Raising penalties

A13.1 The application of some penalties is straight forward and may require little ATO enquiry. For example, where a taxpayer fails to lodge a required document on time, certain penalties would apply.

A13.2 In other instances, such as penalties relating to taxpayer statements, the ATO has to make inquiries to determine whether the imposition of penalties is appropriate and if so determine any mitigating circumstances which should reduce its quantum.

Recording and reporting penalties raised

A13.3 The ATO expects its officers to record the information obtained and used in making penalty decisions on the ATO’s case and work management systems. The ATO system used to record this information depends on the type, stage of activity, complexity and the ATO business line in which that work is carried out.

A13.4 Information that quantifies the liabilities resulting from penalties (financial information) is also recorded on the ATO’s various ‘Client Account’ systems, such as Integrated Core Processing (ICP), ATO Integrated System (AIS), Instalment Processing System (IPS) and Corporate Penalty Systems (CPS). In particular, the AIS and the ICP systems are the ATO’s accounting systems that determine taxpayers’ integrated liabilities from a range of different ATO systems and automatically post the amounts to taxpayers’ running balance accounts (RBA).

A13.5 Table 14 below shows the various ATO systems used to record and report such information.

Table 14: 2012–13 ATO systems for penalty recording and reporting
ATO activity Type of information recorded Recording and reporting system
Active Compliance Case Management Siebel Case Management
Siebel Work Management
Automated Work Allocation (AWA)
WinCas
Receivables Management System (RMS)
Financials Siebel Case Management
Client Accounts

Source: Australian Taxation Office.

A13.6 The Siebel Case Management system is used in all ATO business lines for audits which are more complex and less routine and records case-related information, including, the relevant facts obtained during the audit and reasons for decisions. Various types of information are manually input to the system at the end of audits, including the type and amount of penalties imposed and the reasons for any increases or decreases in rates as well as any amounts remitted. Some cases may involve multiple penalty decisions. This system records different types of false or misleading statement penalties imposed for each year, however, any increases, decreases or remissions to any of these penalties are consolidated.

A13.7 The Siebel Work Management system is used for routine, simple and high volume types of work, such as the MEI business line’s pre-issue reviews of income tax refunds and other forms of letter-based audits. In relation to penalty decisions, only the total amount of penalties imposed are manually input to the system at the end of an audit. As a result, the ATO is unable to determine the type of penalty that was imposed and the reasons for the imposition from recorded data.

A13.8 The Automated Work Allocation (AWA) system is used by the ATO’s Indirect Tax (ITX) business line in undertaking Business Activity Statement (BAS) audits. Once a decision has been made in these cases to impose a penalty, the ITX Penalties and Interest Practice Team inputs the penalty amount and type into the ATO’s CPS. However, other information about penalties is not recorded. The AWA system is simply used to manage internal referrals of cases.

A13.9 Once an audit is finalised and a penalty raised, the Client Account Services business line inputs penalty amounts into the ATO’s ICP system,341 unless the penalty relates to a BAS in which case, the ITX Penalties and Interest Practice Team inputs the relevant amounts into the AIS via the CPS.

A13.10 To address the risk that the amounts recorded in the Siebel Case Management system may not reconcile with the amounts recorded in AIS and ICP, the ATO expects its officers to view taxpayers’ Notices of Assessment before closing audit cases in the Siebel Case Management system so that any discrepancies can be rectified.

A13.11 For internal reporting purposes, information from the case and work management systems is gathered by the Active Compliance Governance Team and compiled for inclusion in monthly reports to the Compliance Executive.

A13.12 Data recorded in the AIS and ICP systems are used to publicly report financial details of penalties raised.

Amount of penalties raised

A13.13 According to the Commissioner of Taxation’s 2011–12 Annual Report, the ATO undertook 6,918,304 active compliance activities, raised approximately $8.9 billion in tax and applied approximately $2.4 billion in penalties and interest. According to the ATO’s internally generated reports, of this $2.4 billion, approximately $1.4 billion (or 58.33%) relates to penalties. It should be noted that the penalty figures are aggregates and ‘net’ of any remission and do not include any subsequent penalty adjustments due to internal or external review.342

A13.14 The ATO has advised that care should be exercised when examining such annually aggregated figures as a small number of cases involving large amounts may take a number of years to resolve and therefore cause distortions.

A13.15 Table 15 below provides primary tax, interest and penalties raised over the last two financial years. As the ATO’s Annual Reports do not break up penalties and interest, the table also includes data from internal reports. Similar to the Annual Report, this data does not reflect any remission or subsequent adjustments due to internal or external review.

Table 15: Number of active compliance activities and amounts of primary tax liabilities, penalties and interest raised from 1 July 2010 to 30 June 2013
Financial year Total active compliance activities^ Number of activities with a liability impact^^ Total tax liabilities ($m)^ Primary tax liabilities ($m)^ Penalties ($m)^^^ Interest ($m)^^^
2010–11 7,972,504 973,085 11,326 9,011 1,313 1,001
2011–12 6,918,304 906,475 11,300 8,900 1,449 979
2012–13 6,200,000 Not available 12,176 9,353 1,490 1,333
Total 21,090,808 1,879,560 34,802 27,264 4,252 3,313

Note: There is a discrepancy of $27m (1 per cent difference) of the penalty and interest figures for the 2011-12 year between the Commissioner of Taxation’s Annual Report and the ATO’s internal reports.

(^) Source: Commissioner of Taxation Annual Report.

(^^) Source: ATO’s internal Business lines penalty and interest break up report.

(^^^) Source: ATO’s internal Penalty and Interest break up report.

A13.16 The data in Table 15 above shows:

  • those compliance activities which resulted in average adjustments of $12,037 in total liabilities — comprising $9,529 in primary tax, $1,469 in penalties and $1,053 in interest;
  • the total amount of penalties comprises approximately 12 per cent of the total tax liabilities raised over the last two years; and
  • the ratio of total penalties to total primary tax liabilities is 3:20, or 15 per cent.

