1.1 The Inspector-General of Taxation (IGT) announced terms of reference for this review on 12 October 2007 following concerns raised by industry, tax practitioners, the public and Parliament relating to the Tax Office's settlement of active compliance activities. The review aimed to determine whether the Tax Office's settlement approaches, policies and practices strike an appropriate balance between the interests of individual taxpayers and taxpayers as a whole.
1.2 Overall, the IGT concludes that the settlements process is a necessary and important feature of tax administration. Providing there is community confidence in the integrity of the system, settlements are an efficient and effective means of finalising appropriate cases. The IGT would be concerned if Tax Office actions and processes were to reduce access to settlements as a means to resolve tax disputes.
1.3 The review looked at information, systems and processes that related to the Tax Office's settlement of 15,637 active compliance cases over a five-year period (the 2003-04 to 2007-08 income years). It examined files relating to 2,773 cases involving a reduction of $3.6 billion from the Tax Office's initial active compliance position to reach agreed liabilities of $1.56 billion in settlement.
1.4 During the review, the Tax Office acknowledged the need to take a more 'whole of dispute' approach with emphasis on moving dispute resolution closer to the point of the original decision.
1.5 The IGT examined the basis for concerns raised by interested parties (see Appendix 1) and found that the issues and potential improvements to the Tax Office's settlement processes fell into two broad categories: Code of settlement processes; and Active compliance matters affecting settlements.
1.6 Code of settlement processes start from considering the finalisation of a tax case by a formal settlement process, including the procedures set out in the Tax Office's Code of Settlement Practice. The IGT found that at a systemic level, the cases examined generally evidenced compliance with the relevant Tax Office policies and processes. However, the IGT identified a number of areas with scope for improvement (see chapter 3, paragraphs 3.16 to 3.17).
1.7 Active compliance matters affecting settlements occur 'upstream' of the formal settlement process. They may bring about settlement or underlie why it becomes a necessary consideration, or influence how settlement processes are undertaken. The IGT found that the Tax Office has a substantial framework of policies and procedures for the conduct and finalisation of active compliance activities. However, some of the cases examined evidenced areas in which more could be done to improve transparency and the taxpayer experience as well as to reduce delays and taxpayers' costs (see chapter 3, paragraphs 3.18 to 3.21).
Action arising as a result of the review
1.8 As a result of this review, the Tax Office has agreed to commence a program of work to make both short-term and longer term improvements in the administration and integrity of the end-to-end settlement process and the upstream processes. This work includes (more detail is given in chapter 4):
- improving the Tax Office's recording, analysis and public reporting of settlements;
- improving settlement decision-making by strengthening compliance with the existing Tax Office procedures that support settlement decision-making;
- amending templates for settlement deeds to enable taxpayers, in certain circumstances, to reopen settlements where the Tax Office later changes its view of the law;
- improving the taxpayer experience in relation to the settlement process by providing a 'circuit breaker' or 'reference point' for taxpayers that will provide a fresh set of eyes for settlement decisions drawing on significant alternative dispute resolution and settlement experience;
- ensuring that taxpayers do not have any misconceptions about their likely 'out-of-pocket' liability, by requiring officers to disclose changes to the Tax Office's approaches that would reduce the range of settlement points;
- strengthening compliance with existing Tax Office procedures that require escalation of technical matters and, where the Tax Office view changes, requiring transparent communication to affected taxpayers and complete and transparent rectification action;
- improving auditor technical discipline in dealing with evidentiary matters and explanations of the role that evidence has played in active compliance decisions; and
- minimising public perceptions of favourable treatment of certain taxpayers by improving the comprehensiveness and detail of public reporting on settlements and the net contribution to revenue of active compliance activities, and by publicly reporting summaries of the related analysis of these figures.
1.9 The overall aim of this work is for the Tax Office to make a fundamental improvement in settlement administration and risk mitigation by considering all stages of settlement administration and decision-making. It also aims to recognise settlements as an integral part of the disputes process, and recognise the impact that upstream processes have on settlements.
1.10 The agreed intended outcome is increased community confidence in the transparency, consistency, correctness, integrity and administrative soundness of settlement decisions.
1.11 The IGT will, in accordance with current practices, review the implementation of this work at a future date.