Conduct of review

1.1 This is the Inspector-General of Taxation's (IGT) report of his review into the Australian Taxation Office's (ATO) administration of penalties. The report is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (IGT Act 2003).

1.2 During public consultation for the IGT's 2012–13 work program, a range of stakeholders raised concerns with the ATO's application of penalties in compliance activities. The IGT commenced this review in response to those concerns and pursuant to section 8(1) of the IGT Act 2003. The IGT undertook further community consultation to better understand these stakeholder concerns, which are reflected in the terms of reference issued on 22 November 2012 and reproduced in Appendix 1.

1.3 The IGT received a number of submissions from taxpayers, tax practitioners and their representative bodies amongst others. The IGT also met with interested stakeholders to understand their experiences and to discuss their submissions. The concerns generally focussed on penalties that relate to the statements that taxpayers make in fulfilling their tax obligations and may be grouped under the following four themes:

  • the legislative framework of the current penalty regime, such as the stratification of penalty rates;
  • the number and quantum of penalties that are reduced on internal and external review;
  • the purported reasons for unsustained ATO penalty decisions, such as ATO officer capability in dealing with evidentiary matters and the potential for penalties to be used as leverage in resolving primary tax disputes; and
  • the clarity and accessibility of ATO advice and guidance on various aspects of penalty matters.

1.4 The IGT established a working group to discuss the potential solutions to the systemic issues identified in this review. This group comprised key tax practitioners and their representatives: Arthur Athanasiou, Thomsons Lawyers; John Avery, Australand; Michael Bersten, PricewaterhouseCoopers; Ron Jorgensen, Harwood Andrews Lawyers; Ashley King, Deloitte; Chen Leong, BHP Billiton; Frank O'Loughlin, Victorian Bar; Paul Stacey, Institute of Chartered Accountants in Australia; Glenn Williams, Ernst & Young; and senior ATO officials, led by the Second Commissioner—Compliance.

1.5 We greatly appreciate the generosity of the members of this working group in freely giving their time and expertise. Their involvement has greatly enhanced the outcomes of this review. It should be noted, however, that the views and recommendations expressed in this report are not necessarily those of individual members of the working group. The views and recommendations were finalised by the IGT after deliberation and input from private sector representatives and the ATO.

1.6 The IGT review team also worked progressively with ATO senior management to distil the scope for improvement and to agree on specific actions to realise these improvements. Broader policy issues were also discussed with officers in the Attorney-General's Department and the Department of Finance and Deregulation.

1.7 In accordance with section 25 of the IGT Act 2003, the IGT provided the Commissioner of Taxation with the opportunity to make submissions on any implied or actual criticisms contained in this report.

1.8 All legislative references mentioned in this report are to Part 4-25 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) unless stated otherwise.

Purpose and design of penalties

1.9 Generally, the purpose of penalties is to promote the smooth running of social and economic structures by shaping desired behaviours and punishing undesirable behaviours. As such, the design of any particular penalty regime depends on the policy aims of the area of activity in which they are sought to be imposed, such as the areas of corporate governance, consumer protection or taxation.1

1.10 In the self assessment system established by the taxation laws, the administrative penalty regime is designed to encourage voluntary compliance with taxation obligations.2 These obligations may be grouped into the following four categories:

  • registration obligations — registration with the relevant authorities for various taxation obligations;
  • lodgement obligations — timely lodgement of requisite taxation information or documents;
  • reporting obligations — complete and accurate information to be reported, as well as the maintenance of supporting records; and
  • payment obligations — the prompt payment of taxation liabilities.3

1.11 Tax administration penalties encourage a level of taxpayer compliance by setting out the consequences of not meeting the standard of conduct required to fulfil the relevant tax obligations.4 There may be instances where some levels of non-compliance may be tolerated and not attract the imposition of penalties.5

1.12 In the self assessment system, determining whether taxpayers have complied with registration, lodgement and payment obligations may be a relatively easy exercise as non-compliance with these obligations are objectively observable events — for example, a taxpayer not lodging a specific form.

1.13 Determining non-compliance with reporting obligations, however, may be more complex as even simple economic transactions can involve considerable uncertainty about the correct interpretation and application of the tax law.6 Furthermore, reporting obligations may require taxpayers to undertake complex tasks such as:

  • concurrently interpreting various legislative provisions, administrative interpretations and the interactions between the two;
  • making conclusions of fact that cannot be directly evidenced and can only be inferred from various pieces of evidence — for example, questions of residency, arm's length and market value; and
  • determining which facts and evidence should be considered in applying the law and their effect on the resulting outcomes.

1.14 Such complexities with reporting may be compounded by other factors such as the capability of the taxpayer and the nature and availability of reliable advice provided by the ATO and advisers.

Principles of penalty regime design

1.15 The principles of penalty regime design in a self assessment environment have been reviewed in jurisdictions such as the United States of America (USA). In that jurisdiction, a task force was established to develop a fair, consistent and comprehensive approach to penalty administration. The task force issued a report in February 1989 that identified four broad principles for evaluating whether penalties encourage voluntary compliance,7 namely fairness, comprehensibility, effectiveness and ease of administration.8

1.16 The first principle, fairness, consisted of three main components:

  • horizontal equity — similarly treating taxpayers in substantially the same circumstances by reference to taxpayers' wilfulness of non-compliance, level of sophistication and prior compliance history;
  • proportionality — the penalties reflect the culpability of taxpayers and the harm caused by their non-compliance; and
  • procedural fairness — the regulator to provide opportunities for taxpayers to be heard on the issues before imposing penalties and carefully considering any mitigating facts and circumstances.9

1.17 The second principle, comprehensibility, requires taxpayers with various levels of education to be able to understand the conduct that is expected of them and the consequences for failing to meet those expectations. In cases where more than one penalty can apply to the same conduct, complexity may increase and influence the level of voluntary compliance.10

1.18 The third principle, effectiveness, requires the penalty to be severe enough to eliminate non-compliance without being so severe as to be difficult to enforce or perceived as disproportionate or unfair.11 However, a penalty regime is likely to be more effective in encouraging voluntary compliance if it is graduated and based on taxpayers' efforts to correct any initial non-compliance, provided such graduations do not produce excessive complexity.

1.19 The fourth principle, ease of administration, allows the regulator to simply determine whether the penalty should be imposed and to exercise discretion in waiving the penalty if appropriate. It also requires the regulator to not provide overly detailed guidance or for the rules to be rigid.12

1.20 This task force report recognised that individual penalties and the penalty regime as a whole must effectively balance these four principles.13

1.21 To best understand how the application of these principles could be most effective in influencing taxpayer behaviours, there must be an appreciation of what motivates taxpayers to comply with their tax obligations.14 The extensive but still unsettled literature coalesces around two models of taxpayer compliance—a deterrence model and a norms model.15

Deterrence model

1.22 The deterrence model argues that taxpayers will comply with their obligations where the expected benefits of compliance outweigh the expected costs of non-compliance.16 As a result, this model implies that tax penalties should be high in order to increase the expected costs of non-compliance and thereby encourage taxpayer compliance.17

1.23 However, some have observed that the deterrence model is derived from a narrow view of taxpayer motivation as it assumes that tax compliance decisions are made by rational taxpayers who simply compare expected benefits to expected costs.18

Norms model

1.24 The norms model argues that a substantial number of taxpayers comply with their obligations through adherence to social or personal norms,19 such as reciprocal cooperation and trust. For example, a taxpayer who values integrity, honesty and the benefits of citizenship may feel guilt, shame or similar emotions if they do not meet their tax obligations.

