2.1 This chapter sets out a brief description of the ATO's Large Business & International compliance program and results including the number of risk reviews and audits conducted, the total liabilities raised and collected and the tax collected from the large market through cooperative processes such as Annual Compliance Arrangements.
2.2 It also describes the ATO's management of LB&I including the organisational structure, the role and responsibilities of those involved in risk reviews and audits and the various management reports regarding performance of audit and risk reviews1.
2.3 The chapter then briefly sets out the main sources of guidance to LB&I officers on undertaking risk reviews and audits. It considers the key findings of the Burges Report and the ATO's response including a detailed examination of the 13 specific initiatives announced by the Commissioner at that time.
2.4 The chapter then sets out the community feedback regarding the LB&I approaches, processes and work practices received by the ATO through the Professionalism Survey and Client Feedback Questionnaires.
LB&I compliance program and results
2.5 There are over 1,300 economic groups and entities in the ATO's large market segment, encompassing over 32,000 businesses. Approximately two-thirds of these businesses are public companies and approximately 1,100 of these groups have an annual turnover of greater than $250 million.2
2.6 Large business represents a significant part of the Australian economy and plays a crucial role in the tax system. In 2008-09 large business represented 63 per cent ($37.8 billion) of income tax collections from companies and 53 per cent ($20.2 billion) of total net GST.
2.7 The ATO's historical approach in communicating its large market compliance program is to use various mediums including, speeches, guides, other publications and by engaging directly with specific industry forum groups. This market is a very significant area for revenue collections (across a range of taxes applied directly or by way of withholding) and as a consequence for the ATO's functional delivery to Government. The strategy and approach along with the underlying risks or concerns that the ATO sees are outlined in more detail in the Large Business and Tax Compliance booklet which is discussed in Chapter 4.
2.8 The ATO has indicated that it is moving towards a more sophisticated measurement of its compliance performance so as to evaluate whether its compliance activities are having the expected impacts. This involves measuring the efficiency (cycle times and completion targets) and effectiveness of risk reviews and audits. Some measures of effectiveness include direct revenue adjustments, revenue protected, audit strike rates, success of litigation, assessments of changed taxpayer behaviour, conformance with the ATO's Integrated Quality Framework and taxpayer satisfaction with the conduct of the risk or audit. The ATO also issues Client Feedback Questionnaires to gauge or measure taxpayer satisfaction with the conduct of the risk review or audit.
2.9 The IGT has not had the opportunity to consider the use or effectiveness of Client Feedback Questionnaires or other external market surveys. While the IGT supports the ATO's attempt to gain insight around their service delivery performance it may be that certain response collection methods may be more effective than others. It may also be that there is potential bias in survey results from respondents even if arranged through third party agents due to factors that may not be completely appreciated, including underlying concerns about anonymity amongst others.
2.10 The ATO also notes that an increasing proportion of tax is now collected from the large market through cooperative processes, such as Annual Compliance Arrangements and also through less formal real-time work to help taxpayers obtain earlier certainty on their tax risks. As such, traditional measures of audit results such as 'liabilities raised' reflect only one part of the ATO's activities to manage tax risks in the large market.
LB&I active compliance program
2.11 According to the ATO's case management system, the number of LB&I compliance cases conducted between 1 July 2006 and 30 June 2010 was 1,284 (some of which were already in progress at 1 July 2006). Table 2.1 provides a break-up of the different types of compliance activities for this period.
|Compliance activity||Number of cases|
|Client risk review||505|
|Specific risk review||387|
|Transfer pricing review||132|
|Specific issue audit||73|
|Transfer pricing audit||8|
2.12 Of the 505 client risk reviews, 371 did not progress to audit (although in 42 of these risk reviews there was an adjustment without the need to progress to audit). Of the remaining 134 client risk reviews, 39 led to a comprehensive audit and 53 led to a specific issue audit. As at 30 June 2010 there were 42 client risk reviews still in progress.
2.13 Similarly, of the 387 specific issue reviews, 292 did not progress to audit (although in 44 of these cases there was an adjustment without the need to progress to audit). Of the remaining 95 specific issue reviews, 23 led to an audit with a further 72 reviews still in progress at 30 June 2010.
2.14 Figure 2.1 outlines the work flow of the 150 comprehensive audits that were conducted between 1 July 2006 and 30 June 2010. As at 30 June 2010 there were 49 comprehensive audits still in progress.
Figure 2.1: Outcomes of comprehensive audits3
2.15 Figure 2.2 outlines the work flow of the 73 specific issue audits that were commenced or recorded on the ATO's case management system during this period. As at 30 June 2010 there were 38 specific issue audits still in progress.
Figure 2.2: Outcomes of specific issue audits4
2.16 Table 2.2 provides a more detailed break-up of the large market revenue adjustments arising from ATO compliance activities together with total collections.
|Tax Type||Total Collections||Active Compliance
2.17 In the IGT's view 'total liabilities raised' through compliance activities are just one indicator of the ATO's active compliance performance. Solely in hard monetary terms the related and more important measure of collection against such liabilities raised (including both costs of collection and dispute) needs careful consideration. While management across various industries view variance or errors analysis against liabilities raised and collections received as a very useful tool in assessing the effectiveness of outcomes, as noted, the analysis in a tax collection environment should include other measures.