A13.17 Figure 8 below visually represents the number of compliance activities and amount of primary tax liabilities, penalties and interest raised over the last six years.

Figure 8: Number of active compliance activities and amount of primary tax liabilities, penalties and interest raised from 1 July 2007 to 30 June 2013

Combined column and line chart visually representing the number of compliance activities and amount of primary tax liabilities, penalties and interest raised over the last six years. The lowest value for active compliance activities was just under 3000 in 2008-9, and the highest value was close to 8000 in 2010-11. The amount of primary tax liabilities has a generally positive trend, with the lowest value being around $6000 million in 2007-08 and the highest value being around $9000 million in 2012-13. The amount of penalties and interest raised also has a generally positive trend, with the lowest value being between $1000 million and $2000 million in 2008-09, and the highest value being around $3000 million in 2012-13.

Source: Commissioner of Taxation Annual Reports.

A13.18 Figure 9 below disaggregates the above penalty and interest amounts and shows that the amounts of both penalties and interest raised have steadily increased over the last three financial years.

Figure 9: Amount of penalties and interest raised from 1 July 2009 to 30 June 2013

Stacked column graph showing the amount of penalties and interest raised in the last six years. The chart disaggregates the above penalty and interest amounts and shows that the amounts of both penalties and interest raised have steadily increased over the last three financial years.

Source: Australian Taxation Office.

A13.19 The aggregated penalty and interest amounts shown in Figure 9 above may also be disaggregated into the following sub-groups, being:

  • ATO business line;
  • market segment;
  • revenue product; and
  • to a limited extent, penalty type.

A13.20 Each sub-group is discussed separately below in the sections that follow.

Total penalties raised by ATO business line

A13.21 Each ATO business line has its own compliance focus, which may involve different types of compliance activities and different types of penalties.

A13.22 Figure 10 below shows the proportion of total penalties each business line has raised from the 2010–11 financial year to YTD (October 2012).

Figure 10: Total penalties raised by ATO business lines from 1 July 2010 to October 2012

Pie chart showing the proportion of total penalties each business line has raised from the 2010–11 financial year to YTD (October 2012). The LBI, SME, ITX and TPALS business lines generally raise the greater amounts of penalties. The LBI and SME business lines deal with taxpayers with larger turnovers and the ITX business line deals with the indirect taxes of all Australian businesses. The TPALS business line deals with lodgement obligations amongst others. The MEI business line also raises a significant amount of tax liabilities. A significant proportion of its compliance activities are data matching in which penalties are not routinely applied.

Source: Australian Taxation Office.

A13.23 The LBI, SME, ITX and TPALS business lines generally raise the greater amounts of penalties. The LBI and SME business lines deal with taxpayers with larger turnovers and the ITX business line deals with the indirect taxes of all Australian businesses. The TPALS business line deals with lodgement obligations amongst others.

A13.24 The MEI business line also raises a significant amount of tax liabilities. A significant proportion of its compliance activities are data matching in which penalties are not routinely applied.

A13.25 Table 16 below shows the amounts of penalties raised and the ratio of penalties to total liabilities by ATO business line from 2010–11 to YTD (October 2012).

Table 16: Total tax liabilities and penalties raised from 1 July 2010 to October 2012
2010-11 TOTAL ATP ITX LB&I ME&I S&ME SNC SPR TPALS
Penalties raised $m 1,296 14 205 209 92 276 98 28 372
Tax Liabilities raised $m 8,725 24 2,053 1,182 1,346 865 175 341 2,635
Total Liabilities raised $m 11,014 47 2,266 1,814 1,535 1,447 374 417 3,009
Ratio of Penalties to Total Liabilities 12% 30% 9% 12% 6% 19% 26% 7% 12%
2011-12 TOTAL ATP ITX LB&I ME&I S&ME SNC SPR TPALS
Penalties raised $m 1,442 18 263 290 140 250 135 36 307
Tax Liabilities raised $m 9,173 10 1,723 1,264 1,760 1115 193 585 2,441
Total Liabilities raised $m 11,594 29 1,997 1,957 2,067 1,631 416 665 2,749
Ratio of Penalties to Total Liabilities 12% 60% 13% 15% 7% 15% 32% 5% 11%
Year to Date October 2012 TOTAL ATP ITX LB&I ME&I S&ME SNC SPR TPALS
Penalties raised $m 403 0 73 28 50 104 41 19 88
Tax Liabilities raised $m 2,561 2 384 260 445 460 91 171 750
Total Liabilities raised $m 3,185 2 457 333 531 653 172 199 838
Ratio of Penalties to Total Liabilities 13% 6% 16% 8% 9% 16% 24% 10% 11%

Note: Penalties raised include those for false or misleading statements, failure to lodge and promoter penalties. Interest is included in Total tax liabilities.

Source: Australian Taxation Office.343

A13.26 The penalties data in Table 16 is also visually presented in Figure 11 and Figure 12 below.

A13.27 Figure 11 shows the penalties raised by business lines and Figure 12 shows the percentage of total penalties that form part of the total tax liabilities.

A13.28 Figure 12 shows that of the total tax liabilities raised, the ATP and SNC business lines have raised the greatest proportions of penalties (42 per cent and 29 per cent respectively). Conversely, of the total tax liabilities raised, the lowest proportions of penalties were raised by the MEI and SPR business lines (6 per cent for both). This information is reflective of the fact that the ATP and SNC business lines would be expected to deal with higher levels of taxpayer culpability.

Figure 11: Total penalties raised by business lines from 1 July 2010 to October 2012

Column graph showing total penalties raised by business lines from 1 July 2010 to October 2012. The penalties data in Table 16 is visually presented.

Source: Australian Taxation Office.

