1.1 This is the fourth and final report on the review conducted by the Inspector-General of Taxation (the 'Inspector-General') into the Tax Office's ability to identify and deal with major, complex issues1 within reasonable timeframes. This report is pursuant to section 10 of the Inspector-General of Taxation Act 2003 (the 'IGT Act').
1.2 The Inspector-General made public his intention to undertake this review on 11 August 2005. This announcement followed concerns expressed by tax professionals and certain sectors of the community that the Tax Office takes too long to come to grips with and satisfactorily resolve major, complex issues. They argued that the Tax Office appeared to allow significant periods of time to elapse before an issue is seen to have accumulated enough potential revenue leakage to initiate compliance action. This, they argued, causes significant uncertainty and unnecessary costs. They pointed to significant amounts of money and time the private sector spends in dealing with the Tax Office on these types of issues.
1.3 Stakeholders gave a number of examples to illustrate their concerns, including:
- research and development (R&D) syndication arrangements claiming deductions under section 73B of the Income Tax Assessment Act 1936;
- living away from home allowances (LAFHAs); and
- service entity arrangements.
1.4 Community stakeholders said they would welcome the identification of any systemic changes which might prevent prolonged timeframes occurring in the future as major issues arise.
1.5 On 31 October 2005 the Inspector-General formally announced terms of reference for this review (Appendix 1) and called for submissions on the three examples identified by stakeholders that were to be case studies for the overall review. The Inspector-General foreshadowed that a fourth report could be produced to bring together recommendation on systemic issues raised by the case studies.
1.6 The Inspector-General reported separately and progressively on the three case studies as follows:
- Review of Tax Office Management of Complex Issues — Case Study on Research and Development Syndicates, publicly released 16 August 2007;
- Review of Tax Office Management of Complex Issues — Case Study on Living Away From Home Allowances, publicly released 10 May 2007; and
- Review of Tax Office Management of Complex Issues — Case Study on Service Entity Arrangements, publicly released 24 April 2007.
1.7 Collectively, the case study reviews attracted 53 submissions from community stakeholders. The reports of these reviews can be found on the Inspector-General's website.
1.8 Following completion of the case studies, the Inspector-General summarised the generic issues arising from them and worked progressively with Tax Office senior management to distil key areas where there was scope for improvement, and to agree specific changes.
1.9 During the period that the Inspector-General was working with the Tax Office to finalise this report, he also finalised his review into the Potential Revenue Bias in Private Binding Rulings Involving Large Complex Matters. Some of the recommendations arising from that review also addressed issues identified by the case study reviews and they are included in this report at Appendix 3.
1.10 During the review the Tax Office identified significant improvements it has made over recent years to the way it manages major issues. The report includes an Appendix 2 prepared by the Tax Office that summarises its current approaches.
1.11 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 'Major, complex issues' should not be too tightly defined, but the three case studies are good examples. These issues generally involve a significant number or class of taxpayers and significant amounts of revenue or substantial community attention. Issues identified by the Tax Office as Category 1 (the most significant) Priority Technical Issues (PTIs) would also generally qualify. Of itself, legal complexity in a matter may not be a 'Large, complex issue'.