its staff follow when undertaking compliance work. This procedural map is linked to Siebel CASE and is designed to ensure that staff cannot proceed through a case until each mandatory step is completed. Of relevance to this recommendation is the step requiring the inclusion of expertise to assist in the resolution of technical or strategic issues (for example, one step involves the holding of a workshop to identify risks and to develop strategies during the initial 'risk review' stage94 of the audit process). This procedural map is still in its early stages of implementation and therefore its application was not relevant for the audit cases reviewed by the Inspector-General.

Early engagement of technical and other specialists

4.31 As discussed further in Key Recommendation 2, the Tax Office is developing additional processes and procedures to facilitate the effective engagement of technical and other specialists early in the audit process. This includes the revision of two existing law administration practice statements — PS LA 2004/4 Referral of issues to Centres of Expertise for the creation of the precedential ATO view, and early engagement of internal technical specialists in active compliance cases and PS LA 2003/10 The Management of 'Priority Technical Issues'.95 Fieldwork undertaken by the Inspector-General revealed that the early engagement of technical input is common practice.

4.32 Of relevance to this key recommendation, the Tax Office has a cross sub-plan PTI working group looking at areas where the Tax Office's timeliness of resolution of PTIs can be improved. For example, the working group is reviewing a proposal from the Inspector-General to introduce a six-month benchmark for the TCN and the CoE to provide advice to business lines that are conducting compliance activities including audits. The proposal also includes the situation where at the outset of identifying an 'advice PTI', it is clear that it will take longer than six months to provide the advice and a business case will need to be made and agreed to by the relevant SES Band 2 officer.

4.33 A further proposal being explored by the Tax Office is for the introduction of an appropriate 'top down' intervention mechanism in the management of major/complex issues (including PTIs) when it becomes apparent that a significant milestone will not be met. It is proposed that where appropriate, the intervention will be escalated to involve the Tax Office's Chief Tax Counsel where relevant. The Tax Office is currently working through strategies to enhance the progress of PTIs including referral to expert external counsel or consultants for advice.

Providing all parties with the opportunity to understand each other's views

Interaction with taxpayers throughout the audit process

4.34 Fieldwork undertaken by the Inspector-General revealed that the Tax Office is proactive in gaining an understanding of the taxpayer's position as well as explaining its own position. Sampled cases demonstrated that this type of activity was undertaken via a number of methods. An example early in the audit process is the holding of an initial meeting with the taxpayer to discuss the audit team's 'audit plan' (that is, the scope of the audit). At this meeting the Tax Office:

  • provides the taxpayer with a copy of the audit plan for discussion;
  • discusses the audit scope, the periods under audit and the expected completion date;
  • discusses the information gathering processes;
  • discusses any Tax Office guidelines relevant to the issues and years to be audited, including procedures in relation to voluntary disclosures;
  • outlines facilities and assistance which the Tax Office may require; and
  • provides the taxpayer with the contact details of a senior officer in case the taxpayer needs to raise any concerns during the audit.96

4.35 Relevant interaction with taxpayers in line with the recommendation was also demonstrated in workshops held with taxpayers during the initial stages of a number of audit cases sampled by the Inspector-General. The purpose of these workshops was to gain an understanding of the operation of each taxpayer's business as well as the commercial environment in which each taxpayer operated. In one of the cases sampled, the audit team even provided a presentation to the taxpayer to ensure that the audit team correctly understood the taxpayer's corporate structure (a critical issue in the audit given the size and nature of the taxpayer's dealings).

Position papers

4.36 Also relevant to the issue of providing all parties with the opportunity to understand the merits of each other's views, the Tax Office has a procedure for large business, SME and GST taxpayers97 whereby it provides the taxpayer with a written statement outlining the Tax Office position before an audit is finalised. These written statements, referred to as position papers, set out:

  • Tax Office's analysis of the available facts;
  • application of the law to the facts; and
  • details of any proposed adjustments or recommendations.

4.37 The purpose of the position paper is to provide taxpayers with an opportunity prior to the finalisation of an audit to submit further facts and legal argument that may be relevant to the formulation of the Tax Office's position (generally twenty-eight days is provided depending on the complexity of the issues involved). Taxpayers are given the option of submitting further detail either by written submission or in person via an interview with the case officer.