Figure 12: Percentage of total penalties forming part of total tax liabilities from 1 July 2010 to October 2012

Column graph showing the percentage of total penalties that form part of the total tax liabilities from 1 July 2010 to October 2012. The penalties data in Table 16 is visually presented. This shows that of the total tax liabilities raised, the ATP and SNC business lines have raised the greatest proportions of penalties (42 per cent and 29 per cent respectively). Conversely, of the total tax liabilities raised, the lowest proportions of penalties were raised by the MEI and SPR business lines (6 per cent for both). This information is reflective of the fact that the ATP and SNC business lines would be expected to deal with higher levels of taxpayer culpability.

Source: Australian Taxation Office.

Total penalties raised by market segment

A13.29 Each taxpayer market segment may involve tax compliance issues that are particular to that segment and, therefore, may attract different types of penalties. The ATO has advised that its figures on market segments will be different to the figures on business lines since business line figures do not always relate to a particular market segment—for example, the ITX business line deals with taxpayers across the micro, SME and large business market segments.

A13.30 Figure 13 below shows the proportion of penalties raised by market segment for both the 2010–11 and 2011–12 financial years combined. This figure shows that the micro market segment constituted the largest proportion of total penalties raised, accounting for just over half of total penalties raised over these two years. The remaining penalties raised can be attributed in similar proportions to the individuals, large and SME market segments.

Figure 13: Total penalties raised from 1 July 2010 to 30 June 2012 by market segment

Pie chart showing the proportion of penalties raised by market segment for both the 2010–11 and 2011–12 financial years combined. This figure shows that the micro market segment constituted the largest proportion of total penalties raised, accounting for just over half of total penalties raised over these two years. The remaining penalties raised can be attributed in similar proportions to the individuals, large and SME market segments.

Source: Australian Taxation Office.344

Total penalties raised by ATO revenue product

A13.31 ‘Revenue products’ is an ATO reference to the various types of taxes or tax and superannuation obligations and include income tax, Pay-As-You-Go withholding (PAYG(W)) and Superannuation Guarantee (SG).

A13.32 Figure 14 that follows shows the proportion of total penalties raised by revenue product for the 2010–11 and 2011–12 financial years. The figure demonstrates that income tax accounts for the largest amounts of penalties raised and, together with GST, comprise approximately 91 per cent of total penalties raised.

Figure 14: Total penalties raised from 1 July 2010 to 30 June 2012 by ATO revenue product

Pie chart showing the proportion of total penalties raised by revenue product for the 2010–11 and 2011–12 financial years. The figure demonstrates that income tax accounts for the largest amounts of penalties raised and, together with GST, comprise approximately 91 per cent of total penalties raised.

Source: Australian Taxation Office.345

Total penalties raised by penalty type

A13.33 The total penalties raised can be disaggregated by penalty type. Having a greater understanding of the proportion and amount of each type of penalty imposed provides some insight into the nature of underlying taxpayer non-compliance.

A13.34 The ATO does not currently have corporate reporting on the types of penalties imposed in compliance activities as some of their systems do not record this information.346 As a result, it is difficult to establish the types of penalties that are imposed most often and the amounts of different types of penalties raised. However, incomplete data on penalty types and numbers was obtained from the ICP system. Due to the incompleteness of the information, however, caution should be exercised in drawing conclusions.

A13.35 Table 17 below presents the ICP data on the penalty amounts and numbers raised during audits by penalty type. This table shows that the greatest proportion of penalties raised by value were for making a false or misleading statement and for taking a position that was not reasonably arguable and the most frequently imposed penalty was that for failing to lodge on time.

Table 17: ATO’s ICP system data on penalties raised by penalty type from 1 July 2011 to 30 April 2012
Penalty type  Amount
($)
Number
Failure to lodge penalties
Penalty for failure to lodge on time - large  200,115 95
Penalty for failure to lodge on time - medium  4,244,920 3,995
Penalty for failure to lodge on time - small  74,768,165 134,317
False or misleading statement penalties
Shortfall penalty relating to a failure to take reasonable care 170,609,160 42,896
Shortfall penalty relating to recklessness  86,278,182 3,835
Shortfall penalty relating to an intentional disregard of a taxation law 129,630,143 886
Shortfall penalty – other 18,828,833 137
No reasonably arguable position penalties
Shortfall penalty relating to a position that is not reasonably arguable  68,135,939 235
Scheme penalties
Shortfall penalty relating to a scheme shortfall  83,685,260 73
Shortfall penalty where a reasonably arguable scheme adjustment provision does not apply  965,687 3
Shortfall penalty where a reasonably arguable scheme transfer pricing adjustment does not apply  6376 5
Failure to provide a document penalties
Penalty for failure to provide a document as required 107,451,050 2,790
Other penalties 
Penalty for failure to give a compulsory release authority  244,200 111
Penalty for failure to give a statement of a released excess contributions liability  550 1
Penalty for failure to release excess contributions  6600 3
Total 745,055,180 189,382

Source: Australian Taxation Office.347

Unsustained penalties

A13.36 Once raised, a penalty may also be reduced or become ‘unsustained’ through the following means:

  • automatic remission of a penalty, which may occur at the same time as making a penalty decision, but before the taxpayer is notified of the potential liability to the penalty;
  • internal review of an ATO officer’s penalty decision, which may be made by an independent ATO officer at the request of taxpayers in certain circumstances;
  • objection to a penalty decision, which is a form of internal review of ATO assessments provided by the tax laws;
  • appeal to the AAT or Federal Court in relation to disallowed objection decisions, which are forms of external review provided by the tax laws;
  • settlement between the taxpayer and the ATO in relation to the penalty amounts; and
  • as an automatic consequence of the liability to primary taxes being reduced—for example, where certain penalties are calculated as a percentage of tax liability shortfall amounts, the penalty amount will reduce in proportion to the adjusted primary tax amount even though the basis for the penalty itself is not challenged.

