4.1 Using the summary of systemic issues distilled from the case study reviews, the Inspector-General and the Tax Office have worked together to identify areas for improvement and agree specific changes as follows.
Areas agreed for improvement and change
A. There needs to be clear guidance for Tax Office staff and the community on what timeframes the Commissioner expects to be achieved in resolving complex issues, noting the income tax and other tax time-cycles that taxpayers must work within. Corporate time limits or performance standards need to be set for the Tax Office to conclude its view of how the law applies in respect of priority technical issues (PTIs) and other issues requiring precedential views.
The Tax Office agrees that there is a need for standards for the timeframes allowed to reach a considered ATO technical view of the law for all PTIs.
The Tax Office will implement and work to a benchmark maximum of six months for establishing the Tax Office view. If at the outset of identifying or progressing a PTI it is clear that it will take longer than six months to establish the Tax Office view, a business case will need to be made and agreed by the relevant Band 2 SES officers.
The Tax Office will continue to improve the current processes for PTIs and ensure that agreed timeframes (including significant milestones) are in place when those PTIs are registered. In addition, approval from the relevant Band 2 SES officers in both the Law Sub-plan and relevant Risk area will be required during the resolution of a PTI before those agreed timeframes are extended.
For public rulings and LAPS, the Tax Office's programs reflect the agreed delivery timeframes for those products including the issuing of drafts in the case of public rulings. The Tax Office processes governing the development of both products requires referral to and approval from the relevant Band 2 SES officer for existing timeframes to be varied.
The rulings program also indicates the Tax Office's 'target' timeframes for the development of taxation rulings and determinations across the different subject areas. Exceptions to these targets (for example, to allow additional consultation with industry) are advised on the program. The 'target' timeframe for a LAPS is six months from notification on the program with an additional three months allowed when public consultation is involved.
B. Ways to increase early top management awareness and hands on management of complex issues that are unresolved for unreasonable periods of time need to be developed. Circuit-breakers are needed to cut across processes and procedures where they are not leading to the timely establishment of the Tax Office technical view.
The Priority Technical Issues Committee (PTIC) process, under the leadership of the Chief Tax Counsel, regularly monitors the progress of all PTIs and governance of the PTI process.
The Tax Office has now introduced a 'top down' intervention mechanism in the management of major/complex issues, including PTIs, when it becomes apparent that a significant milestone will not be met.
The intervention is by the relevant existing SES Band 2 officers in both the Law Sub-plan and Risk areas, such as a Deputy Chief Tax Counsel, or the Chief Tax Counsel and the Deputy Commissioner responsible for the issue as part of the PTIC process which meets every six to eight weeks. If necessary/appropriate, issues can be further escalated to the relevant Second Commissioners.
C. To assist management of the events that are critical to timely resolution of complex issues, the Tax Office should improve project management capability for large complex issues, and introduce initiatives to ensure that compliance actions are fair and based on a contemporary appraisal of the factors that have led to the issue.
Improving project management capability is important to the Tax Office. Project plans are required for the resolution of all PTIs. In addition to the PTI Committee process mentioned under 'Area B' above, there are regular call-overs to monitor progress of resolution of PTIs against project plans.
In addition to improvements to assist officers in their planning for the development and delivery of public rulings and LAPS, the Tax Office is developing further assistance for officers in both the Law Sub-plan and the relevant Risk areas to improve the management and timeliness of resolution of PTIs. The main assistance is aimed at improving their project management capability by providing assistance with project plans that must be completed on registration of a PTI. Achievements against these plans are subsequently monitored through the PTIC and related call over processes to ensure milestones are met. Where there is risk that a significant milestone will not be met, the SES Band 2 officers will intervene as outlined above.
Risk owners for major compliance activities will ensure that:
- adequate field work is undertaken to identify the issue and differentiate categories of taxpayers' circumstances;
- direct communication takes place with affected taxpayers and/or their advisers;
- regular reappraisal is made of compliance and revenue risk and costs, and
- the quality of information provided to taxpayers to help them meet their obligations is tested before a compliance strategy is designed and commenced.
D. More needs to be done to reduce the time taken to identify and progress test or lead cases including increasing Tax Office efforts to identify a suitable lead case on an issue, and offering inducements encouraging taxpayers to come forward.