4.38 The requirement to provide a position paper is specifically included in a number of Tax Office procedural documents.98 Fieldwork undertaken by the Inspector-General evidenced that the above-mentioned practices relating to position papers are applied. However, the review of sample cases also revealed that in communicating the Tax Office's final decision to the taxpayer (that is post the position paper process), the Tax Office is not always adequately explaining how it has considered the merits of the taxpayer's case in reaching the final decision.

Active Compliance Quality Review and Technical Quality Review

4.39 The Tax Office established the Compliance Assurance Practice (CAP) to conduct Active Compliance Quality Reviews (AQR) every six months of a sample of large business sector audits. Cases are reviewed in respect of a number of different areas including the overall management of the case including timeliness. CAP is responsible for passing on to case officers any relevant feedback following the review process.

4.40 Another form of review is the Technical Quality Review (TQR) procedure which is also undertaken generally every six months for all business lines. Under this process a random sample of audit decisions are reviewed by internal and external tax specialists with respect to (amongst other matters):

  1. the provision of technical advice; and
  2. how this advice assisted in the progression of audits (where relevant).

4.41 The Tax Office's Technical Excellence Practice (TEP)99 has developed a multi-tiered feedback system for TQR results with individual feedback being provided to case officers, team leaders and segment leaders. A TQR bulletin containing recommendations is also sent to all staff within each relevant business line — for example reminders to audit staff to ensure that they access technical input as required.

Implementation Status: Implemented

Part (a) of this recommendation is considered to be substantially implemented because improvements in the numbers of aged cases on hand have been achieved against Tax Office benchmarks100 in the large business sector (being a key area of concern in the Inspector-General's 2005 review).

These improvements are the result of a number of processes put in place by the Tax Office to ensure that issues with the potential to delay audits are resolved. In particular, the introduction of the Case Leadership and call over processes has provided business lines with a definite impetus to regularly address matters with a view to finalisation.

However, the Inspector-General has significant reservations about the adequacy of the Tax Office's current monitoring of cycle times in most business lines as well as the static overall performance levels over the past three years. The above-mentioned interim measures should be recognised, but there remains a significant amount of work to be done. In respect of this, the Tax Office points to the continued implementation of Siebel CASE together with the recent release of the EIS.

In respect of part (b) of the recommendation, the Tax Office has also been proactive in gaining an understanding of taxpayers' positions whilst at the same time explaining its own position. The provision of position papers to taxpayers is a good example of this approach being an important opportunity for taxpayers to understand the Tax Office view and to respond in kind. This progress on part (b) supports an overall implemented status for this recommendation.

Key Recommendation 2

The Inspector-General of Taxation recommends that, before intensive information-gathering begins in an audit, the Tax Office ensures that appropriate technical input is brought to bear to develop the correct focus of the audit.

Tax Office Position

4.42 With the deployment of Siebel CASE, there are now enterprise-wide procedures to ensure that technical issues are identified and reviewed at appropriate points throughout the audit process.

4.43 The system will report on, and alert managers to, periods of inactivity or non-compliance with required audit steps.

4.44 Each case now has a specific system-generated 'risks' and 'issues' component which can be monitored by managers and individual case officers to ensure the intended scope of the audit is maintained.101

IGT Analysis

Early engagement of technical and other specialists

4.45 As outlined in Key Recommendation 1, the Tax Office is currently revising the instructions provided to staff regarding the early engagement of technical specialists in audit planning. This includes the revision of two existing law administration practice statements — PS LA 2004/4 and PS LA 2003/10 (referred to in Key Recommendation 1).

4.46 Also in response to the Inspector-General's 2005 review, the Tax Office has introduced changes to a number of audit procedures to reinforce with its staff the importance of the involvement of specialists in the early stages of the audit process. For example, as discussed in Key Recommendation 1, the Tax Office released in 2006 the Large business and tax compliance booklet which includes the two-page Large business end-to-end audit process plan. One of the steps included in this new plan is for audit officers to:

In selected cases … conduct an internal workshop which may include technical, topic and industry experts …102

4.47 The release of the above products also provided an impetus for the Tax Office to incorporate such changes in other business lines. For example, in the SME business line, a mandatory step has been included in its audit procedures requiring case officers to conduct a risk workshop with their team leader and team technical officer to (amongst other matters) identify technical and strategic issues requiring the assistance of both internal and external specialists.