Recording and reporting unsustained penalties

A13.37 The ATO records and reports on the penalties reduced as a result of internal and external review, as well as an automatic consequence of the liability to primary taxes being reduced.

A13.38 The various recording and reporting systems used by the ATO throughout review activities are listed in Table 18 below. Descriptions of these systems are outlined earlier in this Appendix under the ‘Recording and reporting penalties raised’ section.

Table 18: ATO systems for recording and reporting on reviewed penalties
ATO activity Type of information recorded Recording and reporting system
Internal and external review  Case Management Siebel Work Management
Siebel Case Management
Financials Client Accounts
Siebel Case Management

Source: Australian Taxation Office.

A13.39 The ATO only recently started recording all the objection, settlement and litigation activities on Siebel Work or Case Management (settlements from 1 July 2011 and objections and litigation from 1 July 2012). Information on penalties during these activities is collected in templates that ATO officers are required to complete at the activity’s conclusion. However, not all of these templates require ATO officers to provide information on penalties. For example, objection work recorded on the Siebel Work Management system does not require ATO officers to input information on penalties at the conclusion of an objection.

A13.40 Each Compliance Group business line of the ATO generates specific reports, many of which contain various levels of details on penalties. However, the ATO does not have a centralised process for extracting data and generating reports that provide the treatment of penalties over the life of a given case.

A13.41 Furthermore, the penalty information from these case and work management systems is not used in the Commissioner’s Annual Reports. The ATO has advised the IGT that as there is an obligation to report debts raised for financial accounting purposes, the penalty figures are sourced from the ATO’s accounting systems, ICP and AIS.348

A13.42 Since 1 July 2012, however, the ATO has adopted a new reporting tool known as the ‘Objections Cube’. This tool extracts the reasons for all objection decisions that are recorded in Siebel Case Management and compiles relevant reports. These reports are expected to provide a clearer understanding of why audit decisions become unsustained, amongst other outcomes.

A13.43 There are limitations to the Objections Cube data as the system cannot distinguish whether the reason for the objection outcome relates to the primary tax or the penalty matter. Furthermore, there is no validation of the data, which is currently input manually, and the data may also be subject to change due to cases being re-opened.

A13.44 The reports generated by the Objections Cube are ultimately reviewed by the senior executives responsible for the Objections Reference Group, as mentioned in Chapter 1.

Level of unsustained penalty decisions

A13.45 To reconcile unsustained penalty decisions with the initial penalty decisions, each taxpayer’s case needs to be tracked from the initial penalty decision through all the stages of review. However, the inherent limitations with the ATO’s recording and reporting systems prevent such identification, namely the inconsistent types of information collected when a penalty decision is dealt with in different areas of the ATO.

A13.46 An estimate of the level of unsustained penalties can be ascertained by collating the reports that aggregate the information produced at each stage of a dispute resolution process. Although these figures cannot be reconciled on an individual case-by-case basis, an indicative comparison on an aggregated basis may be made, albeit with an inherent time lag between penalties raised in audits and reversals made on review.

A13.47 Table 19 below collates the various aggregated ATO reporting data produced for the last three financial years at each stage of a dispute resolution process, namely, the objection, settlement and litigation stages. There are a number of qualifications, however, that need to be taken into account in relation to this data being that it:

  • only includes disputed cases in which penalties were raised;
  • includes duplication of settlements data, due to different reports containing the same information;
  • does not include approximately 15,000 objection cases in the MEI business line, due to the relevant system, Siebel Work Management, not recording penalty information on those cases; and
  • does not include data on objections before 1 July 2012.
Table 19: Percentage of primary tax liabilities and penalties reduced on review, by financial year
Financial year Total primary tax liability imposed Total penalties Imposed Total primary tax liabilities reviewed Total primary tax liabilities reduced % of reviewed primary tax liabilities reduced on review % of total primary tax liabilities reduced on review
2010-11 9,011,000,000 1,314,342,496 2,199,057,866 1,169,861,012 53 13
2011-12 8,900,000,000 1,449,405,023 1,598,218,370 728,432,820 46 8
2012-13 9,353,000,000 1,490,000,000 3,047,146,700 951,282,337 31 10
Table 19: Percentage of primary tax liabilities and penalties reduced on review, by financial year (continued)
Financial year Total penalties reviewed Total penalties reduced % of reviewed penalties
reduced on review
% of total penalties
reduced on review
2010-11 856,941,078 406,495,128 47 31
2011-12 645,841,034 374,953,248 58 26
2012-13 1,376,998,905 688,607,950 50 46

Source: Australian Taxation Office.

A13.48 Table 19 shows that for the 2010–11, 2011–12 and 2012–13 financial years, the ATO reduced approximately:

  • 53 per cent of primary tax liabilities and 47 per cent of penalties for cases reviewed in the 2010–11 financial year;
  • 46 per cent of primary tax liabilities and 58 per cent of penalties for cases reviewed in the 2011–2012 financial year; and
  • 31 per cent of primary tax liabilities and 50 per cent of penalties for cases reviewed in the 2012–2013 financial year.

A13.49 As noted, caution needs to be exercised in interpreting the data. At this level of aggregation, the percentage outcomes for penalty decisions themselves may have various underlying drivers. As mentioned earlier, where the primary tax liability is reduced, penalties that are calculated as a percentage of shortfall amounts are reduced proportionally. This reason could explain the similar percentage of penalties allowed in cases reviewed by the ATO. It may also be the case that there is a range of interactions within the data that are not obvious without improvements to the data quality.

A13.50 Table 19 shows a significant percentage of the total penalties raised are reduced on review — 31 per cent in 2010–11, 26 per cent in 2011–12 and 46 per cent in 2012–13. As this table includes all penalties raised but not all penalty amounts reduced, this percentage may be higher. Aggregating amounts over a five year or longer period would also help to reduce the effect that any cases involving large amounts may have.

