Overview of the May 2005 IGT Review

5.1 Prompted by concerns raised with the Inspector-General from industry and tax practitioners, a review was undertaken into the Tax Office's administrative approach to the imposition of penalties and interest resulting from audit activity. In doing so, the Inspector-General focused on the consistency in nature and extent of penalties and interest applied, and the consistency of the Tax Office's approach in the application, which were seen as promoted by:

  1. having a corporate approach to the administration of the penalty and interest regimes, including a uniform set of work practices and support tools for staff;
  2. having in place corporate management information systems;
  3. providing guidance to taxpayers and their advisers on the application and remission of penalties and interest; and
  4. having in place quality assurance and staff-skilling processes.130

Australian National Audit Office Review

5.2 Part of the context of the Inspector-General's review was that the Australian National Audit Office (ANAO) had tabled a report in 2000 of its review titled Administration of Tax Penalties131. This ANAO review examined the Tax Office's administration of penalties with a particular emphasis on its corporate governance framework and issues relating to the consistency, effectiveness and accountability in the administration of the then-current penalty regime.

5.3 The ANAO review found that there was scope for improvement in the Tax Office's administration of the penalty regime and concluded that, although penalties were an important enforcement strategy featured in the ATO Compliance Model, the Tax Office lacked appropriate control structures to oversee the accountability, consistency and effectiveness of its penalty administration. The ANAO made a number of key findings that flowed into five recommendations, all of which were agreed to by the Tax Office.

Review of Aspects of Income Tax Self Assessment

5.4 Also relevant to the Inspector-General's review, in November 2003 the then Treasurer announced the Review of Aspects of Income Tax Self Assessment. On 16 December 2004, the outcome of the review was announced by the then Treasurer with the release of the Report on Aspects of Income Tax Self Assessment (ROSA). The previous government endorsed all 54 recommendations in the report.

5.5 The recommendations were designed to improve taxpayer certainty through:

  • a better framework for Tax Office advice;
  • increased protection for taxpayers such as shorter periods of review for those with straightforward tax affairs;
  • reduced compliance costs;
  • mitigation of the interest and penalty consequences of taxpayer errors; and
  • subsequent improvements as a result of better policy processes, law design and administrative approaches.

5.6 Those recommendations requiring legislative solutions were given effect by the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 1) 2005 and the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. The majority of the remaining recommendations require administrative solutions and are being addressed progressively by the Tax Office.

The Inspector-General's 2005 review

5.7 At the time of release of the Inspector-General's 2005 report only some progress had been made by the Tax Office in implementing the ANAO recommendations. Therefore, the prompt implementation of the remaining ANAO recommendations formed the basis of Key Recommendation 1 of the Inspector-General's report.

Implementation of recommendations

Key Recommendation 1

The Tax Office promptly acts to ensure that the agreed ANAO recommendations are fully implemented and addresses the findings identified in the ANAO report.

5.8 To assess the extent to which the Tax Office has implemented the Inspector-General's key recommendations, the Inspector-General has examined progress on all of the ANAO's recommendations and findings made in 2000.

ANAO Recommendation 1 part (a)

The Tax Office includes penalties administration within its corporate governance framework in order to provide assurance to the Commissioner that it is operating consistently and effectively. This could include:

  • establishing organisation-wide quality assurance of the Tax Office penalty administration to assist in promoting better practice and provide assurance that it is operating consistently.

ANAO Finding 19

The audit found that the Commissioner does not receive assurance through the ATO's corporate governance framework that the penalty regime is operating effectively or consistently.

ANAO Finding 20

The ANAO considers there would be benefit to the ATO in taking a more systematic approach to the quality assurance of penalties and analysing and reporting penalty information as a part of its governance reporting process.

Tax Office Position

5.9 The Tax Office has not provided the Inspector-General with its internal view on the status of implementation of the ANAO recommendations and findings.

5.10 The Tax Office reviews the technical quality of its interpretative decisions in February and August of each year through the Technical Quality Review (TQR) process. This process was introduced in 2001 following the release of law administration practice statement PS LA 2001/11 Technical Decisions — Quality Reviews. TQRs involve having a statistically sound random sample of interpretative work (including decisions concerning the imposition and remission of penalties) reviewed by specially convened panels of experienced technical Tax Office staff and external tax practitioners. The TQR process also includes a range of conformance checks to measure compliance with the policies and practices that support the technical and interpretative decision making activities of the Tax Office.

5.11 At the completion of each TQR, a report is finalised which includes relevant findings and recommendations that are referred back to business lines to assist in promoting better practice.

5.12 Each business line completes a TQR report template that is referred to the Assistant Commissioner, Technical Practice, Office of the Chief Tax Counsel (OCTC). This report is also referred to the Second Commissioner (Law) and finally to the Commissioner of Taxation for corporate reporting purposes.