4.48 Sampling of cases from a number of business lines undertaken by the Inspector-General evidenced that the above practices are followed. For example, in one case, technical specialists assisted the audit team to work through a number of complex provisions relating to tax consolidation. This enabled the audit team to prepare an initial questionnaire for the taxpayer which covered all relevant scenarios regarding the taxpayer's entry into tax consolidation.103

4.49 The above sampling of cases also indicated that workshops are held early in the audit process to work through strategic issues. For example, one case involved a workshop with an internal expert to review how the issuing of a section 255-20 notice104 would affect the progression of an audit.

4.50 As discussed in Key Recommendation 1, the TQR and call over processes monitor work practices and provide appropriate feedback where shortfalls are identified. In relation to this recommendation, the TQR process reviews the appropriate use of technical and other specialist input early in the audit process.

Implementation Status: Implemented

Following the Inspector-General's original 2005 review, the Tax Office has refined its audit procedures to reinforce with its staff the need to consider the use of specialists early in the audit process to ensure that a correct focus is set in place.

Overall, sampling undertaken by the Inspector-General has demonstrated that the Tax Office is proactive in ensuring appropriate technical input is gathered in the early stages of the audit process.

The Tax Office is revising two practice statements (PS LA 2004/4 and PS LA 2003/10) to incorporate instructions to staff regarding the early engagement of technical specialists in audit planning.

Key Recommendation 3

The Inspector-General recommends that the Tax Office fully implements appropriate governance processes to ensure that the general interest charge attributable to significant periods of Tax Office-caused audit delay is remitted.

Tax Office Position

4.51 The practice statement PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods has been published. Implementation, including system changes, communication and skilling requirements for the new practice statement, has been completed.105

IGT Analysis

4.52 In response to the Inspector-General's 2005 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance106, the ATO Executive commissioned the Penalties and Interest Project to ensure that a range of commitments relating to penalties and interest were implemented in a coordinated way. An early deliverable of the project was to recommend preferred organisational arrangements for improving the administration of the penalties and interest regimes. These arrangements were to provide assurance that policies and practices would be consistent across business lines, revenue products and markets.

4.53 After reviewing existing arrangements and identifying opportunities for improvement, a model for the administration of penalties and interest was developed which involved shifting responsibility for developing policy and practice in respect of pre-amendment penalty and interest decisions from the Operations area of the Tax Office to the Compliance area.107 This arose following the Inspector-General's observation108 that the remission of tax shortfall interest did not appear to occur as often as it should when the Tax Office contributed to delays in case finalisation (partly attributable to the fact that Compliance case officers at the time were not responsible for determining remission of tax shortfall interest).109

4.54 In March 2006 the above model was implemented — responsibility for determining the grounds for the remission of tax shortfall interest, as well as any reduction in rate, amount or period, was to be made by the Compliance officer.110 In addition, Compliance officers handling cases that involved particularly complex calculations (such as cases involving larger entities and/or second or subsequent amendments) could obtain support for account reconciliation through a nominated function within Operations.

PS LA 2006/8

4.55 The other key component in terms of this recommendation was the release on 1 August 2006 of PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods which provides direction and assistance to staff in respect of the remission of SIC and GIC for shortfall periods. For example, paragraph 56 of the practice statement directly addresses the above-mentioned problem of Tax Office staff failing to consider the remission of interest despite lengthy delays in the finalising of audits:

Where an audit case is completed beyond the expected audit completion date, the case authorising officer must undertake a full review of the reasons for the delay to determine whether further remission grounds apply.

4.56 Of note, in respect of large corporate audits, PS LA 2006/8 specifically provides that interest will be remitted to the base interest rate for the period that an audit extends beyond two years.111

4.57 On the day of release of the practice statement, the Tax Office issued a media statement which stated:

This is an important step forward in showing the community that we are fair and reasonable when it comes to interest charges.112

4.58 In respect of this, the Inspector-General notes that the Tax Office made no mention that the practice statement was a response to issues raised in his 2005 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities or that taxpayers had been unfairly treated by the Tax Office's previous practices.

Tax Office assisting its staff to correctly apply PS LA 2006/8

4.59 Just prior to the release of PS LA 2006/8 the Tax Office issued to staff a detailed fact sheet outlining the key points and changes included in the practice statement. This was undertaken in line with the Tax Office's communication strategy of ensuring its staff are advised of relevant changes arising from the Report on Aspects of Income Tax Self Assessment113.