1.25 This model accepts that the deterrence model accounts for some level of taxpayer compliance, however, the remaining level can only be attributed to social or personal norms.

1.26 The norms model implies governments should supplement tax penalties with other mechanisms aimed at inducing and reinforcing norms-based compliance.

1.27 Although a penalty regime may be designed on an appropriate balance of the above principles and a sound conceptual understanding of taxpayer motivations, voluntary compliance may not always be achieved in practice. In this respect, the application of behavioural science can assist.

Application of behavioural science

1.28 Behavioural science generally seeks to establish working models, based on observations, which predict how certain people will behave in certain situations.

1.29 A key tool used is that of randomised controlled trials (RCTs), which collect qualitative and quantitative data to assess whether a model is useful in predicting behaviours. RCTs are used extensively in fields such as international development, medicine and business. Similarly, RCTs may be used to assess whether policies and strategies are effective in practice.

1.30 The broader adoption of behavioural science by governments may provide a means to enhance the effectiveness of regulation by indicating alternatives to state-imposed sanctions, such as the reframing of policy and regulatory responses.20 For example, the UK Cabinet Office's paper, MINDSPACE — Influencing behaviour though public policy,21 sets out a framework for policy design by considering the factors that influence behaviours.22 Such approaches are also receiving greater interest from Australian government bodies.23

1.31 A limited number of studies have been conducted on aspects of penalty systems that may influence taxpayer behaviours. Although much of this body of work is based on the USA's system, these studies indicate that tax penalties are more effective in influencing behaviours where they include a threat of guilt feelings, rather than the threat of legal sanctions24 as well as the magnitude of the penalty, rather than the probability of detection.25 More recent studies, one of which is Australian-based, indicate that penalties are more effective in influencing behaviours when they are combined with educational efforts,26 carefully tailored persuasive communication27 or rewards.28

1.32 It is likely that behavioural science research, as a means of identifying factors that influence taxpayer behaviours and testing policy and strategy design, will become a fertile area in future.

Australian taxation law administrative penalties

1.33 Under the Australian laws, criminal, civil and administrative penalties may be imposed in response to different types of behaviour that result in failure to comply with relevant taxation obligations. As the overwhelming focus of stakeholders' concerns related to particular types of administrative penalties, this review examines aspects of those penalties with which concerns have been raised.

1.34 By way of background, an outline of the key legislative developments, legislative framework and administrative arrangements for particular tax administrative penalties are provided to contextualise the particular concerns examined in the following chapters.

Key legislative developments

1.35 Prior to the introduction of the income tax self assessment system in 1986, the ATO bore the risk of ensuring that the law correctly applied to the facts in assessments. This approach meant that the taxpayers' obligation was largely limited to making the required disclosures of facts. Under this system, administrative penalties relating to understatements of income tax were applied at a 200 per cent rate and were remitted on a case-by-case basis to a level which the ATO considered appropriate.

1.36 Upon the introduction of self assessment, the taxpayers' obligation was expanded to correctly apply the law to the facts. As a consequence, the pre-existing penalty regime was replaced in 1992 to align income tax administrative penalties with the standard of conduct required by the new system, namely 'reasonable care':

The changes to the penalty provisions are necessary because the current penalty standard no longer reflects what is required of taxpayers. Rather than making a full and true disclosure of all material facts to the Commissioner so that the Commissioner can actively assess a taxpayer's liability, taxpayers are now effectively required to determine their own taxable income. The new penalties set out the standards that taxpayers should meet in fulfilling their tax obligations in a self assessment environment. … Generally, where taxpayers exercise reasonable care, and, for large items, have a reasonably arguable position, they will not be subject to penalties.29

1.37 The 1992 income tax self assessment penalty regime penalised taxpayers for exhibiting certain types of culpable behaviour such as lack of reasonable care, recklessness and intentional disregard of the tax laws. A penalty was also imposed if a taxpayer position was not reasonably arguable.30

Uniform administrative penalty regime

1.38 In 2000, a 'uniform administrative penalty regime' was enacted to apply uniformly to all taxation laws. In effect, this regime:

  • introduced new penalties for failure to fulfil the obligations arising from the then recently enacted Goods and Services Tax (GST) and related laws, as well as some obligations arising under the pre-existing laws;
  • consolidated penalties arising in all taxation laws by grouping them together, removing duplication and standardising the relevant provisions;31 and
  • standardised the penalty rates and amounts for breaches of similar tax obligations arising under the different tax laws.32

1.39 The uniform administrative penalty regime is currently contained in Part 4-25 of Schedule 1 to the TAA 1953 and has four main types of administrative penalties:

  • penalties relating to taxpayer statements;33
  • penalties relating to schemes;34
  • penalties for failing to lodge returns and other documents on time;35 and
  • other miscellaneous penalties, such as failing to register or cancel registration and failing to issue a tax invoice.36

1.40 As this IGT review focuses primarily on penalties relating to taxpayer statements, the following sections outline those penalties and associated matters. There is also a brief discussion of penalties relating to schemes.

Penalties relating to taxpayer statements

1.41 Penalties relating to taxpayer statements include those relating to making false or misleading statements, positions taken that are not reasonably arguable and failing to provide documents.37

False or misleading statement penalty

1.42 Generally, a taxpayer38 is liable for a false or misleading statement penalty if:

  • the taxpayer or their agent makes a statement to the Commissioner;39 and
  • the statement is false or misleading in a material particular, whether because of things in the statement or omitted from the statement.40

1.43 In the ATO's view, a 'statement' is interpreted very broadly and can be anything disclosed to the Commissioner41 for a purpose connected with a taxation law.42 A statement may be made in many forms, including written, oral or electronic. For example, a statement may be made in correspondence, responses to requests for information, a notice of objection, a request for an amended assessment, in answer to a questionnaire or in connection with an examination or investigation.43

1.44 The ATO considers that a statement is false if it is 'contrary to fact or wrong'44 and a statement is misleading if it 'creates a false impression, even if the statement is true'.45 The statement must also be false or misleading in a 'material particular',46 which the ATO defines as 'something that is likely to affect a decision regarding the calculation of [a taxpayer's] tax-related liability or entitlement to a credit or payment'.47

1.45 In considering the application of false or misleading statement penalties, the ATO must ascertain the level of care that the taxpayer took in making the statement by reference to four different legislative standards of conduct48 — reasonable care, failure to take reasonable care, recklessness and intentional disregard. These standards of conduct are described in further detail below.

Reasonable care and failure to take reasonable care

1.46 A taxpayer is not liable to an administrative penalty for a statement that is false or misleading if the taxpayer took reasonable care in making the statement.49 The ATO has publicly stated that there is no presumption that the false or misleading nature of a statement necessarily or automatically points to a failure to take reasonable care, the evidence must support the conclusion that the taxpayer's attempt to comply has fallen short of the standard of care that would reasonably be expected in the circumstances.50

1.47 The ATO considers that whether a taxpayer took reasonable care in any particular case may be tested by the conduct that could be expected of a reasonable person in their position at the time of making the false or misleading statement. This test imputes the reasonable person with certain circumstances and characteristics of the taxpayer,51 such as the taxpayer's level of knowledge or understanding of the tax system, whether the taxpayer should have been aware of the correct treatment of the law and whether the taxpayer had made reasonable enquiries.52 The actual intention of the person said to be at fault is not relevant.53

1.48 Importantly, a taxpayer will not be liable to a penalty where a false or misleading statement was made by a registered tax agent due to the agent's lack of reasonable care,54 so long as the taxpayer provided all the relevant taxation information to the agent.55

Recklessness

1.49 Recklessness is conduct that goes beyond mere carelessness or inadvertent behaviour by displaying a high degree of carelessness.56 It is established where the taxpayer's behaviour falls significantly short of the standard of care expected of a reasonable person in the same circumstances as the taxpayer.