5.13 Further quality assurance is undertaken via a number of quality intervention points that are completed within the Tax Office's new case management system (known as Siebel CASE). Data from this system, together with information gathered from a number of sources, is compiled to produce the monthly Heartbeat summary report. This report, prepared by the Compliance Penalties & Interest Team (CPIT) for the Compliance Executive (which includes the Second Commissioner (Compliance)), tracks performance for each market segment and provides analysis of current issues surrounding penalties administration.

IGT Analysis

5.14 A TQR is performed twice per year to provide an analysis of the technical quality of interpretative decisions (including those relating to penalties). Panels of experienced technical Tax Office staff and external tax practitioners review a random sample of cases. These reviews have occurred since the introduction of the process in 2001.132 Feedback arising from the reviews is provided to case officers (and where relevant, case approvers) to improve work practices and the quality of technical and interpretative decision making. A report is prepared for corporate governance purposes and includes not only performance measurement but also analysis of areas requiring improvement. This report is referred through to the Commissioner of Taxation for corporate reporting purposes (the Tax Office's annual report includes analysis of the TQR process).

5.15 The introduction of the Siebel CASE system in 2006 also provided the Tax Office with a number of quality checks that are undertaken during the case management process. Data from this system is used to prepare the monthly Heartbeat summary report that provides the Compliance Executive with the current performance of each market segment as well as an analysis of the main current issues surrounding penalties administration. The first such report was prepared in February 2007.

Implementation Status of ANAO Recommendation: Implemented

The Tax Office undertakes the TQR process twice each year for all business lines. A detailed report is prepared after each review and this is referred to the ATO Executive and finally to the Commissioner of Taxation for corporate reporting purposes. An analysis of the TQR process is included in the Tax Office's annual report. Information gained from the TQR process is used to promote better practice within Active Compliance. Relevant feedback is provided to case officers and case approvers.

The introduction of the Tax Office's Siebel system has also included a number of quality control points in the case management environment. Data from this system is included in the monthly Heartbeat summary report outlining the performance of penalties administration for each market segment.

ANAO Recommendation 1 part (b)

The Tax Office includes penalties administration within its corporate governance framework in order to provide assurance to the Commissioner that it is operating consistently and effectively. This could include:

  • using statistical and demographic data to monitor the effectiveness of penalties in addressing and improving compliance.

ANAO Recommendation 5

The Tax Office study the relative effectiveness of penalties on taxpayer behaviour to assist in determining whether penalties have been effective. This would assist the Tax Office in improving taxpayer compliance and in refining the Compliance Model.

Tax Office Position

5.16 The Tax Office has not provided a report to the Inspector-General of its internal view on the status of implementation of the ANAO recommendations and findings.

5.17 The Tax Office's CPIT coordinated research via two methods:

  1. internal research involving the analysis of internal data to identify changed behaviour of taxpayers subsequent to the application of a penalty (completed 3 June 2006);
  2. external research which involved the commissioning of Colmar Brunton Social Research133 (CBSR) to study how the taxation penalties regime influences taxpayer attitudes and behaviour regarding their tax obligations (completed 23 May 2006).

IGT Analysis

Tax Office Internal Research

5.18 Two main approaches were used to undertake the internal research:

  1. a study of the effectiveness of compliance action and penalties on taxpayer behaviour; and
  2. an examination of the characteristics and indicators of compliance across different taxpayer groups in order to assist future compliance monitoring.

5.19 The overall conclusion from the Tax Office's internal analysis was that compliance action and penalties can influence taxpayer's compliance behaviour — however not in all cases. It was found that it was most likely to have a greater impact on taxpayers that are already trying to be compliant. However, it was also concluded that in the absence of controlled pre- and post- audit monitoring and subsequent follow-up action:

… only inferences can be made about the impact of penalties on their compliance behaviour. There is no actual measure of impact.134

External Research

5.20 The primary focus for this research was on taxpayer knowledge and awareness of penalties, and the subsequent impact this has on behaviour. The study found that overall awareness of penalties was high, but participants did not have much knowledge of them. More than 90 per cent of respondents believed that the consequence of non-compliance with the Tax Office is a penalty which is in itself a deterrent.

5.21 The CBSR study recommended that the Tax Office develop an education and information package aimed at the general public regarding tax penalties as participants did not possess specific knowledge of the penalty regime. The study also recommended the Tax Office ensure that it has an efficient and fair system that applies penalties to non-compliers and that it continues monitoring community attitudes to tax and tax penalties. This last recommendation was made by CBSR in response to the perception held by participants in the study that:

… those taxpayers with higher incomes can work the system.135

5.22 In summary, the CBSR study did not conclude that the Tax Office inefficiently and unfairly applies penalties to non-compliers. The recommendation was made to re-affirm the need for the Tax Office to ensure that an efficient and fair system is in place.