4.60 Shortly following the release of PS LA 2006/8, the Tax Office issued to staff a set of guidelines on how to impose and remit SIC/GIC. Directly relevant to this recommendation, the Tax Office included in these guidelines the following instruction:

Operations will remit the interest charge accrued by any ATO processing delay.114

4.61 To assist its staff with navigating through and applying PS LA 2006/8, the Tax Office developed and introduced a decision support tool. Some key points about this support tool include:

  • it is a web-based tool designed to guide staff through the hierarchy of questions and relevant grounds to determine the appropriate remission decision outcome;
  • the tool directs the officer to the relevant paragraph in the practice statement that applies in a taxpayer's situation;
  • the decision tool is linked to the Siebel system so that appropriate monitoring and guidance to staff is available.115

4.62 In addition, the Tax Office developed a question and answer tool to provide a number of practical questions and answers reflecting audit situations which involve the practice statement.

4.63 Relevant skilling of Tax Office staff has also been undertaken to further support the implementation of PS LA 2006/8. This has included the continued use of its extensive ROSA i-learn training package.116 The Tax Office provided the Inspector-General with a copy of a report into the status of staff skilling immediately prior to the release of PS LA 2006/8.117 This report provided an assurance to the Inspector-General that relevant staff had received training on the practice statement and that skilling solutions had been implemented by the various business lines.

4.64 Reviewing the application of PS LA 2006/8 is also a part of call overs and TQRs (discussed in Key Recommendation 1). For example, a copy of the most recent TQR template provided to the Inspector-General included the following question:

Was the remission of interest charges considered in this case?

4.65 Only in a small number of cases sampled by the Inspector-General was it appropriate for the remission of SIC/GIC to be considered. A review of these cases demonstrated that the remission processes had been applied appropriately.

Implementation Status: Implemented

The Tax Office has made appropriate efforts to ensure that an interest charge is remitted where the charge was attributable to Tax Office-caused delay. This has included the shifting of the responsibility for practices relating to the remission of interest charges to the Tax Office's Compliance Sub-plan — back to the officers with first-hand experience of the audit process.

In response to this recommendation, the Tax Office has prepared a revised practice statement to guide Tax Office staff — PS LA 2006/8. Part of the roll-out of the practice statement was an extensive training program to ensure that officers were aware of the implications of the new practice statement and support tools.

A review of cases by the Inspector-General demonstrated that processes to consider the remission of SIC/GIC were applied where relevant. This included the application of PS LA 2006/8.

To monitor adherence to the practice statement, the Tax Office includes a review of the application of PS LA 2006/8 in TQRs and the call over process.

Key Recommendation 4

The Inspector-General recommends that the Tax Office:

  1. clearly articulates to the taxpayer the expected timeframes of the audit at its outset;
  2. ensures that Tax Office auditors comply with procedures requiring taxpayer notification of commencement and finalisation of audit activities;
  3. notifies taxpayers of the progress of audits where those audits involve periods of Tax Office-caused delay; and
  4. in complex matters, allays taxpayer concerns by ensuring that the relevant technical specialist will take account of the taxpayer's full commercial circumstances in determining the Tax Office view.

Tax Office Position

Part (a)

4.66 For audits which commence after the issue date of PS LA 2006/8 (that is 1 August 2006), the Commissioner has advised that the Tax Office will notify taxpayers at the commencement of an audit of the expected completion date. This expected completion date will be determined by applying a pre-determined cycle time that has been approved by the Active Compliance Steering Committee.118

4.67 PS LA 2006/8 has been supported by the development of published cycle times for all audit products. These anticipated cycle times are attached to each case as a part of Siebel CASE.

Parts (b) and (c)

4.68 The introduction of Siebel CASE now provides mandatory steps to be completed and recorded which include commencement, progress and completion notification to clients.119

Part (d)

4.69 A panel of industry experts (particularly in the large business sector) has been established to assist the Tax Office in its understanding of industry economics, commercial practices and related matters. Appropriate panellists will participate in risk review and audit processes.

