3.1 This chapter summarises the generic issues arising from the case studies and specifies the changes agreed by the Tax Office to achieve further improvements to tax administration in each of the areas identified at para. 2.6.
Timeliness — reducing the risk and consequences of delayed resolution
3.2 In responses to the case study reports, the Tax Office referred to measures aimed at improving timely consideration and resolution of complex issues, for example, case management leadership, aged case management, the priority technical issues (PTI) process and alternative processes to the statutory dispute resolution Part IVC process. The Tax Office's PTI process is an established approach to the resolution of complex technical issues and provides a foundation for further improvements. However, the case studies showed that, despite the introduced measures, prolonged delays were still experienced, indicating further changes are needed.
3.3 The changes in this area need to recognise the impact on taxpayers who are faced with making decisions during protracted periods of uncertainty about the Tax Office's technical and compliance position. The case studies have shown that delays also compound the negative impact of compliance strategies, entrench taxpayer resistance and exacerbate management complexity for the Tax Office. Changes are needed to increase the general sense of urgency for providing guidance in matters where taxpayers need to make decisions or may be making decisions that do not comply with the Tax Office view. Where there is uncertainty in the law the Tax Office must deliver clarification in a timely manner. However, in all the case studies the Tax Office took too long to finalise its view of how the law applied, which is a crucial prerequisite to resolution.
3.4 The case studies have shown that resolution can proceed more quickly when very senior managers become directly involved. This suggests that strong disciplines are required to guarantee early intervention at top management levels where resolution is not being achieved within expected timeframes. A reliance on bottom-up escalation procedures may not be enough and may actually contribute to overly protracted timeframes.
3.5 The case studies showed that where resolution of complex issues appropriately involves testing a technical position through litigation the lead times to identifying and progressing test cases can be protracted and cause major delays.
3.6 Changes to reduce the risk of delayed resolution will need to assist management of the critical path events that are generic to complex issues and to the range of possible courses that management of such issues might take. Generic events include early identification; establishing and communicating robust technical views; and sound approaches to confirming risks and behaviours. Others might involve selecting a number of test cases and going through the objection and review and appeal processes, or it may be by seeking declaratory proceedings while the matters are still at the audit stage. These critical path events might also provide a good framework for considering ways of achieving improvements in other agreed areas including communication.
Compliance and risk management strategies — balancing efficiency and differentiation
3.7 In deciding its strategies to address compliance risks involving large populations the Tax Office is faced with striking a balance between administrative efficiency and the need to recognise the individual circumstances of affected taxpayers. There is a danger that leveraged approaches3 adopted to contain Tax Office effort may inadequately differentiate between types of taxpayers involved or may be based on inadequate fieldwork to confirm and distinguish taxpayer behaviours. Lead cases may be selected primarily for their potential to strengthen Tax Office compliance strategies and views of the law, without being representative of the full range of cases to which the outcome will be applied.
3.8 This risk is at its highest where the scale of a compliance issue and the potential effort required to address it cause the Tax Office to look for a highly leveraged 'silver bullet' strategy, including the potential for applying anti-avoidance provisions.
3.9 The case studies also show that risk assessments of emerging major issues may not be borne out by field appraisals and subsequent experience. Risk assessments of major compliance issues should be updated regularly to ensure that compliance action is in proportion to the monetary and non-monetary costs and benefits, and relative to other compliance risks.
3.10 A Senior Executive decision-maker should exist for any major compliance activity to lead that activity from the outset. This leader must ensure that risk assessments are updated and that leveraged strategies are based on an adequate sequence of audits that test for a range of taxpayer circumstances, amended assessments and, if necessary, objections and court decisions.
Tax Office values and obligations in a self-assessment system
3.11 Mandatory checks and balances are needed to give the Commissioner and the community the assurance that Tax Office values and obligations in a self-assessment system are being lived out in its management of significant issues.
3.12 The complexity of the tax system requires the Tax Office to consciously test if its expectations of taxpayers' level of compliance are reasonable. The Tax Office acknowledges its obligations in a self-assessment system to provide clear guidance and support taxpayers. The extent to which it has fulfilled this obligation can have a major bearing on compliance and on perceptions of the fairness of its compliance strategies.