1.50 The test for determining whether a statement has been recklessly made is the same as the test for determining whether a taxpayer has failed to take reasonable care. However, it is the extent or degree to which the conduct of the taxpayer falls below that required of a reasonable person that underscores a finding of recklessness.57

1.51 The ATO considers that recklessness assumes that the behaviour in question shows disregard or indifference to a risk that is foreseeable by a reasonable person,58 such as making a statement knowing that there is a real, as opposed to a fanciful, risk that the material may be incorrect. Recklessness may also mean that the taxpayer is grossly indifferent as to whether or not the material is true and correct in circumstances where a reasonable person would perceive a real risk.59 Evidence of dishonesty is not a necessary element for conduct to be considered reckless.60

Intentional disregard of a taxation law

1.52 Intentional disregard of a taxation law is established where the taxpayer has actual knowledge that the statement made is false. The ATO considers that the taxpayer must understand the effect of the relevant legislation and how it operates and makes a deliberate choice to ignore the law.61

1.53 Unlike the tests for a failure to take reasonable care or recklessness, the test for intentional disregard of the law considers the actual intention of the taxpayer.62 Therefore, dishonesty is a factor.63

No reasonably arguable position (RAP) penalty

1.54 In addition to penalties for false or misleading statements, a penalty can also be imposed if:

  • the taxpayer or their agent makes a statement to the Commissioner;64
  • in the statement, an income tax law was treated as applying to a matter in a particular away that was not reasonably arguable;65 and
  • the shortfall that arises for not having taken a reasonably arguable position (RAP) is more than the greater of $10,000 or 1 per cent of the income tax payable.66

1.55 A position is reasonably arguable if:

…it would be concluded in the circumstances, having regard to relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect.67

1.56 It has been suggested that this definition may mean that the RAP must relate to a contentious or unsettled area of law or a serious question about the application of settled law to the facts of a particular case.68

1.57 The ATO considers that the test for a RAP focuses solely on the merits of the position taken by analysing the law and applying it to the relevant facts. It is not a question of whether a taxpayer thinks or believes that its position is reasonably arguable, but simply whether it is reasonably arguable.69

Potential penalties overlap

1.58 There is a question about the potential overlap regarding the no RAP penalty and the false and misleading statement penalties addressed earlier.

1.59 Potentially a statement could be both 'not reasonably arguable' and 'false and misleading' within the meaning of the relevant penalty provisions. In this event, on one view of the legislative provisions, two penalties might be applied to the one statement.

Failure to provide documents penalty

1.60 An administrative penalty may be imposed where a taxpayer fails to provide a return, notice or other document to the Commissioner by the day it is required where:

  • that document is necessary for the Commissioner to determine the taxpayer's tax-related liability accurately; and
  • the Commissioner determines the tax-related liability without the assistance of that document.70

Calculating the amount of penalty in relation to taxpayer statements

1.61 Once the legislative standard of conduct has been identified by reference to the taxpayer's behaviours, the penalty amount must be calculated by:

  • determining the base penalty amount;
  • increasing and/or reducing the base penalty amount; and
  • determining if remission is appropriate.

Base penalty amount

1.62 The base penalty amount for a false or misleading statement penalty is calculated differently depending on whether a shortfall amount exists or not.71 Generally, a 'shortfall amount' is the amount by which either a tax-related liability is less or a Commissioner's payment or credit is more, than it would have been if the statement was not false or misleading.72

1.63 Where a shortfall amount exists, the base penalty amount is calculated by multiplying the shortfall amount by a percentage which is determined by the relevant statement and taxpayer conduct.73

1.64 Where a shortfall amount does not exist, a penalty unit74 is applied. The amount of the unit is determined by the taxpayer's conduct. Penalties relating to taxpayer statements where no shortfall arises were recently enacted in 2010.75

1.65 The base penalty amount for no reasonably arguable position penalties is 25 per cent of the shortfall amount.

1.66 For a failure to provide documents penalty, the base penalty amount is 75 per cent of the tax-related liability that the Commissioner determined without the assistance of the required document.76

1.67 The relevant penalty percentages and penalty units and the types of taxpayer conduct to which they relate are set out in Table 1 below.

Table 1: Relevant percentage rates and penalty units for penalties relating to taxpayer statements
Type of penalty relating to a statement Relevant standards of conduct or type of statement Percentage rate Penalty units
False or misleading statement Intentional disregard of a taxation law 75% 60
Recklessness as to the operation of a taxation law 50% 40
Failure to take reasonable care to comply with a taxation law 25% 20
No reasonably arguable position An income tax law was treated as applying in a particular way that was not reasonably arguable 25% n/a
Failure to provide documents Failure to provide documents to accurately determine the taxpayer's tax liability 75% n/a

Source: IGT

1.68 The base penalty amount may be reduced to the extent that a taxpayer applies the law in accordance with:

  • advice given to the taxpayer by or on behalf of the Commissioner;
  • a general administrative practice; or
  • a statement in a publication approved in writing by the Commissioner.77

Increase or decrease in the base penalty amount

1.69 Once the base penalty amount has been determined, any circumstances justifying an increase or decrease in this amount are considered.78

1.70 The base penalty amount may be increased by an additional 20 per cent where the taxpayer:

  • took steps to prevent or obstruct the Commissioner from finding out about the shortfall amount or the false or misleading nature of a statement; or
  • became aware of the shortfall amount or the false or misleading nature of a statement after the statement was made and did not tell the Commissioner about it within a reasonable time.79

1.71 In the ATO's view, preventing or obstructing the Commissioner from finding out about the shortfall amount or the false or misleading nature of a statement can include the following conduct:

  • repeated failure or deferral by the taxpayer to supply information without an acceptable reason;
  • providing false or misleading information or documents; and
  • destroying records.80

1.72 The base penalty amount may also be increased by an additional 20 per cent where a base penalty amount was calculated for the same statement penalty.81

1.73 The base penalty amount may be reduced by 80 per cent82 where a taxpayer voluntarily discloses sufficient information for the Commissioner to determine the shortfall amount, or the false or misleading nature of a statement, before the earlier of:

  • a taxpayer being advised that an examination of their tax affairs is to be conducted; or
  • the Commissioner publicly requesting voluntary disclosures to be made.83

1.74 Where a taxpayer makes a voluntary disclosure after being advised that an examination of their affairs is to be conducted, the base penalty amount will only be reduced by 20 per cent.84 However, the Commissioner has discretion to treat disclosures as if they were made before the taxpayer was informed of such an examination85 and, therefore, provide an 80 per cent reduction of the base penalty amount, instead of 20 per cent.

1.75 According to the ATO, a disclosure is voluntary when the Commissioner receives the information required in the approved form.86

Commissioner's discretion to remit

1.76 The Commissioner may also exercise his unfettered discretion to remit all or part of an administrative penalty as a result of a taxpayer's request or on his own initiative.87 Should the Commissioner partly remit or not remit the penalty at all, he must provide the taxpayer with written notice of his decision.88

1.77 The ATO requires its officers to consider certain matters in approaching the exercise of remission:

156. Tax officers must consider the question of remission in each case based on all of the relevant facts and circumstances and having regard to the purpose of the provision. Relevant matters to consider in approaching the issue of remission of penalty include:

  • that the purpose of the penalty regime is to encourage entities to take reasonable care in complying with their tax obligations. Where the entity has made a genuine attempt to report correctly, it will generally be the case that no penalty applies because of the exercise of reasonable care, safe harbour or because the law was applied in the accepted way.
  • remission decisions need to consider that a major objective of the penalty regime is to promote consistent treatment by reference to specified rates of penalty. That objective would be compromised if the penalties imposed at the rates specified in the law were remitted without just cause, arbitrarily or as a matter of course.