A13.51 Table 19 also shows a significant difference between the primary tax liabilities and penalties reduced when viewed as a percentage of total primary tax liabilities and penalties raised.

A13.52 The following tables provide further detail by disaggregating the data in Table 19 into the specific stages of a review activity, namely the objection, settlement and litigation stages. These tables also quantify the difference between the percentages of penalties reduced with that of primary tax reduced.

Table 20: Percentage of primary tax and penalty allowed after objections, by financial year
Financial year Primary Tax Penalty Difference in %
  Original primary tax for objection cases Primary tax allowed at objection % Original penalty for objection cases Penalty allowed at objection %
2010-11 775,226,850 204,135,641 26 333,685,725 158,536,712 48 21
2011-12 775,226,850 204,135,641 26 333,685,725 158,536,712 48 21
2012-13 1,362,702,664 331,480,767 24 811,648,884 279,218,788 34 10

Source: Australian Taxation Office.349

Table 21: Percentage of primary tax and penalty allowed after settlement, by financial year
Financial year Primary Tax Penalty Difference in %
  Original primary tax for settlement cases Primary tax allowed at settlement % Original penalty for settlement cases Penalty allowed at settlement %
2010-11 777,867,023 251,973,604 32 201,498,549 161,131,436 80 48
2011-12  301,446,322 93,330,496 31 131,112,091 85,021,806 65 34
2012-13  1,328,406,546 496,000,323 37 355,854,353 318,947,128 90 52

Source: Australian Taxation Office.

Table 22: Percentage of primary tax and penalty allowed after litigation, by financial year
Financial year Primary Tax Penalty Difference in %
  Original primary tax for litigation cases Primary tax allowed at litigation % Original penalty for litigation cases Penalty allowed at litigation %
2010-11 1,421,190,843 917,887,408 65 655,442,529 245,363,692 37 -27
2011-12  521,545,199 430,966,683 83 181,043,217 131,394,730 73 -10
2012-13  356,037,490 123,801,247 35 209,495,668 90,442,035 43 -8

Source: Australian Taxation Office.

A13.53 The above tables indicate that for the 2010–11, 2011–12 and 2012-13 financial years in objections and settlements, the amount of penalties reduced were greater than the amount of primary tax liabilities reduced.

A13.54 The sections that follow provide further detail on the level of unsustained penalties at various stages of review activity, namely, objection, settlement and appeal.

Objections

A13.55 Where a taxpayer is dissatisfied with an assessment, including a penalty decision, they may lodge an objection against it.350Objections can relate to tax adjustments, tax adjustments and penalties, or solely penalties.351

A13.56 According to the ATO’s Your case matters publication, in the half year 1 July to 31 December 2012, around 350,000 review and audit activities were completed. Over 226,000 resulted in an amended assessment, giving rise to 16,500 objections (or 7.3%).352

Total objections by number and variance

A13.57 Table 23 below sets out the total number of taxpayer objections, together with the primary tax liabilities and penalties originally raised, disputed and allowed at objection from 1 July 2012 to 30 June 2013 by ATO business line.

A13.58 It should be noted that the information in the following tables relate solely to the Siebel Case Management system. As mentioned above, this system is used for complex, less routine and lower volume work and therefore detailed financial information as well as other information of varying degrees of quality is collected—for example, reasons for objections and the financial outcomes of objections.

A13.59 On the other hand, the Siebel Work Management system, which is used solely for routine, simple and high volume type work does not record any financial information. According to the ATO, there are approximately 15,000 low value cases recorded in this system which have not been included in the tables that follow under this section of the report.

A13.60 Also, information prior to 1 July 2012 could not be provided by the ATO as no corporate reporting on objections existed on the Siebel Case Management system prior to this date.

Table 23: Total objections, from 1 July 2012 to 30 June 2013 by business line
BSL Number Original primary tax liabilities raised ($) Primary tax liabilities allowed ($) Primary tax liabilities allowed (%) Original penalties raised ($) Penalties allowed ($) Penalties allowed (%) Difference between  primary tax liabilities and penalties allowed (percentage points)
ATOP 2 36,207 510 100 29,863 - 0 -100
ATP 90 7,031,921 264,596 6 13,231,209 37,011 0 -6
CSC 7 5,710,636,245 7,969,670 1 2,520,517 2,520,517 100 99
ITX 2,192 293,346,091 57,816,261 23 119,808,255 28,166,042 24 1
LBI 112 14,786,532,317 313,750,574 10 95,002,920 51,424,080 54 44
MEI 1,243 197,579,857 21,851,880 12 108,670,376 12,528,773 11 -1
SME 341 758,148,897 100,800,076 30 119,745,681 15,515,473 13 -17
SPR 2,608 97,750,133 19,753,681 26 15,081,409 4,568,432 37 11
Total 6,595 21,851,061,667 522,207,247 11 474,090,230 114,760,328 25 14

Source: Australian Taxation Office.

A13.61 The difference between the percentage of primary tax liabilities allowed (primary tax variance) and percentage of penalties allowed (penalty variance) assists in determining the extent to which penalties are reduced as an automatic consequence of a reduction in primary tax liabilities. If the sole reason for penalties being reduced on objection was due to a reduction in the primary tax, these percentages would be the same and therefore the difference between these two figures would be zero.

A13.62 According to Table 23 above, and discounting those business lines dealing with small numbers of cases, a large proportion of penalties were reduced in the LBI business line (54%). This business line also recorded significant differences between the primary tax and penalty variances.

A13.63 A recent publication also mentions that an increased use of data matching and refund checking has resulted in a large increase in objections in recent years, with a proportion relating only to penalties and interest.353

Objection cases with penalty amounts by number and variance

A13.64 In order to better determine the extent to which penalties are reduced due to unsustained penalty decisions, Table 24 below removes from the total objection population those objection cases with no penalty amounts. The remaining population, therefore, comprises those objection cases with penalty amounts, although the penalty decision may or may not be the subject of dispute. The data in Table 24 shows that the majority of such objection cases arose from the ITX, SPR and MEI business lines.