4.70 The Siebel CASE management system provides mandatory steps to be completed to ensure that technical issues are identified and that industry involvement is considered.120

IGT Analysis

Part (a)

4.71 On 1 August 2006 the Tax Office's Active Compliance Capability introduced a corporate-wide process to include the expected audit timeframe in all 'intention to audit' letters sent to taxpayers. The application of this process was outlined in PS LA 2006/8 as follows:

Expected audit completion date — When notifying a taxpayer of the intention to audit, the Tax Office will generally provide an expected audit completion date in that notice. This date will be determined by applying a pre-determined audit cycle timeframe to the commencement of the audit to calculate the expected completion date. The cycle timeframe will be different for different taxes, products and markets. The cycle timeframes will be:

  • for Large Corporate audits commencing on or after 1 July 2005 — the time notified at the commencement of the audit or 2 years, whichever is the shorter period, and
  • for all other audits commencing on or after 1 July 2006 — as published on the Tax Office intranet.121

4.72 In respect of this last dot point, the Inspector-General considers that it would be beneficial for the Tax Office to publish cycle timeframes on its external website so that taxpayers have the ability to organise their affairs around these pending obligations.

4.73 Sampling of cases commenced post-1 August 2006 undertaken by the Inspector-General demonstrated that expected audit completion dates are included in 'intention to audit' letters. In addition, a number of LB&I cases sampled involved the auditor and team leader conducting an initial meeting with the taxpayer to provide further detail — such as to discuss the types of circumstances that could affect the proposed timeframe for completion of the audit.122

4.74 Notification of the expected time to complete an audit is also included as one of the steps in the new Client Audit Management Plan which is used for large market audits. This document is provided to taxpayers (and their advisers) at the commencement of an audit to inform them about the audit process. Included in this plan is a requirement to meet with the taxpayer to discuss (amongst other things) the relevant timeframe of the audit and for both the taxpayer and the Tax Office to commit to that timeframe. Fieldwork undertaken by the Inspector-General demonstrated adherence to this practice. The Client Audit Management Plan is currently being updated by GST Large Active Compliance as well as by LB&I.123

Part (b)

4.75 The Tax Office has standard commencement and finalisation of audit letters available on its Active Compliance Work Processes System. Relevant case sampling undertaken by the Inspector-General demonstrated that these letters are being appropriately sent to taxpayers.

4.76 As part of the staggered implementation of Siebel CASE, the Tax Office is in the process of designing revised letters that notify taxpayers of the commencement and finalisation of audit activities. The timeframe for completion of this project has not yet been established.124 As discussed earlier in this chapter, Siebel CASE is a step-driven system designed to ensure that officers complete this notification step before audits can be progressed to finalisation.

4.77 The requirement to provide commencement and finalisation letters is also included as part of the Tax Office's Client Audit Management Plan.

4.78 It is noted that Case Leadership does not examine the extent to which auditors comply with internal guidelines on notifying taxpayers about the start and end of an audit.

Part (c)

4.79 Sampling of cases by the Inspector-General indicated that there are variations in the levels of communication with taxpayers in respect of this part of the recommendation. Some auditors demonstrated a close working relationship with the taxpayer (and their adviser) with constant dialogue throughout the audit. However, in other cases a number of months had passed without appropriate contact being made.

4.80 To address this problem, the Tax Office has just recently introduced into Siebel a step requiring officers to keep taxpayers informed of the progress of an audit and to notify them of any delay. In addition, a new capability has been included into Siebel CASE enabling team leaders to monitor contact made with taxpayers.125 Because of its recent introduction, it has not been possible for the Inspector-General to review adherence with this new procedure. Furthermore, for large market audits, the Tax Office has recently revised the above-mentioned Client Audit Management Plan to include a direction to staff (and a commitment to the taxpayer) that regular updates on the progress of an audit (as well as a revised plan as appropriate) will be provided. The Client Audit Management Plan is currently being updated by GST Large Active Compliance as well as by LB&I.126

Part (d)

4.81 As mentioned in Key Recommendation 1, the Tax Office is currently revising the instructions provided to staff regarding the early engagement of technical specialists in audit planning. This involves the revision of two existing law administration practice statements — PS LA 2004/4 and PS LA 2003/10.

4.82 The Tax Office commitment to understanding a taxpayer's business when performing an audit was highlighted in the 2006 Large business and tax compliance booklet:

… the Tax Office needs to understand your business context and environment. Where appropriate we will engage experts on particular industries or specific issues …127

4.83 In developing that understanding, auditors refer to a table of business characteristics128 that were drawn from Audit Accounting Standard (402) Understanding the Entity and its Environment and Assessing the Risks of Material Misstatements.

4.84 Sampling of cases by the Inspector-General indicated that where relevant, Tax Office staff are enabling the flow of communication between taxpayers and Tax Office technical specialists as per the recommendation. For example, the holding of workshops that include taxpayers, Tax Office auditors and technical specialists to discuss the impact of corporate developments (that is to ensure that the Tax Office understands the commercial circumstances faced by the taxpayer).