2.18 The ATO's compliance performance like other revenue authorities needs to take into account measures such as the promotion of voluntary compliance, minimisation of taxpayer compliance costs and overall stakeholder satisfaction with the effective running of the system and service level provided.
2.19 The existence of the ATO's active compliance program, depending upon taxpayers' perceptions about the consequences of the ATO's approach or conduct, may have positive or negative behavioural reinforcement effects for voluntary compliance.
2.20 Figure 2.3 displays LB&I audit liabilities raised against the time taken to complete the audit.
Figure 2.3: lb&i audit results by liabilities raised and elapsed time
2.21 The ATO has designed its compliance program around a risk differentiation framework (RDF) approach. This framework directs ATO compliance activity or resources on consequences for, or risk to, expected tax collection revenue. The ATO considers that the significant consequences of potential non-compliance in the largest businesses are such that (even though the likelihood of non-compliance may be lower) it will devote significant resources to monitor, review and (where appropriate) audit them. For more details on the ATO's RDF refer to Chapter 4.
Management of ATO LB&I business line
2.22 During the course of this review, LB&I adopted a new structure, reporting and governance arrangements across the business line. This did not significantly change the day-to-day work of teams working in active compliance but did alter management structure and reporting arrangements above the Team Leader level.
2.23 Prior to the change, LB&I's active compliance teams were organised into broad groups with an industry segment focus and Segment Leaders. Under the new arrangements, a senior tax officer continues to have primary responsibility for managing the ATO's ongoing taxpayer relationship at the strategic level.
2.24 The new arrangements bring ATO active compliance teams together under one Operations group.
2.25 LB&I has a presence across 11 sites in all States and the Australian Capital Territory. The new arrangements place a greater emphasis on site leadership with Senior Executive and Executive Level officers working together in the active management of compliance and other work for teams under their direction. Committee structures assist these leaders to co-ordinate the entire work program across all sites to improve efficiency and effectiveness (for example, through improved flexibility in work allocation).
2.26 The ATO's interactions with each of the higher consequence taxpayers (that is, higher risk and key taxpayers) is managed by one team that reports to a Senior Executive Service (SES) officer, usually within their own location and working to a strategic plan designed specifically for the circumstances of the taxpayer.
2.27 Other compliance teams work on cases in relation to one taxpayer or a group of taxpayers on a project basis. Project cases may have an industry or tax risk focus. Those teams report to the SES officer who is responsible for managing their site.
2.28 All compliance teams are led by the Team Leader accountable for the ATO's engagement and relationship with the taxpayer in the context of risk reviews, audits or other compliance activities and the day-to-day management and progress of the work program in their team.
2.29 Compliance teams have assistance and support in relation to technical issues and case management from experienced officers within the business line including from LB&I's technical networks.
2.30 Case Leaders also assist and support compliance teams at the request of the relevant SES, or may initiate an intervention by agreement with the SES where assurance processes indicate that this may be required. They can have issues or cases referred to them at any time during the lifecycle of a case.
2.31 The overall business management of the compliance work program is reviewed by the Business Delivery Committee, which consists of SES and Executive Level officers across sites.
2.32 This is complemented by assurance processes led by the Business Management and Governance Team. There are also specific 'intervention points' where the Case Leaders will work with leaders in the sites and the Business Management and Governance team to provide assurance that cases are being appropriately managed as part of the monthly review process and the formal governance call-over process (three times per year).
2.33 LB&I has a monthly reporting cycle and reports are reviewed by the site SES, Business Delivery Committee and the LB&I Executive.
2.34 The Team Leader is responsible for managing their team to ensure the completion of active compliance casework in appropriate timeframes and to a high standard of quality. This responsibility encompasses all aspects of people management, organisation, oversight of work and mandatory sign-off.
2.35 Technical leaders provide leadership to officers within their site in identifying and resolving technical issues within a case.
2.36 Case officers are responsible for the day-to-day active management of a risk review or audit. They do the internal work prior to initial contact with the taxpayer and thereafter in the conduct of the plan.
2.37 Case Leaders (known as Special Advisers under the former LB&I structure) are a small group of senior tax officers who provide specific assistance and technical leadership in selected casework. Case Leaders report to a senior SES Officer who in turn reports to the LB&I Deputy Commissioner. Their interventions in casework may be in relation to a particular issue within a case or it may extend to taking on the role of the SES with ultimate responsibility for the entire case. In such cases, the team leader and case officer remain responsible for the day-to-day running of the case but are subject to the direction of the Case Leader for matters in relation to the case in the same way that they would normally take direction from their site SES.
2.38 The Deputy Commissioner LB&I Case Leadership is a Band 2 SES position reporting to the Second Commissioner, Compliance. This role was established to undertake interventions at a senior level in selected cases with a particular focus on the largest, most complex and sensitive matters.
2.39 LB&I has established technical networks to support the development of capability and sharing of knowledge around key areas of the law (such as Capital Gains Tax, International, Consolidation, and Transfer Pricing). Additional networks also exist around areas of practice, such as the Litigations and Objections network.
2.40 As at 30 July 2010, there were a total of 1,323 ATO personnel (or Full Time Equivalent (FTE)) working as part of LB&I, with a total of 911 FTE involved in active compliance work. Of these, 705 FTE were allocated to undertake risk review and audit work through active compliance teams that were in the previous industry based segments — Energy & Resources (174 FTE in 12 teams), Financial Services Industry Group (210 FTE in 16 teams) and National Client Group (321 FTE in 29 teams).
