Overview of the April 2005 IGT Review

6.1 The key theme raised by small businesses and their advisers during the Inspector-General's original review in 2005 related to the Tax Office's inability, on a broad systemic basis, to distinguish between the different general categories of tax payment compliance attitudes: those businesses wanting to meet tax payment obligations but unable to do so without short-term assistance; and those businesses either incapable of meeting tax payment obligations or in serial default.

6.2 The business community highlighted that flowing on from this a competitive disadvantage of the same payment leniency shown to normally compliant businesses, facing manageable cash flow problems, was also being shown to serial defaulters and those incapable of meeting their tax payment obligations. Non-compliant businesses could simply reduce operating costs where tax debts continued to remain unpaid and therefore undercut compliant businesses' prices. Creditors were also potentially disadvantaged through having to deal with small businesses capable of continuing to trade only because of Tax Office-supplied credit.

6.3 The Tax Office agreed with the Inspector-General's recommendation that an improved analytical tool was needed to better distinguish debt collection processes.

6.4 The 2005 review also established that notwithstanding a number of obstacles facing the Tax Office, including resource allocations and the large numbers of outstanding debt cases, the Tax Office must work with the small business sector to develop and implement new administrative measures to actively assist small businesses with managing cash flows and meeting tax liabilities as and when they fall due.

Implementation of recommendations

Key Recommendation 1

The Inspector-General recommends that the Tax Office addresses issues of competitive disadvantage by distinguishing collection approaches between:

  • those small business tax debtors that want to comply with their payment obligations but need short term assistance to do so; and
  • those small business tax debtors that are either incapable of meeting tax payment obligations within a relatively short timeframe or are in serial default.

Tax Office Position

6.5 The Tax Office agreed with this recommendation and is in the process of delivering a fully automated risk model based on analytics which is expected to significantly improve risk profiling capability. The Tax Office expects that the risk model, together with expert business rules and relational formulas, will help to differentiate taxpayers according to their revenue and compliance risks. The primary objective is for higher risk cases to be identified for treatment proportionate to their risk.

6.6 The Tax Office view is that implementation of this model, together with a new enterprise-wide risk-based selection capability, should contribute to maximising earlier and fairer debt collection. It is expected that the model should be able to predict a taxpayer's payment compliance behaviour more accurately than current methods and previous models.

6.7 There will be an ongoing requirement to make the model more intuitive to adapt to changes in circumstances both internal and external to the Tax Office.

6.8 The Tax Office has in place an ongoing integrated strategy of awareness through communication and education to ensure that its officers understand how the new system will operate and impact on their work.

6.9 In July 2006 the Tax Office's Internal Assurance Branch prepared a report on the progress of implementation of the IGT recommendations. The status of implementation of Recommendation 1 contained in this report was stated as 'in progress'.

IGT Analysis

6.10 The Tax Office's current approaches do provide some capability to differentiate along the lines recommended in the Inspector-General's review. The extensive use of payment arrangements is a form of assistance to small business tax debtors who want to comply, but arrangements are also afforded to those who are in fact incapable of meeting payment obligations and may also be abused by serial defaulters. The approach to persistent debtors does identify and enable differentiated management of a limited number (estimated at about 6,000) of known serial defaulters; but it is labour-intensive and therefore limited by resources. These current approaches are therefore limited in their sophistication and range.

6.11 In this context, the Tax Office's approach to implementing this recommendation is to develop a sophisticated and fully automated system based on an analytics model being developed as part of its Change Program. Implementation is entirely dependent on the success of this model which is still under development and therefore cannot be tested by the Inspector-General. A very broad overview of the model has been provided to the Inspector-General, including a list of the types of client attributes that will be analysed to determine the compliance risk profile of each case. No finalisation date for this initiative has been provided.

6.12 The Inspector-General notes that model design includes two predictive scoring approaches that relate directly to the recommendation: (1) a propensity to pay score, and (2) a capacity to pay score. These scores would be combined with business rules and formulas to determine the appropriate treatment of each case. The expectation that the model will be a fully automated predictive model that will enable the Tax Office to select treatment strategies based on the risk profile of a debtor, appears to be in line with the Inspector-General's recommendation.

6.13 The Tax Office approach and expectations are sophisticated and ambitious. The Inspector-General also notes that the December 2006 progress report to the Tax Office by Accenture said that a number of key improvements to the model were required and that a conclusion as to the model's effectiveness was not currently possible.

6.14 In its February 2007 response to the Inspector-General160, the Tax Office acknowledged that this recommendation had been with them for nearly two years. However in respect of this point, the Tax Office referred to the progressive implementation of the Change Program which they stated is due for completion in 2009.

6.15 Notwithstanding this, the Tax Office has identified a number of opportunities to change existing practices, including:

  • remission of small residual general interest charge (GIC) on completed promises to pay;
  • accepting GIC remission requests to the value of $1,500 over the phone;
  • simpler and more flexible guidelines for payment arrangement proposals including those under $25,000;
  • removing the need for taxpayers to lodge outstanding returns before the Tax Office agrees to enter into a payment arrangement;
  • the development of key guiding principles, which reflect the Tax Office's organisational values.