The Tax office is committed to clarifying the law through litigation of contentious areas of the law. Our test case litigation program is designed to do this. As well as considering applications for test case funding from taxpayers, we will continue to proactively seek significant or contentious lead cases and, because of the public interest in having the law clarified, fund them as part of our test case program. This will include:
- generally offering test case funding where the Commissioner appeals against an AAT decision or seeks special leave to appeal to the High Court4;
- given the nature of the issues covered by the test case program, funding will generally be extended to appeals against funded decisions, at least to the Full Federal Court. Where cases are approved for funding in state or territory courts, funding will generally extend to the Court of Appeal or equivalent in the relevant Supreme Court. In contrast to the current test case funding arrangements, a fresh application for funding will not usually be needed but a decision on funding will be made by taking into account the nature of the issue being tested on appeal.
- contacting all taxpayers that we have identified as having objections lodged on a legal issue and seeking their willingness to be part of the test/lead case process and including the likely factual matrix needed to test the legal issue;
- resolving objections from taxpayers who have suitable cases and encouraging them to come forward as a test case;
- publicly announcing that a test case is being sought describing the issue to be clarified and why; and
- seeking NTLG/professional body assistance to publicise the fact that a test case is being sought.
An ongoing challenge is to identify, and obtain agreement from, taxpayers to be test cases where there is no application from a taxpayer for test case funding.
The Inspector-General has raised concerns in relation to the need for new procedures to accelerate and encourage the identification and progression of test cases. In response to those concerns the Tax Office will increase the existing 50 per cent GIC remission concession (currently available for disputed tax debts where taxpayers enter into a 50/50 arrangement5 by paying a minimum of 50 per cent of the tax in dispute) from 50 per cent to 75 per cent where a test or lead case funded as part of the test case program is involved.
It would not be expected that penalties would generally be imposed in test cases. Penalties may, however, be imposed in certain lead cases for widely marketed schemes. It would not be appropriate to remit penalties in such cases merely because a case is the first case to be litigated.
It is generally easier to get agreement from taxpayers to be test cases where there is agreement on the facts of the case. We will continue to seek agreement on facts where possible in those cases which we believe would be suitable to test a contentious area of the law.
Once identified we seek to fast track test cases through the court. This involves the necessary cooperation of taxpayers and the court. New Federal Court directions for tax litigation should enable more timely progress of cases, particularly test or lead cases.
We are currently revising our test case funding guidelines which explain our approaches to law clarification through litigation of contentious issues. The revised guidelines will include the relevant approaches agreed in this report.
E. 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. 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.
The Tax Office website currently has information on significant technical issues through the publicly available rulings and LAPS programs. The ATO also provides a list of Strategic Litigation issues to the NTLG on a regular basis.
Within the next two years (in recognition of current major Tax Office IT commitments) the Tax Office will work towards consolidating its information on significant technical issues (generally all PTIs) into one reference area on the Tax Office's web site with links to other relevant areas such as the Public Rulings and LAPS Programs. Some issues may not be included due to confidentiality considerations.
F. To avoid uncertainty, draft or all final public advice products (including taxation rulings, determinations, interpretive decisions, Practice Statements, Fact Sheets and publications), should be promptly withdrawn or appropriately flagged as soon as the Tax Office has changed its view of the law, or where a court decision has raised the need for review. This should occur as soon as the change or need for review is identified, even if a replacement or fully updated product is not immediately available.
The Tax Office recognises the need to ensure the public advice and guidance it provides represents the current Tax Office view. It recognises the importance in a self-assessment system of taxpayers having access to advice and guidance about the application of the laws administered by the Commissioner.
The Tax Office agrees that once it concludes that its view has changed, the existing public advice or guidance should be withdrawn immediately and the Tax Office should clearly indicate whether replacement advice or guidance is required.
Where the existing view is merely being reconsidered due to possible uncertainty, the existing advice or guidance would not normally be withdrawn. Where there is a change to a general administrative practice that is less favourable for taxpayers and that change is not communicated by way of a public ruling, the Tax Office will not necessarily amend assessments that were raised consistently with a practice in place at the time of the assessments. As a general rule the Tax Office will amend assessments only where tax avoidance is involved or the practice has been exploited in an unintended way. (See para 32 of PS LA 2008/3.)
The Tax Office's views about the provision of advice and guidance are now comprehensively explained in PS LA 2008/3 — Provision of advice and guidance by the Tax Office.
G. See also Appendix 3 — Recommendations of the Inspector-General's review into the potential revenue bias in private binding rulings involving large complex matters — for further agreed recommendations relevant to issues raised in this report. Full information on these recommendations and the Tax Office's full response to them are available from the Inspector-General's website.
4 See Page 8 of our Test Case Litigation Program booklet (NAT 4556-04.2005).
5 As explained in Chapter 28 of PSLA 2006/11 ATO Receivables Policy.