LB&I management reports — audit and risk review performance
2.41 With the change in the LB&I management structure, it is expected that each area will undertake its own more detailed monitoring and this will involve the production of various reports to track case progress and plans.
2.42 Previously, each segment had a range of localised arrangements for ad hoc and regular reports to assist them in planning and managing their case workload and tailored to the specific needs of these areas. ATO LB&I management has advised the IGT that it is examining these arrangements for extracting performance data and preparing reports at the local and LB&I level to determine the most efficient and effective process.
2.43 The LB&I Compliance Assurance Report is the main report that is prepared for the LB&I Leadership team to monitor the progress of the program of active compliance work.
2.44 The LB&I Executive Report also contains overview format information around performance across all key areas of the work program, including a section about active compliance work. The information in the active compliance section of this report is largely a high level summary of the content found in the Compliance Assurance Report. Periodically, the LB&I Executive reviews lists of current and planned audits and risk reviews to obtain a more detailed update of the progress of casework and how this is tracking against plans for the year.
2.45 LB&I provides input to corporate reporting (also known as Heartbeat reports) in relation to active compliance. This is a higher level overview of how active compliance is travelling and drawn from the more detailed reports described above.
ATO LB&I guidance on compliance approaches, processes and work practices
ATO Large Business and Tax Compliance booklet
2.46 The ATO Large Business and Tax Compliance (LBTC) booklet (the latest update of which was released in June 2010 during the course of this review) provides a high level explanation of the LB&I end-to-end compliance processes. The ATO developed the booklet through a process of consultation, collaboration and co-design with large business. It is the ATO's intention that the booklet have a broad audience that includes large businesses' internal tax management, chief financial officers (CFO's), chief executive officer's (CEO's) and board members and naturally ATO staff working with the large business sector.
2.47 The statements of mutual expectations in this booklet reflect an approach which promotes frank and open dialogue and outlines the responsibilities of the ATO and expectations of large business in working together.
2.48 The booklet details what taxpayers and their advisers can expect from the ATO including how the ATO manages tax risk, its active compliance approaches and a simplified representation of its processes for carrying out risk reviews and audits. It also sets the principles that the ATO will adopt for gathering information and the points of its interaction with the taxpayer and what they can expect of the ATO.
2.49 The booklet stresses that in conducting a risk review or audit the ATO will have a strong focus on:
- planning to agree on time frames and the scope of active compliance activities;
- open dialogue with taxpayers, including initial discussions on the matter that has attracted the ATO's attention;
- gaining an understanding of the taxpayer's business context and environment;
- gathering relevant information and evidence to get the full facts quickly; and
- making the right tax decisions according to the law.6
2.50 The ATO considers the booklet to be a flagship document — setting out the ATO's complete engagement model and current service offering for large business. It establishes the platform and reference point for all aspects of its compliance program management. The booklet represents a high-level explanation of its end-to-end process.
2.51 In discussion with the IGT, the ATO acknowledged that it is important that the spirit of the booklet is 'lived out' and reflected in the conduct and approaches of the ATO both internally and with its interactions with taxpayers, especially as it moves towards a more differentiated approach. Appropriate guidance to staff and effective assurance processes need to be in place to ensure the consistent and proportional application of the principles and expectations in the booklet through the ATO's risk review and audit processes in achieving this goal.
2.52 The principles in the booklet also set out ATO expectations of taxpayers who wish to avail themselves of particular engagement or service levels that are provided for in the booklet.
ATO LB&I Compliance Manual
2.53 The ATO LB&I Compliance Manual is an internal document that seeks to provide a bridge between the high level steps in the Large Business Tax Compliance (LBTC) booklet and the ATO's end-to-end skilling materials and Siebel case management system procedures. It is intended to provide a one-stop shop for all instructional material available to LB&I staff conducting risk reviews and audits.
2.54 The LB&I Compliance Manual sets out guidance on the expected thinking, logic, judgement and reasoning behind the LB&I risk review and audit processes. It covers a range of different aspects of the risk review and audit process including:
- the risk hypothesis, planning a risk review, identifying and reviewing tax risks and conducting internal workshops;
- assessing the risk, developing recommendations and communicating the outcomes to taxpayers; and
- commencing and planning the audit, information-gathering, refining the risk hypothesis and determining the ATO position.
2.55 The manual is an important management and operational document. It is vital that the manual interface and link effectively with the ATO's Risk Differentiation Framework and the LBTC booklet in a manner that provides instruction to staff, and ensures consistency in application.
2.56 Complementing the LBTC booklet and LB&I Compliance Manual are detailed procedures, support tools and instructions provided on the work processes intranet site and Siebel case management system. In announcing the release of the LBTC booklet the Commissioner in his speech7 noted that it was to be completed by a comprehensive skilling program for staff, being an 11 day training course directed at end-to-end compliance management.
Burges Report — key findings and ATO initiatives
2.57 The IGT in conducting background research into the area of large business ATO audit and risk reviews looked to consider matters that were raised in any previous reviews undertaken, particularly in the Australian context.
2.58 In September 2004 the then Commissioner of Taxation (Michael Carmody) announced that he had appointed Mr Kevin Burges to conduct one-on-one interviews with representatives of large corporate taxpayers to get a picture of their experiences and concerns about ATO audits.