157. The discretion to remit penalties should be approached in a fair and reasonable way, including ensuring that prescribed rates of penalty do not cause unintended or unjust results.89

Penalties relating to schemes

1.78 A penalty may also be imposed where:

  • a taxpayer obtains a reduced tax-related liability or increased payment or credit under a scheme90 (a scheme benefit); and
  • that scheme benefit, although allowable under general tax law provisions, is cancelled due to the application of an adjustment provision.

1.79 Such a penalty is calculated in a similar manner as penalties relating to taxpayer statements above, with the following alterations:

  • in the place of a shortfall amount a 'scheme shortfall amount' is quantified which is the amount by which the taxpayer's liability is less than or payment or credit is more than it would have been but for the application of the adjustment provision;91 and
  • the relevant percentage to be applied is 50 per cent, or 25 per cent if the taxpayer's position is reasonably arguable.92

1.80 There is potential for penalties relating to taxpayer statements and penalties relating to schemes to be applied to the same adjusted tax liabilities. The ATO states that if a taxpayer has a shortfall amount from participating in a scheme, the penalty will typically be assessed as a penalty relating to statements and a scheme penalty in the alternative.93 This situation arises where the ATO raises assessments on alternative grounds, typically involving cases in which the ATO is uncertain whether an adjustment provision applies at the time of adjusting the taxpayer's assessment.94

1.81 Where a taxpayer has been involved in a scheme and makes a false or misleading statement in relation to that scheme, cumulative penalties may be applied.95 However, the ATO states that it would only apply penalties cumulatively in exceptional cases, which 'is a matter of fact to be determined by considering [a taxpayer's] particular circumstances'.96 In such a case, the Commissioner may exercise his discretion to remit the resulting cumulative penalty amount to a reduced penalty amount.97

Notification of the liability

1.82 Once penalties are calculated, the Commissioner is required to notify the taxpayer in writing of their liability to pay the penalty and the supporting reasons. No reasons are required if the Commissioner decides to remit the entire penalty.98

1.83 The payment of the penalty is due on the day specified in the notification but this date must be at least 14 days after the notice is given to the taxpayer.99

Resolving disputes over penalty decisions

1.84 Taxpayers may dispute penalty decisions through various informal and formal options that are available to them.

1.85 The ATO has advised the IGT that its preference is to informally engage and resolve matters directly with taxpayers if the relevant audit has not been finalised.100 In these circumstances, taxpayers are asked to contact the ATO as a first step when correcting mistakes or disputing decisions. This informal step is generally considered a more efficient means to resolve disagreements.101

1.86 Large business taxpayers may also seek an internal review of audit position papers by ATO officers from outside the Compliance Group in certain circumstances. However, the ATO has advised that such a process does not include internal review of penalty positions.102

1.87 The tax laws also provide taxpayers with the means to object to penalty decisions which is a form of internal ATO review. The ATO requires an objection to be in writing, either in one of the forms provided by the ATO or in a letter.103 The objection must be lodged within the later of:

  • 4 years from the date the assessment was given to the taxpayer where the penalty is directly linked to an assessment of liability, such as a penalty relating to false or misleading statements; or
  • 60 days from the date the penalty notification was issued to the taxpayer where the penalty is not linked to an assessment of liability.104

1.88 Taxpayers who are dissatisfied with the ATO's objection decision may also seek an external review of the decision by appealing to the Administrative Appeals Tribunal (AAT) or the Federal Court of Australia (Federal Court).105 Taxpayers generally have 60 days from the date of the notice, advising the taxpayer of the ATO's objection decision in which to lodge such an appeal.106 Taxpayers that appeal to the AAT or the Federal Court bear the burden of proving, on the balance of probabilities, that the penalty was 'excessive; or … should not have been made or should have been made differently'.107

1.89 It is also possible for taxpayers to settle disputes concerning penalties, along with other matters that may be in dispute. ATO officers involved in settlement proceedings are required to follow the ATO's Code of Settlement Practice.108 The ATO's Practice Statement PSLA 2007/5 outlines key elements of the settlement process and prescribes the mandatory use of the Code of Settlement Practice by all tax officers in the settlement of taxation disputes.109 Where the settlement involves a number of taxpayers, ATO officers are also required to follow the ATO's PSLA 2007/6 Guidelines for settlement of widely-based tax disputes.110

Penalties relating to taxpayer statements in other jurisdictions

1.90 Other jurisdictions with self assessment tax systems also impose penalties with the aim of encouraging voluntary compliance with taxation obligations. However, the design and application of these penalty regimes differ to Australia's in certain respects. The following sections briefly outline aspects of the penalty regimes relating to statements in New Zealand, the USA and the United Kingdom (UK).

New Zealand

1.91 In New Zealand, a penalty of 20 per cent of the tax shortfall is imposed on taxpayers who do not take reasonable care in fulfilling their tax obligations.111

1.92 A penalty of 40 per cent of the tax shortfall is imposed where 'gross carelessness' is established. This standard involves taxpayer behaviours exhibiting a high degree of carelessness and disregard of the consequences. It is conduct that creates a high risk of a tax shortfall occurring, which would have been foreseen by a reasonable person in the same circumstances. Whether the taxpayer was unaware of being grossly careless or intended to be so is irrelevant.112

1.93 New Zealand's penalty for 'evasion' is established by taxpayer behaviours such as knowingly failing to make a legally required withholding of tax and knowingly obtaining a refund or payment of tax when you are not lawfully entitled to that refund or payment.113

1.94 New Zealand also adopts a concept similar to RAP, known as an 'unacceptable tax position'. An unacceptable tax position is one that fails to meet the standard of being about as likely to be correct as being incorrect. The penalty for a tax shortfall resulting from an unacceptable tax position is 20 per cent of the tax shortfall.114

1.95 In relation to remission, penalties for tax shortfalls in the New Zealand tax system may be reduced by 50 per cent if the taxpayer was not previously liable to pay a similar penalty.115 A penalty for a tax shortfall may also be reduced by 40, 75 or 100 per cent where a taxpayer has made a voluntary disclosure of all the details of the shortfall, depending on the type of penalty and when the voluntary disclosure was made.116

United States

1.96 In the USA, penalties may apply when a taxpayer files a return that is inaccurate and the inaccuracy results from certain taxpayer behaviour.