A13.65 Table 24 also shows that, excluding those business lines that only deal with small numbers of cases, a significant amount of penalties was reduced at objection in the LBI (54%), SPR (30%), ITX (24%) and SME (13%) business lines.

A13.66 These business lines also recorded significant differences between the primary tax and penalty variances. Excluding those business lines that only deal with small numbers of cases, the following business lines show a significant difference between the primary tax and penalty reduced, namely LBI (26%), SPR (12%), ITX (6%) and SME (6%).

Table 24: Objection cases with penalty amounts, from 1 July 2012 to 31 March 2013 by business line
BSL Number Original primary tax liabilities raised Primary tax liabilities allowed % of primary tax liabilities allowed Original penalties raised Penalties allowed % of penalties allowed Difference between primary tax liabilities and penalties allowed (percentage points) 
ATOP 1 33,181 0 0 29,863 0 0 0
ATP 32 3,328,548 134,892 4 13,231,209 37,011 0 -4
CS&C 2 0 0 - 2,520,517 2,520,517 100 100
ITX 986 209,757,384 37,311,805 18 119,808,255 28,166,042 24 6
LBI 10 177,397,900 49,465,861 28 95,002,920 51,424,080 54 26
MEI 341 158,368,706 16,293,715 10 108,670,376 12,528,773 12 1
SME 119 269,130,565 18,595,353 7 119,745,681 15,515,473 13 6
SPR 647 47,016,570 8,408,017 18 15,081,409 4,568,433 30 12
Total 2,138 865,032,855 130,209,642 15 474,090,230 114,760,328 24 9

Source: Australian Taxation Office.

Penalty-only objections by number and variance

A13.67 In order to better understand the extent of penalty variance arising from unsustained penalty decisions, those objection decisions in which primary tax was disputed need to be extracted. Table 25 below extracts from the Table 24 data above, those objections where only the penalty decision was in dispute — penalty-only objections (being 407 of the 6595 objection cases set out in Table 23).

A13.68 Table 25 shows that the majority of penalty-only objections arose from the ITX (42.26% of total objections), SPR (36.61%) and MEI (12.53%) business lines.

A13.69 However, in terms of the amount of penalty disputed in these penalty-only objection cases, most of this amount arose from the SME (56.32%), LBI (20.14%) and ITX (15.23%) business lines. Whilst there was only one case that was objected to in the LBI business line, the amount involved was comparatively large.

A13.70 Table 25 also indicates that whilst ITX, SPR and MEI business line penalty decisions may be subject to the largest number of penalty-only objection cases, by value the largest proportion of penalty-only objections arose from the SME, LBI and ITX business lines.

A13.71 Furthermore, Table 25 shows that in a number of business lines a significant amount of penalties was reduced at objection, namely the CS&C (100%), LBI (100%), ITX (43.15%), SPR (36.93%) and SME (20.01%) business lines. However, in the CS&C and LBI business lines, only one objection was made where the penalty was the only issue in dispute.

Table 25: Penalty-only objections from 1 July 2012 to 31 March 2013 by business line
BSL Number % of total number Original penalty raised($) Penalty disputed($) % of total penalty disputed Penalty allowed($) % of disputed penalty allowed
ATOP 1 0.25 29,863.00 29,863.00 0.05 - 0
ATP 10 2.46 55,140.95 55,140.95 0.09 639 1.16
CS&C 1 0.25 1,847,641.00 1,847,641.00 2.91 1,847,641 100
ITX 172 42.26 9,735,820.53 9,665,909.43 15.23 4,171,111 43.15
LBI 1 0.25 12,777,892.00 12,777,892.00 20.14 12,777,892 100
MEI 51 12.53 1,302,605.54 1,303,839.92 2.05 100,157 7.68
SME 22 5.41 35,720,993.39 35,735,993.47 56.32 7,150,967 20.01
SPR 149 36.61 2,063,532.37 2,032,283.50 3.2 750,549 36.93
Total 407 100 63,533,488.78 63,448,563.27 100 26,798,955 42.24

Source: Australian Taxation Office.

Penalty-only objections by outcome

A13.72 Table 26 below shows that a large proportion of penalty-only objections are either allowed in full (20.88%) or allowed in part (25.55%). Together, these figures represent a total of 46.43 per cent of the total number of penalty-only objections for the 1 July 2012 to 31 March 2013 period. The data also identified that 39.56 per cent of penalty-only objections were disallowed. A number of other reasons were provided for the remaining 14.01 per cent of these objections.

Table 26: Outcomes for penalty-only objections, from 1 July 2012 to 31 March 2013 by business line
Final outcome ATOP ATP CSC ITX LBI MEI SME SPR Total %
Allowed in full     1 45 1 6 8 24 85 20.88
Allowed in part   1   39   18 3 43 104 25.55
Commissioner's discretion exercised           2 1   3 0.74
Commissioner's discretion part exercised       1       1 2 0.49
Disallowed 1 8   72   24 7 49 161 39.56
Invalid       8   1 1 21 31 7.62
Withdrawn - settled             2   2 0.49
Withdrawn - taxpayer   1   7       10 18 4.42
Unknown               1 1 0.25
Total 1 10 1 172 1 51 22 149 407 100

Source: Australian Taxation Office.

Settlements

A13.73 A settlement can occur at any time in the compliance verification and dispute resolution cycle. If a settlement is concluded, ATO officers are required to record the basis for, and the financial outcomes of the settlement. The ATO has advised that an unquantifiable number of settlements in the data below have also been included in the objections and appeals data.354

A13.74 Tables 27, 28 and 29 below show the amount of pre-settlement penalties (that is, the ATO’s position on commencement of settlement negotiations) and the amount of penalties imposed post settlement for three separate financial years. Tables 27, 28 and 29 exclude cases that did not consider penalties.