2.59 A report was issued in April 2005, entitled 'Report on the concerns of a number of the largest companies in the Large Business Segment with ATO audit, investigation, and advice procedures' (the Burges Report).8
2.60 The Burges review was part of a larger initiative to improve the quality and timeliness of ATO audit processes in the large corporate sector. The review was undertaken on the basis that it was not to test the veracity or reasonableness of the statements made by large business, although the report noted that:
... if the Cooperative Compliance Model is to achieve the full benefits sought by both the ATO and by taxpayers, it is important that the perception of less than desirable professionalism and level of service felt by these companies, be addressed by the ATO, just as it is equally important that taxpayers maintain appropriate standards of honesty, frankness and courtesy in their dealings with the ATO.
2.61 In relation to audits, the Burges Report noted three main areas of concern raised by large business:
- delays, often long after all information requested had been provided, leading to last minute position papers and inadequately considered assessments;
- difficulties in arranging meaningful discussion of issues during the progress of the audit; and
- some instances of perceived aggressive or oppressive conduct in relation to settlement negotiations.
2.62 The Burges Report also noted some concerns in regard to the risk assessment process including the procedures involved in making the assessment and the consequence of the risk assessment.
2.63 On 13 October 2005 the then Commissioner of Taxation, Michael Carmody, released the Burges Report together with details of his strategy for improving the audit experience for large business, including a series of 13 specific initiatives9.
Initiative 1 — Early engagement of technical experts in audits
2.64 The Commissioner indicated that this initiative would ensure that senior technical experts, including those from the ATO's Tax Counsel Network and Centres of Expertise, are brought into the process early to assist with focusing the information-gathering and contributing to the formation of the ATO view on the facts. It was also envisaged that taxpayers would have the opportunity to respond and discuss the issues with the ATO technical experts as the ATO view is being formed.
2.65 This initiative was aimed at ensuring that all technical issues and information needs are identified as early as possible in the audit process, providing greater clarity for the taxpayer and minimising the need for protracted information gathering processes.
Initiative 2 — Twice yearly meetings with top 100 taxpayers
2.66 This initiative was aimed at helping to build an ongoing professional relationship with the largest corporate groups. It involved corporate group executives being invited to meet with senior tax officers (Senior Executive Service officers for the top 30 taxpayers and Executive Level officers for the balance of the top 100) on a half-yearly basis to discuss the progress of any compliance activity and significant events in the company's business or revenue performance.
Initiative 3 — Engagement of external experts to improve the ATO's understanding of business
2.67 To strengthen the ATO's understanding of business imperatives and commercial practices, the ATO announced it would put into place arrangements with a range of external topic and industry experts who will be available on an advisory basis for major reviews or audits. The experts were to provide the ATO's key technical staff with greater insights into the business environment and help the ATO to quickly identify the issues and information needs.
2.68 In an update to the ATO's key consultation group, the National Tax Liaison Group (NTLG), the ATO advised that the use of external experts has already occurred in a number of cases and LB&I officers have been notified to use external consultants when appropriate. For example, experts have been engaged in market valuations work, transfer pricing cases and corporate financing issues.10
2.69 The ATO also indicated that this initiative was being supplemented by internal workshops and technical forums across the ATO to share knowledge and understandings about industry sectors, business processes and lessons from the use of consultants in active compliance work.
Initiative 4 — Workshopping technical issues arising in risk reviews
2.70 Corporate representatives had indicated that some audits may have become unnecessary if the ATO had undertaken more complete internal workshopping of the commercial and technical issues before the risk review was completed.
2.71 The initiative requires case officers to workshop the risks arising from all risk reviews that are likely to lead to an audit. ATO technical leaders and experts must participate in these workshops and they must be held prior to the finalisation of the risk review.
2.72 The aim of these workshops is to ensure that all relevant tax officers (Case Officers, Team Leaders, technical specialists and experts) have a greater understanding of the issues to clearly explain the significant tax risks to taxpayers and their internal risk management committees.
2.73 The benefits for the ATO would be improved decision-making and better quantification of the risk through a greater ability to explain the tax risks, their scope and legal basis and the allocation of resources to higher tax risks. For taxpayers, the intended benefits included the clearer articulation of the risks, scope and legal considerations in the event that risk review proceeds to audit and the assurance that the issues have been discussed with the relevant experts.
2.74 The involvement of appropriate technical leaders and experts at these workshops would be reflected in the ATO's corporate assurance results and taxpayer feedback such as the Client Feedback Questionnaire and Professionalism Survey.
Initiative 5 — Provision of draft report to taxpayer for comment
2.75 Corporate representatives had indicated that some risk reviews escalate to audits without adequate consultation and that the final letter does not provide guidance on the next course of action. The Commissioner stated that there was a need to provide further opportunities for taxpayers to interact in the risk review and audit decision-making processes.
2.76 This initiative requires that the ATO issue a draft risk findings letter and then having a discussion with corporate executives prior to finalising its position. At those discussions the implications of the ATO's conclusions should be raised. This letter must be issued before the finalisation of all risk reviews except where the risks are rated low or trivial in which case the ATO will issue a finalisation letter stating that no further action will be taken at this time.
2.77 The benefits for the ATO would include improved dialogue and openness with the taxpayer and greater opportunity to build a better understanding of the taxpayer's perspective of the risks and technical interpretation. Taxpayers would also benefit through an improved awareness of the outcomes of the risk review and have the opportunity to correct any errors of fact.