5.23 The Tax Office has used both internal and external resources to analyse the effectiveness of penalties on taxpayer compliance by reference to collected data. The internal study provided an overall conclusion that penalties can influence compliance behaviour but noted that there was no direct measure available. The overall conclusion of the CBSR study was that the influence of tax penalties is moderate, with more than half of participants in the study reporting that they comply because there are tax penalties.

5.24 The CPIT has applied knowledge gained from these research projects in preparing the Tax Office's plain English guide to penalties and interest (titled About penalties and interest charges — refer to ANAO Recommendation 4).136

5.25 It is noted in the ANAO report137 that the Tax Office does not monitor in subsequent years whether there is any alteration in the behaviour of those taxpayers that had been identified as non-compliant. The Tax Office has confirmed that such systematic follow-up action is not undertaken.138 The Inspector-General considers that appropriate follow-up action would provide the Tax Office with additional information that could assist in the identification of the need for change in the administration of penalties.

Implementation Status of ANAO Recommendation: Implemented

The CPIT has corporate responsibility for the roll-out of major improvements relating to penalties and interest, a number of these arising from external reviews. Through this team the Tax Office has coordinated two research studies into the influence that penalties have on taxpayer compliance.

This research has been undertaken in accordance with the ANAO recommendations and the knowledge gained has been used in preparing the Tax Office's plain English guide to penalties and interest (titled About penalties and interest charges). The Inspector-General expects that the Tax Office, through the CPIT, will continue to use the two research projects in delivering further improvements.

ANAO Recommendation 2

The Tax Office technical training material on penalties includes reference to, and discussion of, the impact of the Taxpayers' Charter and the Compliance Model. This would include guidance on the application of penalties to the different scenarios outlined in the Compliance Model.

ANAO Finding 21

ATO staff training in relation to penalties could be enhanced by including the linkages between the Taxpayers' Charter, the Compliance Model and the imposition and remission of penalties. Also, training materials could be improved by providing analyses of the different gradations of non-compliant behaviour and the appropriate enforcement strategies to be applied.

Tax Office Position

5.26 The Tax Office has not provided a report to the Inspector-General of its internal view on the status of implementation of the ANAO recommendations and findings.

5.27 The Tax Office has developed the 'Guide to how a taxpayer's compliance history affects a penalty decision' and has a corporate-wide training package in relation to administrative penalties. Both of these products are for internal use only.

IGT Analysis

5.28 The above-mentioned guide includes discussion on how the Taxpayers' Charter and the Compliance Model are to be applied by Tax Office staff when administering the imposition and remission of penalties. For example, it outlines to staff how the Compliance Model must be applied on a whole-of-taxpayer basis — in other words, where there is some doubt about whether a taxpayer has a good compliance history, that taxpayer's other roles and activities should be examined to assist in forming a view of their overall level of compliance. Guidance on the application of the penalties regime to a number of practical scenarios is also included in the guide in line with the ANAO recommendation.

5.29 The guide has not yet been released as the Tax Office is currently reviewing whether it should be published as a practice statement.

5.30 The Tax Office also provided the Inspector-General with its internal training package relating to penalties. As part of a PowerPoint presentation, some limited comments are made by presenters about both the Compliance Model and the Taxpayers' Charter. However, these comments do not include a discussion of the impact of the Compliance Model or the Taxpayers' Charter.

5.31 The Tax Office has stated that there is no other technical training material relating to penalties which includes instructive guidance on the impact of the Taxpayers' Charter and the Compliance Model.139

5.32 The Tax Office has agreed that the recommendation has not been explicitly finalised. However it asserts that it has successfully integrated these principles into its compliance practice. During the 2005-06 financial year more than 3,000 Tax Office staff participated in penalties-related training.

5.33 The Inspector-General has examined practice statements PS LA 2006/2 Administration of shortfall penalty for false or misleading statement and PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods and notes that PS LA 2006/2 instructs staff to consider the Taxpayers' Charter and the Compliance Model and to consider the impact that penalties will have on future compliance by taxpayers. PS LA 2006/2 also refers to the need for Tax Office staff to consider specific principles from the Taxpayers' Charter and the Compliance Model when considering penalty remission.

Implementation Status of ANAO Recommendation: Partly Implemented

The Tax Office has taken some steps towards implementing this recommendation by developing guidelines for Tax Office staff on how they are to consider a taxpayer's compliance history when making a decision about the imposition or remission of penalties. However, seven years has passed since the release of the ANAO report and these guidelines are yet to be released. Currently the Tax Office is debating what format the guidelines should take, resulting in further delays.

However, the release of the above-mentioned Tax Office practice statements in 2006, together with continued application by Tax Office staff, has addressed the essence of the ANAO recommendation.

ANAO Recommendation 3

The Tax Office investigates the cost-effectiveness of providing on-line decision support tools to staff to assist with consistent and efficient application of penalties.