A13.75 Tables 27, 28 and 29 indicate that for the 2010–11, 2011–12 and 2012–13 financial years, there was a high proportion of penalty variance in settlements across all business lines. These tables also show a marked difference between the penalty variance and primary tax variance. The percentage of this difference may be different to that set out in the tables as the ATO has not included in these settlement figures the monetary impact of any agreement not to claim carried forward losses, interest on overpayment and interest charge deductions.

A13.76 In the 2012–13 financial year, pre-settlement penalties were reduced by 83 per cent on average compared with an average pre-settlement primary tax reduction of 36 per cent. In the 2011–12 financial year, on average, pre-settlement penalties were reduced by 65 per cent in settlement and pre-settlement primary tax liabilities were reduced by 31 per cent — a difference of 34 percentage points. In the 2010–11 financial year, the level of pre-settlement primary tax liabilities that was reduced was similar to the 2011–12 financial year, at 32 per cent. However, in that year, the level of pre-settlement penalties was reduced by 80 per cent — a difference of 48 percentage points. The ATP, LBI and SME business lines have also maintained large differences in the penalty and primary tax variance across the three financial years.

Table 27: Total amount of pre and post settlement primary tax and penalties, from 1 July 2012 to 30 June 2013 by business line
BSL Number Pre-settlement primary tax Primary tax allowed % Pre-settlement penalty Penalty allowed % Difference in %
ATP 6 362,424 - 0 181,212 144,970 80 80
ITX 12 4,389,551 3,146,598 72 5,766,685 4,746,410 82 11
L&P 61 29,399,589 13,855,282 47 20,180,830 19,005,569 94 47
LBI 10 1,111,009,279 344,816,562 31 286,344,668 229,998,630 80 49
MEI 13 5,269,744 1,783,383 34 4,070,256 2,648,031 65 31
SME 100 330,637,715 165,617,121 50 97,039,418 87,811,086 90 40
SNC 9 10,437,052 3,094,378 30 6,769,277 4,682,509 69 40
SPR 2 86,883 - 0 51,444 51,444 100 100
Total 213 1,491,592,238 532,313,324 36 420,403,791 349,088,650 83 47

Source: Australian Taxation Office.

Table 28: Total amount of pre and post settlement primary tax and penalties, from 1 July 2011 to 30 June 2012 by business line
BSL Number Pre-settlement primary tax Primary tax allowed % Pre-settlement penalties Penalty allowed % Difference in %
ATP 43 2,987,365 43,539 1 1,325,485 808,278 61 60
ITX 8 4,584,051 1,123,178 25 4,911,906 2,058,273 42 17
LBI 3 61,828,045 19,817,601 32 18,993,947 12,060,723 63 31
MEI 26 8,150,661 2,523,393 31 5,362,212 4,178,797 78 47
SME 44 181,591,279 53,977,221 30 73,397,759 51,264,464 70 40
SNC 39 42,263,701 15,826,354 37 27,110,882 14,641,370 54 17
SPR 2 41,221 19,209 47 9,900 9,900 100 53
Total 165 301,446,322 93,330,496 31 131,112,091 85,021,806 65 34

Source: Australian Taxation Office.

Table 29: Total amount of pre and post settlement primary tax and penalties, from 1 July 2010 to 30 June 2011 by business line
BSL Number Pre-settlement primary tax Primary tax allowed % Pre-settlement penalty Penalty allowed % Difference in %
ATP 119 13,473,113 347,733 3 6,514,774 4,623,409 71 68
EXC 1 924,114 924,114 - 231,028 231,028 100 -
GST 25 9,310,575 7,534,587 81 2,529,275 1,852,220 73 -8
LBI 10 663,105,297 217,790,980 33 163,025,858 134,855,736 83 50
MEI 19 15,507,124 7,691,253 50 3,190,426 1,820,045 57 7
SME 20 44,079,488 7,825,335 18 13,184,642 8,892,546 67 50
SNC 17 31,467,313 9,859,603 31 12,822,546 8,856,452 69 38
Total 211 777,867,023 251,973,604 32 201,498,549 161,131,436 80 48

Source: Australian Taxation Office.

Appeals

A13.77 Taxpayers may appeal objection decisions to the AAT and the Federal Court. The appeals may be concluded either by the Tribunal or Court hearing the case and handing down a decision, or, by agreement between the parties prior to this hearing. The ATO records the outcomes at both of these stages separately—'cases finalised at hearing' and 'cases finalised prior to hearing', respectively.

A13.78 Table 30 below shows the total number of appeal cases finalised at hearing, the number of primary tax and penalty dispute cases and the amount of primary tax liabilities and penalties finalised by business lines from 1 July 2010 to 30 June 2013. Table 31 provides similar information but in relation to appeal cases that were finalised prior to hearing.

A13.79 Tables 30 and 31 show that a substantial proportion of penalties were reduced in a number of business lines within the ATO, both prior to hearing and at hearing. The business lines with the greatest proportion of penalty reductions were ATP (88% prior to hearing), MEI (44% prior to hearing) and SME (56% prior to hearing). These business lines have also shown consistently large differences in the penalty and primary tax variance in both financial years.