1.97 According to the Internal Revenue Service (IRS), the two most common accuracy-related penalties are those based on the taxpayer's negligence or disregard of rules or regulations and the taxpayer's substantial understatement of income tax.117 These penalties are 20 per cent of the net understatement of tax.118 This penalty rate increases to 40 per cent in circumstances where tax is not fully reported on a return because the return contains gross valuation misstatements or there are non-disclosed non-economic substance transactions or undisclosed foreign financial asset understatements.119

1.98 The 'negligence or disregard of rules or regulations' penalty may be applied where a taxpayer's inaccurate reporting results from:

  • negligence, which arises when a taxpayer fails to do what a reasonable person would do under the circumstances; or
  • disregard of rules or regulations, which arises when a taxpayer fails to follow the appropriate law in completing the return.120

1.99 However, the reach of these penalties is limited in the following respects:

  • negligence will not apply if the taxpayer's position has a 'reasonable basis', which is a 'significantly higher [standard] than not frivolous or not patently improper' and which generally exists when the position is based on one or more of the types of authorities set out in the Treasury Regulations;121 and
  • a penalty for the taxpayer's disregard of rules or regulations will not apply if there is a reasonable basis for the taxpayer's position and the challenge to the rule or regulation is adequately disclosed with the tax return.122

1.100 The penalty for substantial understatement of income tax arises by mathematical calculation. In this respect, a substantial understatement penalty may be applied if the correct income tax liability for a taxable year exceeds the amount reported by the taxpayer by (i) the greater of 10 per cent or $5,000 ($10,000 for corporations) or (ii) in the case of corporations, $10,000,000, if less than the amount in (i).

1.101 A taxpayer may avoid the substantial understatement penalty if 'the weight of the authorities supporting the treatment of the item is substantial in relation to the weight of the authorities supporting the contrary treatment' (that is, there is substantial authority for the taxpayer's position) or the taxpayer has disclosed the tax position and it has a reasonable basis. However, if the substantial understatement of income tax arises from a tax shelter, then these two defences do not apply.

1.102 A taxpayer may also avoid penalties arising from taxpayer negligence, disregard of rules or regulations and substantial understatement of income tax if there is 'reasonable cause' for the taxpayer's position and the taxpayer acted in 'good faith'.123 A finding of 'reasonable cause' generally relies on the taxpayer's effort to report the proper tax liability, as well as other factors such as the taxpayer's experience, knowledge, education, and the reasonableness of the taxpayer's reliance on the advice of a tax advisor.124

1.103 The US penalty system also has other accuracy-related penalties, such as a 20 or 30 per cent penalty that may be applied to a reportable transaction understatement,125 depending on whether the reportable transaction was properly disclosed,126 and a 75 per cent penalty that is applied to the portion of an underpayment which is attributable to fraud.127 In addition to the standards of accuracy referred to above, the following also provide exceptions to other penalties:

  • a realistic possibility of the position being sustained on its merits; and
  • an item's tax treatment being more likely than not the proper treatment.128

1.104 From the above, it is clear that, compared to the Australian penalties relating to taxpayer statements, overall, the US system has significantly more differentiation or stratification of the levels of taxpayer non-compliance.

United Kingdom

1.105 At a broad level, the UK has a similar administrative penalty regime for inaccurate tax returns to that of Australia. For example, the amount of such penalties is quantified by reference to the amount of primary tax shortfall and the various taxpayer behaviour tests.

1.106 Notwithstanding the broad similarity, there are substantial differences in how these penalty amounts are calculated.

1.107 The UK penalty rate for an inaccuracy in a return or other document will be one of six ranges that are determined by the type of behaviour and whether the correction was prompted by the taxpayer. Table 2 below shows the six penalty ranges.

Table 2: United Kingdom penalty percentage ranges for inaccurate returns
Type of behaviour Unprompted Disclosure(%) Prompted Disclosure(%)
Careless 0 to 30 15 to 30
Deliberate 20 to 70 35 to 70
Deliberate and concealed 30 to 100 50 to 100

Source: Her Majesty's Revenue and Customs.

1.108 The maximum rate of the relevant range is then reduced, by between 0 to 100 per cent of that rate, depending on the type of taxpayer's disclosure and assistance (such as, telling, helping and giving) provided to Her Majesty's Revenue and Customs (HMRC).129 Other reductions which are unrelated to the taxpayer conduct are then considered — for example, where another penalty or surcharge has been applied on the same tax.

1.109 A taxpayer is regarded as 'careless' where the taxpayer has failed to take reasonable care. Careless behaviour varies between taxpayers. According to the HMRC's website, determining whether a taxpayer is careless involves examining what the taxpayer did or failed to do and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.130

1.110 The behaviour of a taxpayer is deemed 'deliberate' where the taxpayer knew that a return or document was inaccurate when it was lodged. This is similar to intentional disregard of the law in the Australian tax penalty regime.

1.111 The behaviour of a taxpayer would be 'deliberate and concealed' if the taxpayer knew that the return was inaccurate and attempted to conceal the inaccuracy by taking active steps to hide it either before or after it was lodged.131 Arguably, a similar outcome could be reached in Australia by increasing the penalty rate for intentional disregard of the law by 20 per cent on the basis that the taxpayer prevented or obstructed the Commissioner from finding out about the shortfall.

1.112 A penalty rate of up to 70 per cent is imposed in the UK if the inaccuracy is deliberate. This standard is established where the taxpayer knew that a return or document was inaccurate when it was sent. A penalty of up to 100 per cent would be imposed if the inaccuracy is deliberate and the person attempts to conceal it by taking active steps to hide the inaccuracy, either before or after it was lodged.132

1.113 Importantly, the UK also has a new administrative practice whereby a penalty arising from an inaccuracy caused by carelessness may be suspended if conditions can be agreed upon to prevent a similar inaccuracy occurring in future. This practice is known as a suspension of the penalty. When considering whether suspension is appropriate, HMRC will consider the person's compliance, the level of disclosure and the nature of the inaccuracy.133 If at the end of the suspension period, the conditions have been met, the penalty is cancelled, otherwise it will need to be paid.134

1.114 In the UK, there is no equivalent penalty for failing to have a RAP.135

ATO's approach to tax administration penalties

1.115 The ATO uses a range of strategies to encourage taxpayers to voluntarily comply with their tax obligations. Penalties, as noted earlier, are expected to influence taxpayer behaviour, however, they are not the only means of improving voluntary compliance. The ATO's Compliance Model and Taxpayers' Charter are other means through which the ATO seeks to influence taxpayer behaviour.136

The ATO Compliance Model

1.116 The ATO's Compliance Model aims to influence taxpayer behaviours by aligning differentiated compliance strategies according to taxpayers' attitudinal and motivational factors. A visual representation of the ATO's Compliance Model is reproduced in Figure 1 below.

Figure 1: The ATO's Compliance Model

Graphic showing the ATO's Compliance Model. The ATO expects its officers to behave on the presumption that taxpayers intend to be compliant and cooperative. According to the ATO's Compliance Model, such an approach is thought to promote self-regulation. However, if a taxpayer's behaviour demonstrates a different intention, the ATO escalates the intensity of compliance strategy. The ATO's approach of escalating compliance strategy depends upon on an understanding of five factors that are considered to drive taxpayer behaviour: business, industry, sociological, economic and psychological factors (which is commonly referred to as the BISEP model). The greater the ATO's understanding of how these factors influence taxpayer behaviour, the more effective the compliance strategy the ATO can develop.

View image enlarged

Source: Australian Taxation Office.

1.117 The ATO expects its officers to behave on the presumption that taxpayers intend to be compliant and cooperative. According to the ATO's Compliance Model, such an approach is thought to promote self-regulation. However, if a taxpayer's behaviour demonstrates a different intention, the ATO escalates the intensity of compliance strategy.137

1.118 The ATO's approach of escalating compliance strategy depends upon on an understanding of five factors that are considered to drive taxpayer behaviour: business, industry, sociological, economic and psychological factors (which is commonly referred to as the BISEP model). The greater the ATO's understanding of how these factors influence taxpayer behaviour, the more effective the compliance strategy the ATO can develop.138

Taxpayers' Charter

1.119 The Taxpayers' Charter sets out the way the ATO will conduct itself in its dealings with taxpayers, including the application of penalties. The Taxpayers' Charter includes commitments such as:

  • treating taxpayers fairly, reasonably and as being honest unless there are reasons to suggest otherwise;
  • helping taxpayers understand their rights and obligations;
  • explaining decisions made about the taxpayer and making it easy for taxpayer's to comply; and
  • being accountable.139

ATO's governance and management of tax administration penalties

1.120 The ATO's governance and management of tax administration penalties may be understood through its governance and organisational structures, penalty decision making and quality assurance processes.