3.13 The case studies all showed the importance of early, quality Tax Office advice on its view of the law and its expectations for compliance, and the consequences where such advice was not adequate.
3.14 Changes in this area should help the Tax Office to demonstrate that it has actively considered and taken into account how its own behaviour has factored into significant compliance issues and how that, in turn, is reflected in its compliance approaches (for example, prospective or retrospective approaches).
3.15 Checks are also required to ensure that a cultural tendency to tackle perceived tax avoidance aggressively — appropriate in some circumstances — does not unduly colour resolution strategies or behaviours. This risk is at its highest where the Tax Office labels taxpayers as being engaged in aggressive tax planning or tax avoidance, especially where it is culturally attuned to that perception. The case studies suggest that this can cause positions to become entrenched and resolution delayed.
3.16 Changes in this area need to equip the Tax Office to demonstrate to the community through its approaches that it understands that tax is a complex system. Matters decided differently through several layers of process (sometimes within the Tax Office itself) including the courts do not, when ultimately decided, suddenly become black and white. Rather, this process confirms their complexity, their 'greyness' and the reasonableness of different interpretations. Ensuing compliance treatments need to reflect this complexity. In recognition of the complexity of some issues the Tax Office should consider if it would be fair that matters decided differently through several layers of process should only receive prospective compliance treatment once finally decided.
3.17 Processes are also needed to demonstrate Tax Office openness to have matters tested in court. Resolving objections on similar cases should not be held up unless the issue is on foot in the courts or action to get it into the courts can be publicly demonstrated. Procedures and positive inducements should be introduced to encourage taxpayers to come forward with cases that require judicial clarification and proceed to hearing without impediment or delay.
Communication and transparency
3.18 The case studies indicate some variance in respect of the Tax Office's directness and timeliness of communication with taxpayers. At the level of principle, all Tax Office compliance strategies need to feature direct and early communication with taxpayers potentially affected by a compliance concern (an exception may be some Serious Non-compliance criminal matters). A reliance on exposing issues to professional bodies through consultation forums or on indirect communication such as speeches and seminars is no substitute for a default approach of direct communication and guidance to both taxpayers and their advisers.
3.19 The Tax Office has already taken the positive steps of allowing taxpayers to attend its Part IVA Panel and to receive position papers on potential Part IVA matters. More can be done in this area to further improve perceptions, transparency and outcomes.
3.20 Transparency and communication would be greatly enhanced if the Tax Office's full agenda of significant technical issues under consideration was made publicly available and easily accessible. Many of the issues are already in the public arena through topics listed on the Public Rulings and Law Administration Practice Statement Programs, via litigation cases (eg court lists) and through the government's legislative program (for introduced measures) or in government releases (for announced measures). Information on around 70 percent of the Tax Office's list of PTIs is currently available from these sources albeit in disparate form. Some PTIs, around 5%, involve interactions with Treasury that may not be suitable for public disclosure. The balance involves technical issues on individual ruling, audit or objection cases.
3.21 A consolidated listing of all significant technical issues that it has under consideration on a 'Technical Issues Agenda' area within the Tax Office website would be a suitable way of making this improvement. Where necessary, the listing could be 'sanitised' to maintain privacy in the same way as published versions of Private Binding Rulings are. Making this agenda public would improve transparency around the Tax Office's agenda and its performance in resolving issues against benchmark timeframes, as well as enriching dialogue with the professional and business tax community.
3.22 The case studies also underscored the importance of the Tax Office ensuring that taxpayers are clear about their situation and that Tax Office advice is up-to-date, For example, publications, such as the Taxpayers Charter booklet dealing with audit should clearly set out when a taxpayer is under audit.
3.23 Taxpayer uncertainty would be reduced if the Tax Office promptly withdrew or flagged taxation rulings, taxation determinations or other interpretative decisions where it has changed or is uncertain with its view of the law.
3 Leveraged compliance strategies are where the Tax Office takes action against a number or class of taxpayers without undertaking an individual audit or investigation of each taxpayer, thereby largely avoiding the costs of those actions. Leveraged strategies may be based on surveys of taxpayers or their representatives or a small number of direct audits.