ANAO Finding 22

The ANAO found the Tax Office could better align its penalty administration with the principles and undertakings of the Taxpayers' Charter and the Compliance Model by developing a cost-effective, on-line rule-based decision support system and access to taxpayer history and profiles.

Tax Office Position

5.34 The Tax Office has not provided a report to the Inspector-General of its internal view on the status of implementation of the ANAO recommendations and findings.

5.35 In March 2006 the Tax Office issued PS LA 2006/2 Administration of shortfall penalty for false or misleading statement in respect of the penalties regime. An online decision support tool is currently in the draft stage with responsibility undertaken by the CPIT.140

5.36 The Tax Office has not investigated the cost-effectiveness of this tool.141

IGT Analysis

5.37 The Inspector-General recognises that the development of an online decision support tool relating to the penalties regime is a significant task in light of the complexity and size of the legislation involved. However, over a year has now passed since the release of PS LA 2006/2 and the Tax Office is yet to undertake a cost-effectiveness analysis as recommended by the ANAO.

Implementation Status of ANAO Recommendation: Not Implemented

The Tax Office accepts that it has not specifically nor completely implemented this ANAO recommendation. It has been seven years since the ANAO made its recommendation, however, the Tax Office has not yet investigated the cost-effectiveness of an online support tool.

Nevertheless, it appears that the Tax Office is proceeding with an online decision support tool in line with that contemplated by the ANAO, regardless of its cost-effectiveness. The Inspector-General supports this development and the fact that the specific recommendation for a cost-effective study has not been undertaken is not a substantive criticism from a tax administration perspective.

ANAO Recommendation 4

The Tax Office Guide provides information in a plain English format to taxpayers about the penalties regime.

ANAO Finding 23

The ANAO considered that informing taxpayers of their tax obligations is central to the issue of fairness. In a self-assessment environment, taxpayers need to know of their obligations and responsibilities under the law. The audit identified the provision of information for taxpayers about penalties as an area that could be readily improved.

Tax Office Position

5.38 In November 2006, the Tax Office reported that the status of implementation of this recommendation was in progress with a completion rate of 90 per cent.142

5.39 The Tax Office has produced a plain English guide to penalties and interest (titled About penalties and interest charges) which is available on the Tax Office website. This publication provides taxpayers with an overview of both the penalties and interest regimes including an outline of the factors that are considered by the Tax Office in deciding whether to remit. The Tax Office has also prepared the ROSA-in-brief series of reference tools which explain the key changes adopted by the previous government in reforming aspects of income tax self assessment.

IGT Analysis

5.40 The About penalties and interest charges plain English guide has been developed in line with the ANAO recommendation and finding. Also, the Tax Office has already prepared a number of such guides and fact sheets.

Implementation Status of ANAO Recommendation: Implemented

The Tax Office has adopted a number of methods to succinctly inform taxpayers about the application and remission of penalties. In addition, a number of new initiatives have been implemented to guide taxpayers through the main changes resulting from ROSA.

5.41 The following ANAO findings were not aligned with any ANAO recommendation. The Inspector-General has reviewed how the Tax Office has addressed these findings.

ANAO Finding 24

The ANAO found that the ATO does not leverage off its fieldwork where tax shortfalls have been identified, by following-up in future years the effectiveness of penalties on taxpayer behaviour. Such follow-up would enable the ATO to build profiles of non-compliance and to develop indicators of penalty effectiveness.

Tax Office Position

5.42 In June 2006 the Tax Office completed a research project (as discussed in ANAO Recommendations 1 part (b) and 5) that included an analysis of internal data to identify the changed behaviour of taxpayers subsequent to the application of a penalty. This also included an examination of the characteristics and indicators of compliance across different taxpayer groups so as to assist the Tax Office with future compliance monitoring.

5.43 The Tax Office is also currently undertaking an internal research project (titled 'Measures of effective compliance') regarding the effect of Tax Office compliance activity on future levels of taxpayer compliance.

IGT Analysis

5.44 The above-mentioned projects do not address the ANAO finding that the Tax Office should:

… monitor those taxpayers identified as non-compliant in subsequent years to review any alteration in behaviour143

5.45 Put simply, the ANAO view was that the Tax Office should undertake a systematic follow-up in future years, where appropriate, of those taxpayers who had previously been detected as liable for a tax shortfall penalty. Such a practice has not been attempted by the Tax Office.144 However, the Tax Office has thought about the issue raised by the ANAO finding and has done some related research. The Inspector-General notes and accepts the Tax Office's conclusion, based partly on its research, that:

… it is very difficult to discern the impact of penalties versus the impact of a particular compliance activity such as an audit.145

ANAO Finding 25

Streamlining claims to legal professional privilege and to concessions under ATO Guidelines for Access to Professional Accounting Advisers Papers.