1.121 The central ATO governance and management framework as it relates to penalties administration is set out in Figure 2 below.

Figure 2: Aspects of the ATO's governance framework

Flow chart showing aspects of the ATO's governance framework. Administration of penalties is governed by the ATO's Sub-Plan Committees, primarily the Law Executive and the Compliance Executive. Advice and guidance on penalties are generally governed by the Law Executive. Penalty decision making in compliance activities is governed by the Compliance Executive. The Compliance Executive is the peak executive decision making committee within the Compliance Group and oversees all aspects of the ATO's compliance programs. The membership of the Compliance Executive comprises representatives of all Compliance Group business lines and the Compliance Support and Capability (CS&C) service line at the Deputy Commissioner level, amongst others. At the start of this IGT review, these business lines were the Aggressive Tax Planning (ATP), Indirect Taxes (ITX), Micro Enterprises and Individuals (MEI), Large Business and International (LBI), Small and Medium Enterprises (SME), Serious Non Compliance (SNC), Superannuation (SPR) and Tax Practitioner and Lodgement Strategy (TPALS) business lines. During the review the MEI, LBI and SME business lines were restructured to become the Small Business/Individual Taxes (SBIT), Public Groups and Internationals (PGI) and Private Groups and High Wealth Individuals (PGH) business lines. Most references in this report are to the business lines that existed at the start of this review. The Compliance Group business and service lines report regularly to the Compliance Executive. These business and service lines have their own governance and management processes which vary according to the specific line requirements. A number of other internal ATO bodies (such as the Active Compliance Steering Committee (ACSC) and Compliance Penalties and Interest Forum (CPIF)) support the Compliance Executive in relation to penalty matters.

Source: IGT.

ATO Corporate Service and Law Executive and Compliance Executive

1.122 Administration of penalties is governed by the ATO's Sub-Plan Committees, primarily the Law Executive and the Compliance Executive. Advice and guidance on penalties are generally governed by the Law Executive. Penalty decision making in compliance activities is governed by the Compliance Executive.

1.123 The Compliance Executive is the peak executive decision making committee within the Compliance Group and oversees all aspects of the ATO's compliance programs.

1.124 The membership of the Compliance Executive comprises representatives of all Compliance Group business lines and the Compliance Support and Capability (CS&C) service line at the Deputy Commissioner level, amongst others. At the start of this IGT review, these business lines were the Aggressive Tax Planning (ATP), Indirect Taxes (ITX), Micro Enterprises and Individuals (MEI), Large Business and International (LBI), Small and Medium Enterprises (SME), Serious Non Compliance (SNC), Superannuation (SPR) and Tax Practitioner and Lodgement Strategy (TPALS) business lines. During the review the MEI, LBI and SME business lines were restructured to become the Small Business/Individual Taxes (SBIT), Public Groups and Internationals (PGI) and Private Groups and High Wealth Individuals (PGH) business lines. Most references in this report are to the business lines that existed at the start of this review.

1.125 The Compliance Group business and service lines report regularly to the Compliance Executive. These business and service lines have their own governance and management processes which vary according to the specific line requirements. In addition to regular quality assurance reviews and related reporting, certain business lines have:

  • penalty forums, such as the PGH and ITX business lines;
  • an officer with experience in penalty decision making in each ATO site, such as the ITX business line; or
  • have technical networks where penalty issues are discussed, such as the ATP and SNC business lines.

1.126 In addition, the ATO has advised that it currently has the following quality assurance processes in place:

  • feedback loops between audit and objection officers;
  • case call-overs for long running cases; and
  • reviews by individuals or panels of some types of penalty decisions.

1.127 A number of other internal ATO bodies (such as the Active Compliance Steering Committee (ACSC) and Compliance Penalties and Interest Forum (CPIF)) support the Compliance Executive in relation to penalty matters.

ATO Active Compliance Steering Committee (ACSC)

1.128 The ACSC was established to ensure that the ATO has consistent work practices, policies and procedures across the Compliance Group nationally, including those in relation to penalty matters.140 It also has the role of reviewing and driving corporate initiatives and capabilities and monitoring performance of the Compliance Group.141

1.129 The ACSC consists of representatives from each of the Compliance Group's business lines and is chaired by the Active Compliance Capability and Improvement Leader, who is part of the CS&C service line mentioned earlier. This position has general responsibility for the ATO's 'Compliance Penalties'.

1.130 The Chair of the ACSC provides monthly updates to the Compliance Executive via a number of regular reports. The ACSC advises the Compliance Executive142 and the ATO Executive about matters perceived to be of a high priority, which from time to time can include penalty matters.

ATO Compliance Penalties and Interest Forum (CPIF)

1.131 The CPIF is a sub-group of, and reports directly to, the ACSC. It is an advisory group, established as a means to promote consultation, collaboration, co-design and consistency amongst the business lines in the administration of penalties.143 As such, the CPIF is a means of identifying, discussing and jointly resolving significant penalty and interest charge issues that are of concern to the various business lines.144

1.132 The CPIF consists of representatives from each of the Compliance Group business lines as well as the CS&C service line and the Learning and Development unit. Representatives are expected to understand the legislation, policy and work practices, processes and procedures relevant to the work of their business line.145 CPIF representatives generally run their business lines' internal networks relating to penalty issues (such as those in the ITX, SPR and SME business lines) or are members of their technical excellence networks and groups (such as those in the ATO Production and SNC business lines).

1.133 Attendance is not compulsory and meetings are scheduled monthly. A representative from other areas of the ATO may also be invited to participate in the CPIF where appropriate. The CPIF is chaired by the Executive Director of the Compliance Penalties and Interest Team (CPIT). This position has day-to-day responsibility for certain 'Compliance Penalty' policies and practices and reports to the Active Compliance Capability and Improvement Leader.

1.134 The CPIF reports to the ACSC following the end of each quarter on any decisions made by the CPIF and any penalty issues escalated from the CPIF.146

ATO Compliance Penalties and Interest Team (CPIT)

1.135 The CPIT assists the Compliance Group to make consistent, high quality and consistent decisions concerning the administration of penalties and interest charges. In particular, the CPIT is the decision point for internal policy decisions on the treatment of penalties and interest charges and has the authority to make decisions on certain practice issues. As a result, the CPIT has 'ownership' of the ATO's practice statements law administration (PSLAs), which are the Commissioner's instructions to staff, on various aspects of penalty and interest matters.147

1.136 The roles and responsibilities of the CPIT include:

  • developing corporate compliance activity policy, practice and procedures in relation to penalties and interest issues — for example, developing PSLAs, public rulings, penalty methods, practices, training products and corporate management information systems;
  • assisting in the development of communication to taxpayers regarding penalty and interest issues — such as web pages that relate to penalties;
  • providing advice, support, tools, technical clearance and direction to business lines on their penalty and interest decisions — such as the development of A3 information sheets;148
  • providing a single point of contact for responding to external reviewers and forums on penalty and interest issues; and
  • contributing to computer system enhancements and implementation.149

1.137 The CPIT currently comprises three ATO officers and supports the Active Compliance Capability Improvement Leader.

Senior Executive Objections Reference Group

1.138 Since 2012, the ATO has also maintained a senior executive Objections Reference Group which focuses senior management attention on reducing the rate of objections by understanding the drivers for objections. One of the focus questions for the reference group is how the ATO can improve decision making and penalty application processes.