Initiative 6 — Senior ATO staff to discuss outcomes with taxpayers
2.78 The Commissioner stated that where the risk review process proceeds to an audit the ATO would take further steps involving discussions at more senior levels to ensure that the corporate executives understand clearly what is likely to take place.
2.79 This initiative requires senior ATO officers to meet with taxpayers at the conclusion of a risk review to discuss the risk findings and their implications. This applies to all risk reviews except for those cases involving a taxpayer outside the Top 30 and where the risks are low or trivial.
2.80 The senior ATO officer must lead the discussion about the technical issues leading to the identified risks, the reasons why the ATO believes they are risks, the implications for the taxpayer, the timing of any audit activity and what a taxpayer can do to mitigate the risks.
2.81 The ATO considers that this initiative provides greater certainty to taxpayers about future ATO action and allows taxpayers to make any voluntary disclosures before the commencement of any audit. This should be reflected through improved feedback that taxpayers have a better understanding of the identified tax risks, the ATO's view on these risks and the likely next course of action.
Initiative 7 — Discussion of audit plan with taxpayers
2.82 The aim of this ATO initiative is to provide taxpayers with a clear understanding of the scope of the audit, the tax risk being audited, the audit process and the proposed audit project plan timelines. The ATO notes that this is a critical step in the management of the audit and requires much more openness with taxpayers than has been the case in the past to ensure that the discussions are more than just identifying milestones. This initiative is intended to complement the requirement for Team Leaders to maintain regular discussions with taxpayers throughout the course of an audit.
2.83 The initiative requires that at the commencement of an audit, a senior ATO officer must meet with the taxpayer to discuss the audit project plan. At this meeting, the ATO will clearly explain the stages and scope of the audit, what the ATO will do if it finds new issues or decides it will not pursue a certain issue and the protocols for information gathering. These discussions should also cover the taxpayer's other commitments and when they might occur during the audit, such as year-end accounts, preparation and lodgement of returns and the availability of advisers and key personnel.
2.84 At subsequent meetings, the ATO will provide updates on the process of the audit and indicate any further information required and the reasons for seeking that information.
2.85 The benefits for taxpayers through this improved dialogue and openness is that they should be in a better position to respond to information requests and allow them to plan their workloads to allow for the timely progression of the audit.
2.86 The ATO states that the success of this initiative should be reflected through improved taxpayer feedback in Client Feedback Questionnaires which shows that taxpayers have a clear understanding of the scope of the audit and the audit process. The ATO's assurance processes also examine whether audit plans and minutes of the initial audit discussions are on the audit file and whether senior ATO officers have undertaken a review of the audit plan prior to discussing with the taxpayer.
Initiative 8.1 — Case call-overs
2.87 This initiative requires that case call-overs of significant audits are conducted on a six-monthly basis by senior tax officers. Subsequent reviews occur every six months from the initial call-over until the completion of the audit.
2.88 The purpose of this initiative is to assist teams working on significant audits, to identify issues that are causing delays and to progress those issues to a solution. The ATO envisages a number of benefits from the case call-over process, including:
- cases are actively managed leading to a reduction in the number of aged cases and minimising taxpayer's compliance costs;
- intelligence gathered from the audits is fed back into the risk assessment process in a timely manner;
- expertise can be brought into the audit process early leading to the arrangement of workshops with other technical officers and experts to work through difficult audit or technical issues or to more quickly refine the scope of the audit where the risk does not exist or is immaterial;
- audit teams obtaining assistance to resolve problems in obtaining relevant information to progress an audit; and
- improved quality results, productivity, audit coverage and strike rates.
Initiative 8.2 — Monthly reviews
2.89 This initiative requires team leaders to conduct a monthly review of audit and risk review cases to ensure they are progressing in an appropriate manner and without unnecessary delays. All cases must be reviewed on a monthly basis until the risk review or audit has been finalised.
2.90 As part of a monthly review, team leaders are required to:
- ensure that the case plan is still relevant and the milestones are still achievable;
- ensure that the risk review or audit is progressing in accordance with the agreed case plan;
- identify and address emerging issues and risks which are delaying the progress of the case;
- ensure that any internal or external blockers to the progress of a case are identified and appropriate strategies are implemented to mitigate their impact; and
- identify additional support that may be required by the audit team.
2.91 Team Leaders are required to sign-off on the monthly reviews while Segment Directors have responsibility for ensuring that monthly reviews are being undertaken.
Initiative 9 — Remission of the SIC and GIC for the period audits go beyond two years
2.92 The Commissioner noted that delays in completing an audit can add a substantial interest charge and that the assignment of the cause of the delay is at times difficult and contentious. It was also observed that the previous process suffered from the lack of benchmarks for reasonable timeframes for particular activities undertaken in the course of an audit.
2.93 In response to these observations, the Commissioner announced the introduction of a new ground for remission of Shortfall Interest Charge (SIC) and General Interest Charge (GIC) based on an expectation that it is reasonable for a large corporate audit to be concluded within two years of the notification of its commencement. Only in exceptional cases involving blatant obstruction would this remission not apply. Such cases would need to be agreed by the Deputy Commissioner following discussion with executives of the relevant large business taxpayer. The Commissioner noted that implicit in the two year benchmark is a purposeful approach to the management of large cases that, in appropriate circumstances, will involve the use of the ATO's formal powers where it considers that there is a genuine lack of co-operation. The intention of this initiative was to apportion no blame to either party for delays in completing audits and to make it clear that a large taxpayer audit should not take more than two years to complete with a purposeful approach to case management.