4.85 The Inspector-General also reviewed a number of audit cases that had been subject to the Case Leadership and the call over processes. It was evident that these governance processes reviewed whether taxpayers had been given an opportunity to work with Tax Office technical specialists to progress issues arising in the particular audits.

Implementation Status: Implemented

The Tax Office has introduced a number of procedural changes to address all parts of this recommendation. Apart from variations in the level of communication to taxpayers regarding the progress of audits, Tax Office staff are following these new procedures.

Sampling of cases by the Inspector-General evidenced that these procedures are being applied by the Tax Office in respect of all facets of the recommendation apart from adequate communication to taxpayers about the progress of audits. The Tax Office is aware of this issue and has recently introduced an additional procedure within Siebel CASE.129

Overall, the Tax Office has indicated via a number of public forums its commitment to improve its dealings with taxpayers during an audit. The Inspector-General views this, together with the changes made since the 2005 review, as an important commitment to continued improvements.


73 Review into Tax Office Audit Timeframes (2005) — Inspector-General of Taxation (at para 3.103).

74 Four more senior Tax Office staff were also to be appointed to assist in this task (source — Review into Tax Office Audit Timeframes (2005) — Inspector-General of Taxation (at para 2.10).

75 Review into Tax Office Audit Timeframes (2005) — Inspector-General of Taxation (at para 2.10).

76 Senior Executive Service Tax Office staff.

77 Updated business line response for audit committee (Tax Office report November 2006).

78 Ibid.

79 'Micro Enterprises and Individuals — Employer Obligations Stock on Hand & Aged Case Report' — Tax Office Report July 2007 (at p 8).

80 For example, in respect of LB&I audits commenced post-30 June 2005, the relevant timeframe benchmark is 2 years.

81 Source — interview on 17 September 2007 with the Tax Office's Active Compliance Capability Leader.

82 Tax Office report — 'Cycle Time — Productivity Report Compliance Sub-plan' (draft version supplied to the Inspector-General on 4 October 2007). This report provides figures for the 2005, 2006 and 2007 financial years.

83 Ibid.

84 Tax Office minute 'Provision of information in relation to audit timeframes review recommendations' — 7 September 2007.

85 Source — interview on 12 September 2007 with the Tax Office's Active Compliance Capability Leader.

86 Currently, there is no monthly reporting to the Tax Office's Compliance Executive [source — interview on 11 September 2007 with the Tax Office's Active Compliance Capability Leader].

87 Source — interview on 6 September 2007 with the Tax Office's Active Compliance Capability Leader. Information included in the system is currently sourced from Siebel which is also undergoing implementation issues.

88 Special Advisers are at the Senior Executive Service Tax officer level.

89 The call over process is not undertaken in ME&I. Instead, a director monitors the progress of ME&I cases through a 'pivot table' report. Cases are escalated for attention where progress is affected by technical or strategic issues. ME&I does not partake in the Case Leadership program.

90 Tax Office report — 'Progress Report for 30 June 2007 for LB&I Case Leadership audits' (at pp 1 and 2). The Inspector-General may make comment on the adequacy of Tax Office benchmarks for completing audits in his Review into the Tax Office's administration of GST audits.

91 For the purposes of market segmentation, the Tax Office classifies large businesses as those groups with a turnover of around $100 million or more.

92 Within two years of the notification of the commencement of the audit.

93 Large business and tax compliance, 2006 (at p 48).

94 Risk reviews for income tax are typically the first step following case selection and are designed to assess whether there may be income tax risks requiring further compliance action such as a full audit.

95 One method by which the Tax Office aims to provide technical input is via the PTI process. A PTI is an issue of interpretative nature that requires a prioritised approach to resolution. Put simply, every possible assistance is provided to ensure that the issue is resolved promptly. The Priority Technical Issues Committee which is chaired by the Second Commissioner (Law), meets on a six-weekly basis and provides guidance and direction in the management of PTIs within the established corporate framework (including monitoring and intervention as required to ensure timely resolution). The Tax Office is still working on updating PS LA 2003/10 and PS LA 2004/4 [this is despite amendments being listed as having occurred in the former practice statement in December 2006 — interview with Assistant Commissioner, GST Active Compliance 15 August 2007 and the Capability Leader — Active Compliance 21 August 2007].