ATO organisational structure

1.139 During the review, the ATO's organisational structure changed. Prior to 1 July 2013, the ATO managed its administration of the tax system through four sub-plans:

  • Compliance;
  • Corporate Services and Law;
  • Enterprise Solutions and Technology; and
  • Operations.

1.140 After 1 July 2013, the ATO changed its organisational structure to consist of the following three groups:

  • Compliance Group;
  • People, Systems and Services Group; and
  • Law Design and Practice Group.

1.141 The Compliance Group seeks to ensure that the tax and superannuation laws including related penalties,150 have their intended effect. It does this by designing, implementing and maintaining compliance strategies, which aim to support and encourage voluntary compliance with the tax system.

ATO compliance business lines

1.142 The ATO's Compliance Group is structured into separate business lines. The following eight business lines conduct compliance activities that may involve consideration of penalties:

  • Public Groups and International (formerly Large Business and International (LBI));
  • Private Groups and High Wealth Individuals (formerly Small and Medium Enterprises (SME));
  • Small Business/Individual Taxpayers (formerly Micro Enterprises and Individuals (MEI));
  • Aggressive Tax Planning (ATP);
  • Indirect Tax (ITX);
  • Serious Non-Compliance (SNC);
  • Superannuation (SPR); and
  • Tax Practitioner and Lodgment Strategy (TPALS).

1.143 The Compliance Group business lines' responsibilities include the day-to-day administration of penalties, such as applying penalties in the course of conducting compliance activities. Accordingly, each business line may implement its own policies, procedures and practices to identify, mitigate and resolve penalty related issues.

1.144 In addition to the eight business lines above, the Compliance Group also has a CS&C service line which provides support to the other business lines. A graphical representation of the ATO's organisational structure and the Compliance Group is reproduced in Appendix 2.

ATO decision making process for penalties relating to taxpayer statements

1.145 The application of penalties relating to taxpayer statements is generally considered during audits undertaken by the ATO. As part of the audit process, an ATO officer will determine whether or not the requirements for penalty imposition have been met. If it is concluded that a penalty should apply, the ATO officer is required to inform the taxpayer of the reasons and give the taxpayer an opportunity to present their views or further information to the ATO.151

1.146 The ATO has advised that in many cases, an interim penalty decision or position paper will be issued to the taxpayer and the taxpayer is invited to provide comment. A final written statement of the reasons for the penalty decision will follow and be provided to the taxpayer if a penalty is imposed.152 The ATO has advised that in high volume work, the ATO does not send an interim penalty decision but will contact the taxpayer by phone or letter and invite the taxpayer to provide further information before making a final decision.

1.147 All ATO officers must follow the relevant law, ATO guidance and staff instructions in making decisions on false or misleading penalties. These include the following:

  • Miscellaneous Taxation Ruling (MT 2008/1) — Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard;
  • Miscellaneous Taxation Ruling (MT 2012/3) — Administrative penalties: voluntary disclosures;
  • Miscellaneous Taxation Ruling (MT 2008/2) — Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable;
  • Taxation Determination (TD 2011/19) — Tax administration: what is a general administrative practice for the purposes of protection from administrative penalties and interest charges?;
  • PSLA 2012/4 Administration of penalties for making false or misleading statements that result in shortfall amounts;
  • PSLA 2012/5 Administration of penalties for making false or misleading statements that do not result in shortfall amounts; and
  • ATO website information on penalties and interest.153

1.148 The ATO requires officers to take the purpose of the penalty regime154 into account throughout the penalty decision making process. Officers are also required to take the following factors into account:

  • principles underpinning the Compliance Model, including being fair to those who want to 'do the right thing', and being firm but fair with those choosing to disengage and avoid their taxation obligations;
  • statements and principles in the Taxpayers' Charter, including that taxpayers should be presumed to have been honest, unless there is information which suggests otherwise;
  • individual circumstances of the case, giving appropriate consideration to the background and experience of the taxpayer in a self assessment environment;
  • conclusions about the taxpayer's behaviour should only be made where they are supported by facts and evidence, or where reasonable inferences can be drawn from those facts; and
  • taxpayers should normally be contacted and given the opportunity to explain their actions before a penalty decision is made — the exceptions are those arising from the automated case actioning environments, such as data matching, or where the facts clearly show that the taxpayer is deliberately disengaged from the tax system.155

Quality assurance for penalty decisions

1.149 The ATO has various quality assurance processes to assess penalty decisions, either prior to decisions being communicated to the taxpayer or thereafter. These processes include, but are not limited to team leaders, internal panels and the ATO's Integrated Quality Framework (IQF), which are outlined in further detail below.

Team leader and internal panels

1.150 During this review, the ATO has advised that case officers do not make final penalty decisions but rather recommend penalty decisions to more senior officers, such as their team leaders or technical advisors, for review and approval.156

1.151 Furthermore, the SME and SPR business lines both have technical panels which review certain penalties as part of their review of position papers or reasons for decisions before they are communicated to the taxpayer. In the case of the SME business line, penalties totalling more than $1 million, amongst other issues, are reviewed by their technical panel.157 The SPR business line has a Penalties Panel which reviews any case where the imposition of multiple penalties is being considered. For the ITX business line, a Penalties and Interest team reviews a selection of cases in which high penalty rates are imposed.

Integrated Quality Framework (IQF)

1.152 The IQF is also used by the ATO to assess the level of corporate quality assurance of penalty decisions and the related decision-making process.158

1.153 The IQF relies on, amongst other things, random sampling of finalised cases (closed cases) and targeting of higher risk ongoing cases (open cases). The number of cases selected for assurance varies depending on the business lines and ATO compliance product concerned.

1.154 The IQF assesses cases according to nine 'quality elements', which include administrative soundness, integrity, correctness, appropriateness, effectiveness, transparency, consistency, timeliness and efficiency. An explanation of each of the quality elements and the standards is provided in Appendix 3. As a result, the IQF process rates the selected audit and review cases as either 'very high', 'high', 'meets standards', 'aligned' or 'not aligned'. The ATO expects that 90 per cent of selected cases will be assessed as 'meets standard' or higher.

1.155 Once a case has been assessed under the IQF, an email, that includes the assessment results and issues identified, is sent directly to the relevant case officer, case approver, team leader and relevant directors. The ATO expects that the case owners and team leader will take any necessary corrective action for assessed cases and to mitigate any future re-occurrences. The team leader decides whether corrective action should be taken. It is expected that this decision will depend on the status of the case (open or closed) and the impact to the taxpayer or ATO.159

1.156 The business lines may also review the outcome of IQF assessments of penalty decisions and are expected to review in detail those cases rated 'aligned' or 'not aligned'. The ATO expects that such cases will likely identify common issues and opportunities for improvement. Cases rated as 'high' and 'very high' are also reviewed to determine if they can be used as models for developing systemic improvements. Each business line has specific procedures for addressing issues identified by the IQF.

1.157 The CPIT also reviews penalty cases quarterly where the penalty decision was rated as 'aligned' or 'not aligned' and informs the Active Compliance Capability Improvement Leader.

1.158 The ATO also compiles monthly, quarterly and bi-annual reports on quality improvement and assurance activities relating to active compliance cases generally. These reports are based on the IQF activities conducted by all business lines during the relevant period.160

Prior reviews relating to ATO's administration of penalties

1.159 The ATO's administration of penalties has been the subject of public review previously. A summary of the more recent reviews and outcomes is provided below.