Tax Office Position

5.46 In 2005 the Tax Office commenced a comprehensive review of its 'Access and Information Gathering Manual' which sets out a summary of the law relating to the Tax Office's access powers as well as the way in which it exercises these powers. The review resulted in a number of improvements including the development of a number of pro forma documents for inclusion in the manual. Claimants for legal professional privilege and for the Accountant's Concession must complete one of these pro forma documents which include details on how they substantiate their claim.

IGT Analysis

5.47 The requirement to complete these pro forma documents has streamlined the claiming process as claimants quickly become aware of the need to prove their position. The Inspector-General concludes that the Tax Office has addressed ANAO finding 25.

ANAO Finding 26

The audit found other potential areas for improvement relating to the ATO's administration of particular penalties including:

  1. giving priority to outstanding systems changes to implement accurate calculation of the GIC on a compounding basis as required by legislation.

Tax Office Position

5.48 Towards the end of 2004-05, the Tax Office was made aware of a possible error in the calculation of GIC with respect to amended assessments for periods prior to 2000. Tax Office business systems had been designed to apply GIC to the total debt outstanding at the date GIC took effect, which included interest amounts incurred under the previous interest regime. In resolving a taxpayer complaint, the Tax Office reviewed the basis of the underlying design of the business system and concluded that GIC should not apply to the previous interest amounts. In September 2005 the Tax Office's systems used to calculate GIC were reprogrammed to fix the error.

IGT Analysis

5.49 This ANAO finding was made in 2000. Had the Tax Office addressed this issue promptly it may have avoided the significant problems it experienced in 2004-05. As at 31 January 2007, approximately 96.5 per cent of the affected taxpayers had had their matters corrected. Outstanding matters were to be completed by 30 June 2007. The Inspector-General concludes that the Tax Office has now addressed ANAO finding 26 part i), but should have done so earlier.

  1. eliminating anomalies that exist between administrative penalties and penalties imposed through prosecution. This could reduce the incidence of taxpayers preferring prosecution to administrative penalties.

Tax Office Position

5.50 In 2000 a new uniform administrative penalty regime was introduced (via Part 4-25 of the Taxation Administration Act 1953) that has removed the anomalies raised in this ANAO finding. In particular, Division 286 caps the amount of penalty to $2,750 for failing to lodge returns or other documents in the approved form by the required time.

IGT Analysis

5.51 The introduction of new legislation in 2000 has removed the former disparity between the scale of penalties applied by the Tax Office and those imposed as a result of prosecution. Taxpayers no longer have an incentive to delay matters in order to access more favourable treatment through prosecution. The Inspector-General concludes that the Tax Office has addressed ANAO finding 26 part ii).

  1. implementing system changes to avoid incorrectly applying Late Lodgement Penalty to 'nil trading' companies.

Tax Office Position

5.52 A number of changes are to be made to the Tax Office's lodgement systems as part of Release 3 of the Change Program (due to commence in late 2007) that directly address this issue for late lodgers. Put simply, the Tax Office proposes that where a return is lodged late the new system is to automatically review the tax position of the taxpayer before deciding on the imposition of penalty. Exclusions are built into the system such that, for example, a non-taxable company will automatically be excluded from the Failure To Lodge (FTL) penalty.

5.53 Note that for non-lodgers the above exclusions do not apply. However, the Tax Office does undertake risk testing to ascertain the profile of the taxpayer. For example, a search of the Australian Securities and Investments Commission database can reveal whether the taxpayer company is actually trading or is simply a shelf company — resulting in the non-imposition of the FTL penalty. Commitment to the Compliance Model also requires the Tax Office to notify taxpayers when a document is late or not lodged at all — further reducing the likelihood of penalty imposition without taxpayer involvement. This is further supported in the Tax Office fact sheet Failure to lodge on time fact sheet for practitioners where it is stated that:

Generally, we will not apply FTL penalties unless we have warned you about a document that is late or not lodged at all.

IGT Analysis

5.54 Seven years after this issue was included in the ANAO report, Tax Office systems continue to incorrectly apply FTL penalty to late lodging nil trading companies146. The Tax Office response is that this issue has been addressed — where a taxpayer is incorrectly penalised and an error is detected, the penalty will be remitted.147

5.55 The Tax Office stated in the ANAO's 2000 report that a system change cannot be developed that would allow the correct differentiation between classes of taxpayers in all cases. Put simply, there is no system change that could identify nil trading companies because classification is dependent upon answering a question of fact (being whether the company in question is or is not 'carrying on business'). The Tax Office also advised that including a new label on income tax returns was not feasible in terms of space on the return and other costs.148

5.56 For non-lodgers, the Tax Office undertakes testing to determine whether the taxpayer represents a risk to revenue and therefore should be penalised for failing to lodge as required. The current level of sophistication involved with this testing does not guarantee that nil trading companies will be excluded from FTL penalty. These taxpayers must then request appropriate remission from the Tax Office.