96 Tax Office publication Large business and tax compliance, 2006 (at p 52).

97 ATO Minute 'Follow up review of the Tax Office's implementation of Inspector-General recommendations: Audit Timeframes' (9 August 2007 at p 2). In the GST business line, the position paper process is only applied for large business taxpayers (a similar process is being developed for GST's SME and micro taxpayers with the resulting document to be called an interim decision summary).

98 For example, the Tax Office's 'Client Audit Management Plan' (used for large market income tax audits) which outlines how Tax Office staff should inform taxpayers about the audit process. This plan is currently operational but is under review. The plan is proposed to be linked to Siebel as an activity step requiring completion.

99 TEP has been set up in LB&I to support audit teams with technical advice and to look into building the technical capability of the Compliance Sub-plan.

100 The Inspector-General may make comment on the adequacy of Tax Office benchmarks for completing audits in his Review into the Tax Office's Administration of GST Audits.

101 Updated BSL Response for Audit Committee (Tax Office report November 2006).

102 This alerts auditors to the need that appropriate specialists must be 'on board' during the planning of an audit.

103 This case is in contrast to a case sampled in the Inspector-General's original 2005 review where technical resources were not present to tailor the questionnaire resulting in broader information-gathering requests and delays in the completion of the audit [source: para 3.97 Review into Tax Office Audit Timeframes (2005) — Inspector-General of Taxation].

104 Under section 255-20 of the Taxation Administration Act 1953 the Commissioner can bring forward the payment time for a tax related liability in certain cases with the issue of a notice.

105 Updated BSL response for Audit Committee (Tax Office report November 2006).

106 Publicly released 28 September 2005.

107 It should be noted that this recommendation did not apply to GIC on established debts, which remained with Operations.

108 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities (2005) — Inspector-General of Taxation (at para 4.27).

109 An observation supported by the February 2006 TQR where some business lines considered interest remission in as few as 40 per cent of those cases where it should have been considered.

110 As mentioned above, this recommendation did not apply to GIC on established debts, which remained with Operations.

111 PS LA 2006/8 — at paragraph 19 [discussed further in Key Recommendation 4].

112 Tax Office media release Guidelines for remission of interest charges — 1 August 2006.

113 On 24 November 2003 the then Treasurer announced the Review of Aspects of Income Tax Self Assessment. On 16 December 2004 the previous government released the Report on Aspects of Income Tax Self Assessment.

114 'Guidelines for Imposition/Remission of SIC/GIC/s 170AA interest charges' (Tax Office publication released 19 September 2006 — see p 1).

115 The Siebel Case Management system used by the Tax Office (discussed in Key Recommendation 1) contains clear instructions to staff regarding the remission of interest due to Tax Office delays. Quality assurance checks surrounding this issue are also built into Siebel.

116 This package includes a session dealing with the introduction and implementation of PS LA 2006/8. The Tax Office has closely monitored and reported on the completion of the ROSA i-learn training package.

117 'PS LA 2006/8 Skilling: Status Report August 2006' (prepared by the director of the Tax Office's Compliance Penalties and Interest Team).

118 'Updated BSL response for Audit Committee November 2006' — Tax Office.

119 Ibid.

120 Ibid.

121 PS LA 2006/8 — at para 19. The practice statement comments on the use of the word 'generally' by stating that there will be some circumstances when notification will not be appropriate, for example where it is expected that a case involves fraud or evasion or other criminal activity.

122 The holding of these 'initial meetings' directly address a suggestion by the Inspector-General in the original 2005 review (at para 3.115).

123 Both GST and LB&I use slightly different Client Audit Management Plans. Therefore a review is underway to develop a generic plan that can be used by both business lines (source: Tax Office minute, 20 August 2007).

124 ATO Minute 'Audit Timeframe Review' (20 August 2007 at p 2).

125 Source — interview on 6 September 2007 with the Tax Office's Active Compliance Capability Leader.

126 Both GST and LB&I use slightly different Client Audit Management Plans. Therefore a review is underway to develop a generic plan that can be used by both business lines (source: Tax Office minute, 20 August 2007).

127 Large business and tax compliance, 2006 (at p 48).

128 The table is reproduced at page 49 of the booklet Large business and tax compliance (2006).

129 Because of the recent introduction of this change, the Inspector-General was not able to review cases to determine the implementation of this new procedure.