1.1 The Inspector-General of Taxation's (IGT's) review into the Australian Taxation Office's (ATO's) large business audit and risk review policies, procedures and practices ('the Review') was undertaken pursuant to section 8(1) and reported under section 10 of the Inspector-General of Taxation Act 2003 (IGT Act). In accordance with section 25 of the IGT Act the Commissioner of Taxation was provided with an opportunity to give submissions on any implied or actual criticisms contained in this report.
1.2 The IGT announced the Terms of Reference and Submission Guidelines for the Review on 17 November 2009.
1.3 The Review arose from the concerns raised with IGT when consulting with stakeholders on the IGT's forward work program. Various large business and tax practitioner groups suggested that although audits and risk reviews are generally being finalised within the ATO's specified timeframes, the way they were being handled was not achieving the aim of resolving issues and disputes as early as possible.
1.4 The large business community are particularly concerned about how the ATO interacts and engages with them as taxpayers and believe that the ATO is not resolving audits and risk reviews in the most efficient and effective manner.
1.5 Submissions from stakeholders also raised a broader range of concerns. The 'Report Structure' section that follows provides a list of the main chapters and the issues that were addressed.
1.6 All these aspects have the potential to cause unnecessary disputes and increased compliance costs. The report canvasses issues raised by taxpayers and tax practitioners as well as ATO responses along with IGT observations and recommendations designed to improve the administration of the tax system in this area of review.
1.7 The IGT also established a working group made up of key stakeholder representatives. The group participants were: Gary Christie, Deloitte; John Condon, BP Australia; Frank Drenth, Corporate Tax Association; David Drummond, KPMG; Chris Millett, Commonwealth Bank; Judy Sullivan, Mallesons; Chris Vanderkley, GE; and Glenn Williams, Ernst & Young.
1.8 We greatly appreciate the generosity of the members of this working group in freely giving their time and expertise. Their involvement has greatly enhanced the outcomes of the Review.
1.9 The working group met several times to discuss issues and concerns and to consider potential solutions in the Review. It should be noted, however, that the observations and recommendations expressed by the IGT in this report are not necessarily those of individual members of the working group. The IGT also worked progressively with ATO senior management to distil the scope for improvement and to agree on specific actions.
1.10 The IGT would like to take this opportunity to thank all the stakeholders for their submissions, insights and support. The Review was one that was characterised by balanced thinking on the issues by all parties and the recommendations made should lead to better outcomes for both the tax administration and taxpayers alike where implemented effectively.
IGT observations — future practice and policy
1.11 The relationship between large business and the ATO has a history that precedes the Review, some aspects of which are outlined in Chapter 2. It has been an evolving and developing relationship.
1.12 The IGT's report identifies certain aspects of the ATO's risk review and audit (or investigation) processes that may be improved. These aspects gave rise to various levels of large business concerns in its dealings or relationship with the ATO. The recommendations in this report if implemented and applied effectively by the ATO should help ameliorate these concerns. A summary of all the IGT recommendations and ATO responses is located in Chapter 3.
1.13 The IGT wishes to make a few observations in relation to future practice. As noted, it is expected that the changes recommended in this report where implemented and applied effectively should address the various concerns raised. There are, however, certain concerns that have been raised in earlier review situations that may require a deeper understanding of the underlying drivers and related behavioural considerations if the nature of the problems identified in this report continue to arise in future practice. Some of the potential issues that may go toward understanding these drivers and behavioural considerations are discussed briefly below.
1.14 It is important to recognise that large business pays a very significant amount of tax voluntarily and that the ATO publicly seeks to facilitate that outcome. A key area in which the ATO and large business taxpayer relationship is often tested is in the area of ATO risk reviews and audits of taxpayer activities.
1.15 The main potential risk to the ATO and large business taxpayer relationship in the conduct of these ATO investigations processes is that a disagreement may arise. These disagreements or disputes are invariably about the respective party's opinion as to how the law should or is expected to operate, but the force underlying the dispute is an economic one — the primary right to money.
1.16 The other area of increasing importance to this relationship is taxpayer compliance costs. The cost of engaging and dealing with broader tax law compliance is a key factor for taxpayers. Increasing tax legislation and related system complexity, along with increasing reporting and analytical requirements from a range of regulators, including the ATO, are primary cost drivers in this context.
1.17 It is important to appreciate that there have been some important changes and improvements that have been effected by both the ATO and taxpayers in this market to improve the relationship. It is also important to appreciate that large business does maintain some concern about certain aspects of the ATO's investigation processes.