2.94 The benefit of this initiative would be that large audit cases would be better managed so as reduce the need to remit the interest charge for audits that have taken more than two years.
2.95 Practice Statement PS LA 2006/8 sets out the ATO's policy on the remission of SIC and GIC and incorporates the Commissioner's initiative by remitting interest to the base rate for large business audits exceeding two years. The Practice Statement also provides additional grounds for remission, including:
- delay in commencing audit;
- expected audit completion date exceeded or unreasonable delay;
- delay in obtaining information from a third party; and
- longer resolution times due to complexity of issues.
Initiative 10 — New edition of the Large Business and Tax Compliance booklet
2.96 The Commissioner announced the publication of the LBTC booklet to provide large businesses (and their advisers) with detailed information on the ATO's approach to tax risk management and compliance. The first booklet was developed in consultation with key stakeholders and launched at the Large Business and Tax Administration Symposium on 30 August 2006.
2.97 For completeness it should be noted that this was the second LBTC booklet. The first LBTC booklet of this kind issued in 2003. The most recent version was launched by the Commissioner of Taxation (Michael D'Ascenzo) on 15 June 2010.
Initiative 11 — Development and implementation of Forward Compliance Arrangements
2.98 In October 2005 the ATO announced a range of initiatives to improve its processes, enhance its understanding of business operations and strengthen its relationship with large business. One of the initiatives sought to develop and implement a Forward Compliance Arrangements (FCA) model.
2.99 Since 2005 the ATO has sought to develop a more 'real-time' relationship with large taxpayers. This has been through both formal and informal processes such as FCAs, Annual Compliance Arrangements (ACAs), building and maintaining cooperative relationships that encourage taxpayer disclosures of potential risks and a proposal to require large business taxpayers that the ATO regards as higher risk to make disclosure about their uncertain tax positions.
2.100 The FCA was an incentive-based approach to managing compliance for all tax obligations, and provides an alternative to traditional compliance approaches. It is a voluntary arrangement between a large business and the ATO which sets up an agreed way of working together in the future.
2.101 In particular, the FCA is a commitment in writing by large business and the ATO to make a joint effort to focus on complying with current tax requirements and anticipate future tax needs, especially when major transactions affecting tax are likely.
2.102 The ATO expects that a commitment to the principles of an FCA, such as transparency and real time collaboration, will lead to:
- an environment less likely to produce surprises;
- a reduced likelihood of audit;
- concessions in relation to administrative penalties and interest that apply in the event of tax shortfalls; and
- more certainty, trust and ultimately less compliance cost.
2.103 In addition, the ATO requires a high standard of corporate governance (and a corresponding 'low' tax risk profile) as a prerequisite for entry into the FCA program. A demonstrated commitment to continuous disclosure is also a requirement.
2.104 In May 2008, the Commissioner announced a package of initiatives that aimed to add certainty and improve the relationship between large business taxpayers and the ATO.
2.105 These initiatives include ACAs which are designed to provide practical certainty by jointly assessing tax risks in real-time or at the time that the tax return is lodged. The ACA process is intended to build on its learnings and experience from the FCAs that the ATO has in place with some large businesses.
2.106 ACAs are built around two concepts: the company having sound tax risk management processes and a commitment from the company to full and true disclosure of all relevant and material facts. The key features of the ACA are:
- confirmation, from the Chief Financial Officer or Chief Executive Officer on behalf of the board, that the company meets the key corporate governance guidelines set out in the ATO's LBTC booklet and has a genuine commitment to 'putting all cards on the table';
- workshopping with the ATO during the course of the year major transactions or tax positions which have a level of uncertainty so that the ATO and taxpayer can jointly assess the tax risks; and
- once the tax return is lodged, undertaking jointly with the ATO a review of the tax return and other information, including the statutory accounts, and book to tax adjustments.
2.107 The ATO states that the main difference between the ACA and audits and risk reviews is that the ATO asks companies to put their tax risks on the table and to discuss how risks have been mitigated, giving early practical certainty and support to resolve any apparent differences. This requires a sound approach to tax governance and a clear view of the kinds of things that the ATO would see as a risk.
2.108 In return, taxpayers will get a significant level of practical certainty. With both the taxpayer and the ATO having looked at tax risks broadly, the ATO would not as a general rule allocate resources to low risk matters.
2.109 The ATO advises that taxpayers that choose to use an ACA are able to manage their planning and compliance from a position of greater certainty, with 'no surprises' if material risks have been disclosed, and with little or no exposure to penalties and interest.
2.110 An alternative to the FCA and ACA process, and one that is being adopted by a number of taxpayers, is the disclosure of potential tax risks at or around the time of lodgement of a tax return. This assists taxpayers to manage their planning and compliance from a position of greater certainty without having to enter into a formal FCA or ACA. From an ATO perspective, it assists in building a more cooperative relationship and narrows the potential risks that may require further examination.
2.111 The ATO has also raised the possibility of requiring certain large business taxpayers to make disclosures about their uncertain tax positions (UTP). At that time the ATO suggested it may as a starting point look at having large business taxpayers it regards as 'higher risk' making such disclosures.