Table 30: Total amount of pre and post litigation primary tax liabilities and penalties from 1 July 2010 to 30 June 2013 by business line (cases finalised at hearing)
BSL Number Original primary tax liabilities ($) Primary tax liabilities reduced ($) Primary tax liabilities reduced % Original penalties raised ($) Penalties reduced ($) Penalties reduced % Difference between primary tax liabilities and penalties reduced (percentage points)
ATP 17 24,846,351 8,562,948 34 8,812,882 1,420,768 16 -18
EXC 7 15,800,711 - 0 2,960,907 1,101 0 0
GST 40 39,695,609 4,279,566 11 14,834,315 663,506 4 -6
L&P 2 3,129,882 - 0 4,097,480 7,219 0 0
LB&I 28 1,503,014,195 1,205,436,127 80 607,106,408 278,313,976 46 -34
MEI 70 100,247,302 37,472,637 37 59,712,953 24,368,693 41 3
SME 23 29,515,651 9,431,726 32 21,267,267 7,157,245 34 2
SNC 5 14,623,689 12,306,944 84 6,632,512 4,507,843 68 -16
SPR 44 17,724,528 1,248,318 7 5,382,825 964,357 18 11
CSC 1 25,945 - 3,097 -12 - - 4,786 - -
ITX 9 471,410 49,850 11 191,467 15,155 8 -3
Total 246 1,749,095,272 1,278,785,016 73 730,999,015 317,415,077 43 -30

Source: Australian Taxation Office.

Table 31: Total amount of pre and post litigation primary tax and penalties from 1 July 2010 to 30 June 2013 by business line (cases finalised prior to hearing)
BSL Number Original primary tax liabilities ($) Primary tax liabilities reduced ($) Primary tax liabilities reduced % Original penalties raised ($) Penalties reduced ($) Penalties reduced % Difference between primary tax liabilities and penalties reduced (percentage points)
ATP 118 38,387,562 21,232,006 55 26,134,961 23,032,817 88 33
CS&C 5 1,077,686 256,614 24 431,074 218,402 51 27
EXC 9 3,974,135 3,575,501 90 644,142 524,752 81 -9
GST 167 83,134,624 13,655,552 16 47,807,914 14,168,305 30 13
ITX 6 121,218 91,393 75 648,090 126,054
L&P 9 3,515,419 512,042 15 2,531,401 410,527 16 2
LB&I 14 100,928,129 47,567,933 47 30,425,386 12,496,027 41 -6
MEI 396 112,312,460 40,053,332 36 66,287,028 28,963,433 44 8
OCOM 2 521,845 360,194 69 68,297 52,132 76 7
SME 140 151,679,357 52,089,892 34 101,208,586 56,546,480 56 22
SNC 46 50,538,784 13,662,849 27 36,524,030 13,093,820 36 9
SPR 35 3,487,042 813,015 23 2,271,490 128,694 6 -18
Total 947 549,678,259 193,870,323 35 314,982,399 149,761,443 48 12

Source: Australian Taxation Office.

Appeals by outcome

A13.80 Table 32 below shows the number of cases and the amount of penalties disputed and finally imposed at litigation, both before and after the matter was heard, by outcome. This table excludes cases that did not involve penalty amounts.

A13.81 Table 32 indicates that 29.17 per cent of appeal cases were either conceded or abandoned by the ATO or a decision was found, fully or partly, in favour of the taxpayer. Furthermore, penalties were reduced by an average of 70.18 per cent when it was settled and 34.88 per cent when the decision was part favourable to the ATO.

Table 32: Number of appeal cases and amounts of penalty disputed and finalised from 1 July 2010 to 30 June 2013 by outcome
Decision Year Number Penalties disputed
($)
% of Grand total Penalties finally imposed
($)
Penalty variance
(%)
Conceded or abandoned by ATO 2010-11 28 4,343,383 1,531,093 35.25
2011-12 59 8,124,035 34,959 0.43
2012-13 87 21,724,408 70,539 0.32
Total 174 34,191,826 1.66 1,636,590 4.79
Conceded or abandoned by taxpayer 2010-11 68 40,393,294 29,452,035 72.91
2011-12 76 32,065,425 32,059,250 99.98
2012-13 82 56,946,326 56,908,846 99.93
Total 226 129,405,044 6.29 118,420,130 91.51
Settled 2010-11 204 61,270,384 19,335,475 31.56
2011-12 137 29,487,034 6,808,057 23.09
2012-13 206 60,628,112 18,996,767 31.33
Total 547 151,385,530 7.36 45,140,299 29.82
Decision favourable to ATO 2010-11 41 87,481,320 58,592,835 66.98
2011-12 36 10,072,666 10,070,860 99.98
2012-13 89 67,337,438 40,559,971 60.23
Total 166 164,891,424 8.01 109,223,667 66.24
Decision favourable to taxpayer 2010-11 14 1,650,877 1,559,354 94.46
2011-12 12 99,901,538 0 0.00
2012-13 10 1,213,202 1,086,260 89.54
Total 36 102,765,618 4.99 2,645,614 2.57
Decision part favourable to ATO 2010-11 14 460,303,271 299,608,046 65.09
2011-12 17 1,392,519 675,362 48.50
2012-13 13 1,646,183 1,431,250 86.94
Total 44 463,341,973 22.52 301,714,658 65.12
Grand Total 1193 2,057,771,003 1,155,925,325 56.17

Source: Australian Taxation Office.


341 Some MEI staff may also key the amounts into the ICP system.

342 Australian Taxation Office, 'Compliance Penalties and Interest Forum minutes' (29 June 2012), internal ATO document, p 4.

343 Australian Taxation Office, 'Active Compliance: Rates of Penalties Imposed' (21 December 2012), internal ATO document.

344 Above n.150.

345 Ibid.

346 Ibid, p4.

347 Ibid.

348 Australian Taxation Office communication to the Inspector-General of Taxation, 20 February 2013.

349 The ATO has advised that in 2010–11 the objection figures are unavailable and the 2011–12 figures have been used as an estimate for the figures in 2010–11. It is possible that a lower or higher percentage from 2012–13 could apply. Care needs to be taken when using these figures to examine trends.

350 Income Tax Assessment Act 1936, s175A and Part IVC.

351 Australian Taxation Office, Your case matters: Tax and superannuation litigation trends, (3rd ed, 2013) p 6.

352 Ibid.

353 Australian Taxation Office, Your case matters 2012: Tax and superannuation litigation trends (2nd ed, 2012) p 6.

354 Australian Taxation Office communication to the Inspector-General of Taxation, 18 February 2014.