5.57 For late lodgers, Release 3 of the Change Program includes system enhancement to automatically exclude taxpayers such as nil trading companies from FTL penalty. However these changes are not scheduled to be implemented until late 2007. The Inspector-General concludes that the Tax Office has addressed ANAO finding 26 part iii).

  1. improving tax agent lodgement programs to reduce the need to apply Late Lodgement Penalty.

Tax Office Position

5.58 The Tax Office continues to work with the Lodgement Working Party149 (a group chaired by the Deputy Commissioner — Tax Practitioner and Lodgement Strategy) to improve the lodgement performance of tax agents. In 2006, the Commissioner of Taxation supported a review of the tax agent lodgement program in order to make preliminary recommendations about how to improve the 2007-08 and future year lodgement programs. A report150 for the review was released on 18 June 2007 with the vast majority of stakeholders consulted indicating that where they were satisfied with the current lodgement program structure.

IGT Analysis

5.59 The above-mentioned report found that the lodgement program distributed work loads evenly throughout the year and concluded that the current lodgement structure be retained. However, the report also found that the lodgement program included a number of complexities that could affect the ability of agents to manage their programs; for example, the uncertainty faced by tax agents due to delayed consideration by the Tax Office of complicated lodgement deferral requests. In response the Tax Office has introduced two new options to arrange deferral:

  1. Firstly, the self assessed deferral request system provides for lodgement deferrals to be automatically granted under self assessment arrangements. This option saves tax agents the time and resources involved with preparing detailed lodgement deferral requests.
  2. The second deferral option is the one-for-one deferral option which allows agents to defer lodging returns for clients who are up to date so as to help ease the burden of preparing and lodging returns for those clients who have been operating outside the system.

5.60 The Inspector-General concludes that the Tax Office has addressed ANAO finding 26 part iv).

Key Recommendation 1 — Overall Implementation status: Implemented

The Tax Office internal report to its Audit Committee on this recommendation is that it is 90 per cent completed. The Inspector-General considers this to be an appropriate assessment.

The Tax Office has implemented three of the five ANAO recommendations and partly implemented the fourth. The Inspector-General notes that the TQR, research studies and the plain English guide to penalties are probably the more significant ANAO recommendations and they have been implemented.

However, seven years since the ANAO review, ANAO Recommendation 2 regarding the development of training material about the impact of the Taxpayers' Charter and the Compliance Model on penalties administration remains only partly implemented.

Key Recommendation 2

The Tax Office develops a uniform set of processes, procedures, corporate management information systems and guidance to staff for cross-business line application.

Tax Office Position

5.61 In November 2006, the Tax Office reported that the implementation of this recommendation was completed with a completion rate of 100 per cent.151

5.62 In response to the Inspector-General's original review, 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 regime. These arrangements were to provide assurance that policies and practices would be consistent across business lines, revenue products and markets.

5.63 A corporate model was adopted in March 2006. A key member is the CPIT that was established to coordinate and provide a corporate view on policies, practices and decisions relating to penalties and interest. An important contribution to this task was the release by the Tax Office of PS LA 2006/2 and PS LA 2006/8 (together with various support tools).

5.64 The Tax Office is also undertaking a staggered implementation of the Siebel system designed to manage how the Tax Office actions, monitors and stores its case work — a 'one-stop' corporate management information system. Work continues with the roll-out of Siebel's Case Management and Work Management systems.152 The next stage of implementation is the delivery of a facility that will develop purpose-specific reporting for penalties and interest — the Integrated Core Processing system.153

5.65 The monthly Heartbeat report is also a useful management information system that tracks the imposition of penalties and interest. This report is prepared by the CPIT and contains comments from the director of the CPIT regarding the performance of Active Compliance with regards to penalties and interest administration.

5.66 The TQR process is the corporate tool uniformly applied throughout the Tax Office to measure the technical quality of interpretative decisions. Information gained from this process is included in a report that is referred to the ATO Executive including the Commissioner of Taxation for corporate reporting purposes. These reports are also referred back to the business lines to provide staff with further guidance and instruction on the completion of interpretative decisions.

IGT Analysis

5.67 The establishment of the CPIT has resulted in a single area with corporate responsibility for ensuring policies, practices and information relating to penalties and interest administration is provided to staff for cross-business line application. Prior to this, such work was undertaken individually by each business line, often resulting in disjointed practices throughout the Tax Office.

5.68 The project work undertaken by the CPIT has resulted in a number of changes including the release of PS LA 2006/2 and PS LA 2006/8. The release of these two practice statements has seen the completion of a significant piece of work for the CPIT and provides Tax Office staff with guidance, direction and assistance in line with Key Recommendation 2. Importantly, the progress of implementation of these changes continues to be monitored in terms of technical quality via the TQR process (see ANAO Recommendation 1 (part a)).