2.112 More recently the ATO has advised the IGT that it is developing an information disclosure package designed to provide assurance regarding large businesses' most contentious and material risks, and to better understand tax risk across the market. The approaches being developed by the ATO will support the differentiated approach based on the ATO's Risk Differentiation Framework. Further, some concepts and approaches are being trialled in a limited pilot project and were the subject of initial consultation during 2010.
2.113 The IGT recognises that this is an area of potential concern for all. Whatever approach is ultimately taken by the ATO, it is important that potentially affected taxpayers and tax practitioners are engaged and consulted directly to ensure the risk assessment process is effective for both the taxpayers and the ATO.
Initiative 12 — Review of key client manager roles
2.114 Following positive feedback about the effectiveness of the ATO's key client manager concept (KCM), the ATO was to examine building on that success by creating a new role that had direct authority to resolve administrative and transactional issues.
2.115 The outcome of this examination was realised on June 2009 when the Commissioner announced the new role of Lead Relationship Manager for the largest business taxpayers, particularly those considered to have shown a genuine desire to work collaboratively with the ATO. Further information on the Lead Relationship Manager role is contained in Chapter 6 of this report.
Initiative 13 — Large Business and Tax Administration Symposium
2.116 The Commissioner committed to convene a large market symposium to foster strong co-operative relationships between the Tax Office and our largest corporations.
2.117 The inaugural Large Business and Tax Administration Symposium was held on 30 August 2006 and was attended by 84 of Australia's top 100 corporate taxpayers, together with representatives from the major accounting and law firms, other regulatory authorities, the Treasury, the Office of Parliamentary Counsel and the Board of Taxation.
2.118 There were a number of action items arising from the symposium:
- examining the cost of compliance with a focus on tax returns, schedules and corporate reporting;
- developing a suite of key performance indicators to measure the ATO's performance against the commitments made in the LBTC booklet, based on a mix of quantitative measures (such as volumes and cycle times) and qualitative measures (feedback from the case call-over process);
- co-designing the Client Feedback Questionnaire to ensure the process encourages honest taxpayer feedback;
- clarifying the ATO escalation and contact points for large business taxpayers; and
- exploring how the ATO can provide greater clarity and closure at the end of a risk review. The ATO established a Segment Leaders Forum that meets on a quarterly basis to focus on the outcomes of risk reviews and determine what further action might be appropriate. Under the new LB&I management structure announced during the course of this review this forum was replaced.
2.119 As well as launching the new version of the LBTC booklet, the symposium also covered topics such as Tax Office directions and performance, commercial and business directions, developments in tax law, compliance processes and services, key risks and common adjustment areas.
2.120 The ATO engages DBM Consultants Pty Ltd to conduct a biannual Professionalism Survey across different areas within the organisation, encompassing a broad range of taxpayer groups.
2.121 Its main objective is to evaluate ATO employees' level of 'overall professionalism' as perceived by taxpayers who have had an interaction with the ATO in the previous six months.
2.122 This is completed by the evaluation of client satisfaction in two general areas:
- Professionalism displayed by ATO staff, specifically how satisfied was the taxpayer with the professionalism of the ATO staff they recently had contact with?
- Client understanding of the issue recently discussed with ATO staff, specifically how satisfied is the taxpayer that it now has a better understanding of the issue that it recently discussed with the ATO?
2.123 The level of professionalism (known as the 'overall professionalism' score) is derived from the average of the two questions listed above.
2.124 ATO staff professionalism is further evaluated by an assessment of the behaviour and ability of ATO staff across six key elements of professionalism; empathy, fair and just outcomes, accountability, communication, behaviour and ability. These six elements are measured by nine predefined characteristics. The table below shows how these nine Characteristics of Professionalism are measured in this and previous waves of the survey.
|Element of Professionalism Model||Characteristic of Professionalism||Label used in Charts||Question from Survey|
|Empathy||Respect for taxpayers||Respectful and courteous||Staff were respectful and courteous towards taxpayer|
|Explain and respect taxpayer's rights||Willingness to explain rights||Staff were willing to explain taxpayer's rights, obligations and entitlements|
|Fair and Just outcomes||Procedural fairness||Assisted to best of ability and within law||Staff assisted taxpayer to the best of their ability and within the law|
|Distributive justice||Result fair and reasonable||The result was fair and reasonable|
|Communication||ATO's communication||Communicated clearly||Staff communicated clearly in ways taxpayer could understand|
|Accountability||Accountable for actions||Willingness to follow matter through to conclusion||Staff were willing to ensure that the matter was followed through to a conclusion|
|Understand taxpayer's needs||Understood needs||Staff understood taxpayer's needs and assisted taxpayer in meeting them|
|Behaviour||ATO's behaviours||Staff are fair, reasonable and unbiased||Staff were fair, reasonable and unbiased|
|Ability||ATO's ability||Sufficient understanding of issue||Staff had sufficient understanding of the issue being discussed to be able to help taxpayer|
2.125 Results from the Professionalism Survey are used to report to internal and external stakeholders as follows:
- to report ATO performance in the annual report and as one of the agency agreement corporate outcome measures;
- to measure taxpayer perceptions of staff professionalism and service to feed into the ATO's Outcome and Outputs Framework with a view to helping to maintain community confidence in the administration of the tax system;
- to collect data that is used to evaluate compliance with the requirements of the Taxpayers' Charter; and
- to identify areas within the ATO for improvement — including training and support required for ATO staff overall and specific business areas, as well as systems and process improvements.