1.18 The IGT observed various levels of satisfaction between large business taxpayers and their relationship with the ATO. The spectrum of taxpayer responses had certain extremes, but overall there was a general theme of improvements coming through, particularly in more recent times. During the Review large business expressed a strong desire to focus on the future and improving that relationship and its operation. The ATO also expressed a similar desire.
1.19 As large business is predominately made up of public companies, taxation obligations present a complex range of stakeholder relationship issues for them. Boards and senior management of large market companies must decide what resources are to be directed toward managing the organisation's tax affairs, given the imposition of self-assessment under tax law. This necessarily imposes compliance costs on taxpayers in addition to the tax payments themselves, both of which reduce shareholders' funds that directors and management are expected to maximise.
1.20 At the same time, these companies also need to assess the maintenance of social and political relationships for each given jurisdiction in which business is conducted. Large business companies are typically subject to significant levels of public and regulatory forms of scrutiny and are not in a position to pay out corporation funds without a legal or commercial obligation. Directors also have a range of important legal obligations imposed upon them personally in addition to the companies they represent.
1.21 The process of an ATO risk review or audit is at one level simply a regulatory administrator doing its job and making enquiries in its day-to-day function. However, as noted the nature of interaction that attracts most attention is where a significant investigation or a dispute arises that is not expected or provided for by the company. Typically both large business and the ATO have resources available to deal with investigations or disputes, but the cost of these processes is considerable and ever increasing due to tax law or administrational complexity.
1.22 Some broader considerations may need to be taken into account to better understand the nature of the underlying difficulties that are faced here. It may be necessary to consider the legal system given that it has at its core an adversarial dispute resolution approach. Moreover, given this tension that the company management and stewardship functions are subjected to, it should not be surprising that companies may only seek to pay what tax they believe is reasonably due. Similarly, it should not be considered surprising that companies may challenge the ATO (as administrator) on its interpretation or application of the law. The behaviour that is expected from various parties and what incentives or conflicts exist in realising these outcomes are important issues.
1.23 The above underlying issues are worthy of further consideration. If aspects of the ATO's investigation processes give rise to similar concerns after the recommendations of the Review have been implemented and bedded down effectively, it may become necessary to review the policy arrangements underpinning the statutory elements applicable to risk review and audit processes.
Statutory structure — formal processes
1.24 In the course of the ATO's investigative processes a degree of frustration occurs around the communication and information-gathering requirements. The IGT observed that this was the case for taxpayers and for the ATO itself. As an underlying policy matter, it may be worth considering whether a more formal and detailed statutory codification of these processes should be applied in ATO investigations of taxpayer affairs, should these concerns continue to arise in future practice.
1.25 The relevant statutory processes might be specified in greater detail to ensure both parties are aware of their respective positions and obligations. Such an approach would have an impact on both parties, as its greater rigidity would necessarily impose higher discipline in application, but it would also provide more certainty to both large business and the ATO as to these processes. It may also be that the approach would need to be differentiated to ensure smaller taxpayers have flexibility of choice.
1.26 Other jurisdictions have made some steps toward such an approach. It may be worth reviewing aspects of these innovations to consider their efficacy and potential application in the Australian context should the need and opportunity arise.
1.27 This report sets out a separate chapter for each major issue arising from both large business stakeholder submissions and the Review's conduct. In taking this approach and to ensure that each chapter may be read on a stand-alone basis, some brief contextual discussion is outlined within certain chapters that are more fully considered in another more specific chapter topic. A reference or link is provided to the more specific chapter topic discussions where this occurs for ease of reference and access.
1.28 The introduction at Chapter 1 provides some commentary about practice and policy and report navigation. Chapter 2 is a background section that provides some historical context. A snapshot of the report's context, findings and recommendations is summarised in Chapter 3. The ATO's compliance approach is described in Chapter 4, to provide an understanding of the administrational approaches expected to be taken organisationally. The risk hypothesis identification and related communication processes are addressed specifically in Chapter 5.
1.29 The issue of ATO project management and accountability is considered in Chapter 6 and information gathering is canvassed in Chapter 7. The audit and risk review as processes in themselves are discussed in Chapter 8. The expectations and issues surrounding the ATO's development, communication and delivery of its position papers is the subject of Chapter 9. Finally Chapter 10 summarises interest and penalties matters.