5.69 However, the Tax Office has acknowledged that until further implementation of the Siebel system is completed, it will not have the ability to readily access data on a macro-level and therefore be able to undertake the level of analysis required to provide information from a corporate-wide perspective.154 In addition, the Tax Office acknowledges that the value of comments included in the draft February 2007 Heartbeat report provided to the Inspector-General is limited.155

Implementation Status: Implemented

In response to the Inspector-General's 2005 review, the Tax Office put in place a corporate model designed to support the consistent and accurate administration of penalties and interest. A key part of this was the establishment of the Corporate Penalties and Interest Team which continues to coordinate the implementation of a number of the Inspector-General's recommendations. An important initiative of this team has been the release of PS LA 2006/2 and PS LA 2006/8 which has provided significant direction and impetus for change corporately.

The Tax Office has yet to implement a corporate management information system that can examine whether there is consistency in the nature and extent of penalties and interest applied at a Tax Office-wide level. However, the continued implementation of the Siebel system as part of Release 3 of the Change Program is set to establish this level of reporting.

Key Recommendation 3

The Tax Office includes an examination of the administration of the tax shortfall interest regime from the same perspective as its internal review into the penalty regime.

Tax Office Position

5.70 In November 2006, the Tax Office reported that the status of implementation of this recommendation had been fully implemented.156

5.71 In October 2005 the ATO Executive commissioned a project (known as the Penalties and Interest Project) to ensure that a range of outstanding commitments relating to the tax shortfall interest regime were implemented. These commitments related to reviews undertaken by the Inspector-General and the ANAO as well as Treasury's Review of Aspects of Income Tax Self Assessment. The initial scope of responsibilities for the project team was limited to these outstanding commitments and optimising organisational arrangements for the administration of the interest (and penalties) regimes. However, it was soon decided by the ATO Executive that an additional need was for a compliance view on interest (and penalties) resulting in the formation of the CPIT.

5.72 In 2006 the CPIT reviewed existing arrangements relating to the tax shortfall interest regime and identified a number of opportunities for improvement. For example in line with the Inspector-General's 2005 review157, a major organisational change shifting responsibility for developing policy and practice of pre-amendment interest decisions from Operations to Compliance was adopted.

5.73 The CPIT's review also involved consideration of the outcomes and recommendations arising from the Review of Aspects of Income Tax Self Assessment. Most important in terms of this recommendation was the release of PS LA 2006/8.

IGT Analysis

5.74 Although a formalised internal examination of the administration of the tax shortfall interest regime as recommended by the Inspector-General has not occurred, the CPIT has reviewed, and continues to review, this regime with a view to ensuring that a range of commitments arising from previous external reviews are implemented. As part of this process, the CPIT has examined existing arrangements and identified a number of opportunities for change and improvement. An example is the continued work by the CPIT in respect of the inclusion of remission of interest decisions in the TQR process in April 2007.

Implementation Status: Implemented

Following the Inspector-General's 2005 review, the ATO Executive commissioned a project to ensure that a range of commitments relating to the tax shortfall interest regime were implemented. This included establishing a corporate model for the administration of interest and the subsequent release of PS LA 2006/8.

Although a formal review of the administration of the tax shortfall interest regime as recommended by the Inspector-General has not been undertaken, the significant work involved with the above key initiatives has effectively achieved the implementation of this recommendation.

Key Recommendation 4

The Tax Office considers, as part of its internal review, suggested improvements to the administration of the penalties and interest regime as set out in Chapter 4.

Tax Office Position

5.75 In November 2006, the Tax Office reported that the status of implementation of this recommendation had been fully implemented.158

5.76 Submissions from professional associations together with enquiries and investigations by the Inspector-General identified a number of improvements for the Tax Office to consider in its administration of the penalties and interest regimes. These suggested improvements were included in the Inspector-General's original report.159

IGT Analysis

5.77 The Inspector-General has examined the extent of implementation of this recommendation and concludes that the Tax Office has considered all suggested improvements from Chapter 4 of the Inspector-General's 2005 review. The suggested improvements are as follows:

  1. Providing staff with general guidance on determining a taxpayer's overall level of compliance.
  2. Providing clearer guidance on when an audit has commenced and providing taxpayers with an opportunity to make voluntary disclosures prior to an audit formally commencing.
  3. Providing greater guidance to taxpayers and their advisers on the operation of the penalty concessions for voluntary disclosures.
  4. Consolidating the Tax Office view on voluntary disclosures into one corporate document.
  5. Introducing service standards for the finalisation of an audit where the taxpayer makes a voluntary disclosure.
  6. Introducing service standards for issuing amended assessments once the final audit report is approved and sent to the taxpayer.
  7. Clarifying the responsibility of case officers to consider tax shortfall interest remission as part of the audit process under the Tax Office's Receivables Policy.
  8. Providing greater guidance to taxpayers and their advisers on the factors that staff would consider in determining the statutory increase, decrease and remission of penalties.
  9. Reviewing the currency of a number of taxation rulings released by the Tax Office prior to the introduction of the new administrative penalties regime.
  10. Providing greater guidance to taxpayers and their advisers on the application of penalties relating to schemes pursuant to Subdivision 284-C of the Taxation Administration Act 1953, including how the provisions operate and the circumstances that lead to an increase in the base penalty amount.
  11. Providing more targeted information to taxpayers in different markets and tailoring its education strategy to deal with differences in understanding and focus in different markets.
  12. Providing further training and guidance to staff to improve file management and the quality of written penalty decisions.
  13. Establishing organisation-wide quality assurance processes for tax shortfall interest remission decisions.
  14. Developing a skilling package in relation to the tax shortfall interest regime.
  15. Developing a template for penalty and interest decisions to provide greater guidance to staff on the key issues that should be addressed when considering the application of penalties and interest.
  16. Including, as part of its audit quality assurance process, consideration of the extent that case officers follow the audit procedures regarding the imposition and remission of administrative penalties and interest.

Implementation Status: Implemented

The Tax Office has considered all of the suggested improvements that were included in Chapter 4 of the Inspector-General's 2005 review. More importantly, the Inspector-General's analysis has shown that the Tax Office has also taken action in respect of a number of the ANAO suggested improvements.


130 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance (2005) Inspector-General of Taxation (at 2.4).

131 Australian National Audit Office, Report No. 31 of 1999-2000 (tabled 16 February 2000), Administration of Tax Penalties.

132 PS LA 2001/11 Technical Decisions — Quality Reviews.

133 External service providers contracted to provide a quantitative data analysis to measure the effectiveness of penalties on taxpayer behaviour.

134 'Impact of Penalties on Compliance Behaviour — Internal Research' — Tax Office 3 June 2006.

135 The Influence of Penalties on Taxpayer Behaviour, Colmar Brunton Social Research study — May 2006 (at p 11).

136 External Scrutineers' Recommendations Database — report provided by the Tax Office's Policy & Management Division on 7 March 2007.

137 Australian National Audit Office, Report No. 31 of 1999-2000 (tabled 16 February 2000), Administration of Tax Penalties (at 3.39).

138 Source — conference with the Director in charge of the CPIT — 23 February 2007.

139 Source — conference with the Director in charge of the CPIT — 23 February 2007.

140 Tax Office 'Penalties and Interest Issues Paper Work Plan' — 2006.

141 Source — conference with the Director in charge of the CPIT — 23 February 2007.

142 External Scrutineer's Recommendations Database — Tax Office/Policy Management Division, report provided to the Inspector-General on 9 March 2007.

143 Australian National Audit Office, Report No. 31 of 1999-2000, Administration of Tax Penalties (at 3.39).

144 Source — conference with the Director in charge of the CPIT — 23 February 2007.

145 Tax Office minute — 5 April 2007 (at p 4).

146 Nil trading companies are companies which are defined as having no income, no deductions and/or no carried forward losses.

147 Source — conference with the Director in charge of the CPIT — 23 February 2007.

148 Australian National Audit Office, Report No. 31 of 1999-2000, Administration of Tax Penalties (at 3.71).

149 The Lodgement Working Party (LWP) is a sub-group of the ATO/Tax Practitioner Forum. The LWP develops and designs the tax agent lodgement program each year to reflect changing workloads, priorities, legislation and revenue requirements. The LWP is chaired by the Deputy Commissioner — Tax Practitioner and Lodgement Strategy.

150 'Lodgment program review final report' — recommendations for the tax agent lodgement program 2007-08, as well as other recommendations to improve the lodgement workloads of agents (Tax Office 18 June 2007).

151 External Scrutineer's Recommendations Database — Tax Office/Policy Management Division, report provided to the Inspector-General on 9 March 2007.

152 'Simplifying Tax Administration in a Complex World: The Challenge of Infinite Variety' — speech by the Commissioner of Taxation at the Australasian Tax Teachers Association Conference (24 January 2007).

153 'Penalties and interest project finalisation report 30 June 2006' — Tax Office (at page 17). The Integrated Core Processing System (ICP) is to replace around 75 systems and is designed to capture information in one location so as to reduce the likelihood of repeated requests by Tax Office staff for a taxpayer to provide the same set of information. It is anticipated that ICP will be ready to handle income tax matters from March 2008.

154 Source — conference with the Director in charge of the CPIT — 23 February 2007.

155 Ibid.

156 External Scrutineer's Recommendations Database — Tax Office/Policy Management Division, report provided to the Inspector-General on 9 March 2007.

157 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance (2005) — Inspector-General of Taxation (at 4.26).

158 External Scrutineer's Recommendations Database — Tax Office/Policy Management Division, report provided to the Inspector-General on 9 March 2007.

159 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance (2005) — Inspector-General of Taxation (at 4.111).