2.126 The November 2009 survey found that satisfaction with 'overall professionalism' and its two components (staff professionalism and client understanding) has remained quite consistent among large market taxpayers over the last six surveys, with the 'overall professionalism' mean score of 3.75, which is above the benchmark score of 3.7.
Figure 2.4: Summary of overall professionalism scores
2.127 The proportion of large market taxpayers who were either 'very satisfied' or 'satisfied' with 'client understanding' has remained consistent since November 2007 at 63 per cent. However, in November 2009 the proportion of 'very satisfied' taxpayers increased six percentage points (to 17 per cent), while the proportion of 'satisfied' taxpayers decreased six percentage points to 46 per cent.
2.128 The proportion of net satisfaction and mean score satisfaction for all Characteristics of Professionalism remained relatively consistent this survey with no statistically significant changes recorded.
Figure 2.5: Characteristics of Professionalism — large market (net satisfaction)
2.129 The IGT notes that the highest performing characteristic was 'respectful and courteous' and 'communicated clearly' while the lowest were 'willingness to take responsibility for actions and decisions' and 'sufficient understanding of issues'.
2.130 Satisfaction among large market taxpayers was lower than the other business areas for all Characteristics of Professionalism, with satisfaction for some characteristics falling below the ATO benchmark. The largest performance gaps were for 'sufficient understanding of issues', 'willing to take responsibility for actions and decisions' and 'understood needs' all of which were also below the ATO benchmark.
Figure 2.6: Characteristics of Professionalism — comparison between large market and all other business areas
Client Feedback Questionnaires
2.131 As part of each risk review and audit the ATO has advised the IGT that it gives taxpayers an opportunity to provide feedback through its Client Feedback Questionnaires (CFQ). CFQ results are made available to LB&I leadership group and compliance teams to help them understand what they are doing well and to identify potential areas for improvement.
2.132 By way of comparison, the 2005-06 results (prior to the LBTC booklet) indicated an overall client satisfaction of 73 per cent, with specific product scores being:
- written binding advice products achieving the highest satisfaction level of 79 per cent, with a further 14 per cent rating the experience as neither high nor low;
- risk review and audit products achieving a 73 per cent level of satisfaction, with a further 21 per cent rating the experience as neither high nor low; and
- audits-in-progress receiving the lowest satisfaction rating of 51 per cent, with a further 31 per cent rating the experience as neither high nor low.11
2.133 The main issues raised by taxpayers were the need for ongoing communication about the progress of compliance products and the ATO not providing adequate closure upon the finalisation of risk reviews and audits.
2.134 Table 2.3 sets outs a break-up of the CFQ results in relation to the highest and lowest rated questions for 2005-06.
|CFQ type||Audit or risk review||Written binding advice||Audit-in-progress|
|Highest rated questions||
Explanation of the reason for the risk review or audit
Providing taxpayer with enough time to prepare
Negotiation of a suitable timeframe
Helping taxpayer to understand the risk review or audit process
Taking a cooperative and collaborative approach
Application of tax law knowledge to the issues taxpayer identified
Ability to listen to taxpayer
Communication about the progress of taxpayer's advice
Focus on reaching a decision
Explanation of the reason for the audit
Providing the taxpayer with enough time to prepare
Explanation of why information was requested
Taking a cooperative and collaborative approach
|Lowest rated questions||
Understanding of taxpayer's industry
Understanding of taxpayer's business
Willingness to negotiate about how these outcomes would be achieved
Timeliness in finalising the risk review or audit
Understanding of taxpayer's industry
Understanding of taxpayer's business
Flexibility in negotiation
Timeliness in finalising the advice
Consideration of taxpayer's point of view
Taking a fair and reasonable approach
Communication about the progress of the audit
Willingness to negotiate about any points of disagreement
2.135 The IGT considers that ATO compliance performance measurement is a very important area for both the ATO, taxpayers and the community more broadly. It may also be that for the community broader measures of compliance performance management of the tax system itself may need to be considered. The developments in this area need to be monitored closely.
1 A new ATO management LB&I organisational structure was established during the course of this review, a copy of which is provided in Appendix 1. References in this section are to the new structure, unless otherwise stated.
2 Large Business and Tax Compliance, p 2.
3 This diagram is for general information purposes only. The figures are not precise because a single case can have multiple outcomes in relation to different issues over time.
4 This diagram is for general information purposes only. The figures are not precise because a single case can have multiple outcomes in relation to different issues over time.
5 Statistics provided by the Australian Taxation Office.
6 Large Business and Tax Compliance, p 27.
7 Colours to the Mast, Commissioner's speech to the CTA Convention, June 2010.
8 This section of the IGT report quotes extensively from the Burges Report, but it should be noted that the discussion is historical and relates to the time covered by the report unless the context indicates otherwise.
9 Commissioner's speech to the International CFO Forum, Sydney, Australia, 13 October 2005.
10 ATO update on large market initiatives to the NTLG (21 June 2006).
11 Speech by Jim Killaly (Deputy Commissioner LB&I) to the Australian Taxation Summit, Sydney, 5-7 February 2007.