6.16 The Tax Office has not advised when these opportunities will be realised.

Implementation Status: Not implemented

The Tax Office is in a prolonged process of developing an automated risk profiling capability that will enable treatment strategies to be based on the risk profile of a debt case.

The key design features of the proposed analytics model appear to be broadly in line with the Inspector-General's recommendation. It is apparent that the proposed model will need to perform more detailed analysis to effectively distinguish collection processes between compliant and non-compliant small business taxpayers.

The likely effectiveness of the proposed capability cannot currently be assessed. The model is not yet operational. No finalisation date for this initiative has been provided.

Pending successful implementation of the new capability, the Tax Office remains reliant upon existing capability that does not differentiate to the level required by the recommendation.

After two years, this recommendation is not implemented. However, the challenge of building a system with the level of sophistication needed to deliver the required capability is significant. The Inspector-General is satisfied that the Tax Office is attempting to meet this challenge.

Key Recommendation 2

The Inspector-General recommends that the Tax Office works with the small business sector, and their representatives, to develop new administrative approaches to actively assist small businesses to better manage cash flows, if necessary, to meet tax liabilities as and when they fall due.

Tax Office Position

6.17 The Tax Office agreed with this recommendation by responding:

It too reflects current directions as evidenced by the taxi industry initiative referred to in your report and the education program we now run to support taxpayers identified as new to business.161

6.18 A number of speeches by the Commissioner in early 2006 highlighted the key message that the Tax Office would be supportive and work with taxpayers in difficulty by arranging payment of debt by instalments to fit their circumstances. Following this, the Debt Business Line commenced a review of its practices and behaviours with the aim of developing a framework that assists taxpayers to meet their obligations and encourages parties to work together to resolve problems. A series of business design changes were proposed as part of this review including:

  • periodic GIC remission on debt balances of $100 or less with net GIC postings totalling $100 or more;
  • actioning of debts under $25,000 in line with the interactive voice recognition system; and
  • granting of standard payment arrangements where there are outstanding lodgements.

6.19 In addition to the above, the Tax Office trialled in 2006 a number of new strategies, such as dialler technology, aimed at re-engaging taxpayers who had not responded to previous demands and increasing the number of taxpayers that are contacted.

6.20 The Tax Office's July 2006 Internal Assurance Branch report recorded the status of implementation of Recommendation 2 as completed.

IGT Analysis

6.21 The above-mentioned changes specifically focus on established debt whereas the Inspector-General's recommendation was for the Tax Office itself to adopt new administrative approaches that would enable taxpayers to better plan for and avoid debt arising in the first place — in other words, to adequately manage cash flow in order to provide for tax obligations as and when they fall due.

6.22 The Tax Office continues to communicate to taxpayers through a series of guides and fact sheets about the importance of managing cash flows as well as budgeting for tax liabilities. Included in these guides are useful tools designed to assist taxpayers with monitoring their position with a view to meeting their tax obligations — an example of such a tool is e-Record. The Tax Office also continues to conduct a series of seminars around the country dedicated to educating small business on record keeping and managing cash flows.

6.23 The Tax Office has worked with the small business sector to continue to improve these important educative strategies. However, the strategies do not represent any change in administrative approaches by the Tax Office that would assist businesses in line with this recommendation.

6.24 The Inspector-General considers that a range of possibilities exist for new Tax Office administrative approaches that should by now have been considered and developed by the Tax Office, working with the small business sector. Examples of these possibilities include:

  • Extending the kind of thinking and approaches used in the taxi industry to other industries or sectors;
  • Working with the banking sector to develop a withholding facility for selected industry groups which requires businesses to deposit regular amounts into the facility. Once deposited, these amounts would in turn be directed towards tax liabilities. Related possibilities include facilitating and encouraging the use of BPAY facilities towards the same end;
  • Working with the small business sector to conduct research into the cash flow cycles and terms of trade of particular industries as a basis for both considering administrative changes (for example by re-aligning payment due dates with periods when funds are available) and for improved understanding when managing debt cases.

Implementation Status: Not implemented

The continued improvement, in cooperation with the small business sector, of the range of cash flow management tools and education strategies aimed at helping small business to improve their approaches is very positive.

The Tax Office has not provided evidence that it has considered or developed any changes to its own administrative approaches that would assist business to manage cash flows and to meet tax obligations as and when they fall due. There has been no indication of any new approach such as occurred with the taxi industry initiative. The Tax Office has not followed on from its response to the original Inspector-General report.

The Tax Office should have done more over the two years since the recommendation was accepted to consider if it could change its own approaches. The recommendation has therefore not been implemented.

160 Tax Office minute 'IGT08-RECS-2007' — at p 3 (28 February 2007).

161 Review into the Tax Office's Small Business Debt Collection Practices (2005) — Inspector-General of Taxation (at p 20).