IGT's 2012 review into improving the self assessment system

1.160 The IGT observed in his Review into improving the self assessment system that the penalty regime was intended for a pure self assessment model and required reconsideration in the light of recent changes to ATO compliance approaches, particularly those aimed at shifting compliance activities upstream to address risks earlier. Furthermore, significant numbers of unsustained penalty decisions were also observed to have potentially arisen due to a lack of ATO compliance officer discipline in dealing with evidentiary matters for the level of penalty sought to be imposed.161

1.161 As a result, the IGT made a number of recommendations, including that:

  • consideration be given to whether taxpayers should be deemed to have taken reasonable care where they have met the higher standard of a RAP;162
  • consideration be given to whether the current threshold for RAP penalties should be increased to $100,000 to relieve smaller taxpayers from incurring disproportionate compliance costs;163
  • consideration be given to whether, in relation to the penalty for no RAP, the onus of proof for RAP penalties be placed on the ATO to impose a greater level of accountability for ATO penalty decisions;164
  • consideration be given to whether taxpayers should be presumed to have taken reasonable care where they have consulted a registered tax agent and provided all the information that would be reasonably required to provide advice;165
  • the ATO should consider reducing penalties relating to a lack of RAP for taxpayers who have made relevant disclosures in reportable tax position schedules;166 and
  • the ATO improve its internal and public reporting on penalty case numbers, quantum, and remissions, by type of penalty.167

JCPAA report recommendations

1.162 On 26 June 2008, the Federal Parliament's Joint Committee of Public Accounts and Audit (JCPAA) tabled its report on an inquiry reviewing a range of taxation issues within Australia.168 In relation to tax administration penalties, the inquiry considered the appropriateness of the penalty rates in Australia and the ATO's consistency in applying penalties.169

1.163 As a result of its inquiry, the JCPAA recommended that the ATO increase its benchmarks for the technical quality reviews of penalty decisions amongst other things.170

IGT's 2005 review of penalties

1.164 In the IGT's 2005 Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities,171 it had been observed that the ATO was conducting an internal review of penalties at the same time. The IGT, therefore, deferred more substantive consideration of this topic until after the ATO completed implementing any resulting recommendations from this internal review.

Treasury's 2004 Report on Aspects of Income Tax Self Assessment

1.165 On 16 December 2004, the Government released the Report on Aspects of Income Tax Self Assessment (ROSA report).172 This report made a number of recommendations to improve the transparency of the penalty imposition process and to clarify the standard of care required by taxpayers, including that:

  • the ATO revise its rulings on reasonable care and RAP, with a view to providing clearer guidance and further examples as to what conduct will, or will not, attract a penalty;
  • the ATO explain more fully, for example in a ruling or Practice Statement, how it exercises the discretion to remit tax shortfall penalties;
  • where the ATO decides that a penalty applies and should not be remitted in full, it provides an explanation for its action; and
  • the ATO further explain in a ruling or Practice Statement what understatements of liability it regards as immaterial for tax shortfall purposes.173

1.166 The ROSA Report also recommended legislative change to clarify the definition of when a matter is 'reasonably arguable' as well as abolishing penalty for a shortfall resulting from a failure to follow a private ruling. The then Government enacted legislation to give effect to these recommendations and also enacted a requirement for the Commissioner to supply taxpayers with reasons for penalty and remission decisions.

Other IGT reviews

1.167 Aspects of the tax administrative penalty regime and its administration have also been considered in the IGT reviews set out below.

1.168 In 2009, the IGT recommended in the Review into aspects of the Tax Office's settlement of active compliance activities that the ATO improve the evidentiary basis for penalty decisions, among other things.174 The IGT also recommended that the ATO facilitate public understanding of the revenue impact of settlement cases by publicly reporting on an ongoing basis the aggregated amounts of penalties that were reduced in settlements.175

1.169 In his 2011 Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices, the IGT made two recommendations relating to penalties. The first recommendation was directed at improving transparency and taxpayer understanding of the ATO's interest and penalty decision-making processes by improving the quality and timeliness of its communication and engagement with taxpayers.176 The second recommendation was directed at enhancing the voluntary disclosure process by ensuring that the ATO clearly communicates to the taxpayer, at the time of the disclosure in question or promptly afterwards, whether it accepts that the disclosure is voluntary.177

1.170 In 2012, the IGT recommended in his Review into the ATO's use of benchmarking to target the cash economy that the ATO should improve the robustness of correspondence audit penalty decisions by, for example, providing clearer staff guidance on the specific types of evidence which would tend to indicate the application of different penalties.178

1.171 The IGT recommended in his 2012 Review into the ATO's small and medium enterprise audit and risk review policies, procedures and practices that SME officers improve the evidentiary basis for penalty decisions, amongst other things, by using the Facts and Evidence worksheet to develop technical positions.179 The IGT also made a number of recommendations to improve staff technical capability and support, such as improving ATO officers' understanding of commercial and business issues and strengthening staff training (including the involvement of external experts).

1.172 Furthermore, penalties for failing to lodge returns were considered in the IGT's 2009 Review into the non-lodgement of individual income tax returns, which found that the penalty rates for non-lodgement of returns were very low and that increasing the penalty rates for high risk taxpayers should be considered.180

ATO internal reviews

1.173 In addition to these external reviews, the ATO has carried out two recent internal reviews relating to penalty administration.

1.174 On 28 February 2012, the ATO's Compliance Executive were presented with a number of findings from an internal review conducted on objections to decisions made in the MEI, SME and ITX business lines — the ATO's Objection Review Report. This report examined 82 instances in which the penalty and/or interest decision was disputed. Objections were allowed and penalties reduced in 40 of these cases for a number of reasons, including:

  • provision of further evidence or advice at the objection stage;
  • inadequate documentation of the taxpayer's contentions at audit; and
  • the substantive issue being allowed in full.181

1.175 That report observed that:

Most penalty decisions were maintained on objection, however we need to increase our focus on skilling and quality control to improve the coherency of our documented penalty decisions. A new tax technical decision making skilling package has been developed for roll-out across Compliance and includes a new component on the principles for penalty imposition so we see improved technical decisions. Two business lines are currently piloting that package.182

1.176 Separately, the SME business line also undertook a review of its penalty decisions made from 16 August 2011 to 30 June 2012. The review identified 31 cases in which the original penalty amounts had been changed as a result of disputation and selected 20 of those cases for further review.

1.177 This review found that in approximately 70 per cent of those 20 cases, the base penalty amount remained unchanged, suggesting that adjustment of the primary tax decision was the sole cause for the reduction in the penalty amount. However, for the remaining cases, the review identified that the base penalty amount had changed due to the following reasons:

  • processing errors;
  • 'harsh penalties' applied by ATO officers and penalty decisions not supported by evidence;
  • questionable objection decisions; and
  • new arguments or documents provided by the taxpayer.183

ATO improvement work

1.178 In addition to that already mentioned, the ATO has advised that it has undertaken the following improvement work:

  • increasing the focus on penalty decision making by such means as publishing penalty-specific tools to assist in making consistent high-quality decisions;184 and
  • delivering a number of penalty-related training packages, which cover such topics as penalties, quality note taking, decision making (delivered to 1,300 ATO officers) and active case management (delivered to 5,000 ATO officers).185

1.179 Details of the ATO's improvement work are discussed later in relevant sections of this report.


1 Australian Law Reform Commission, Principled Regulation: Federal Civil & Administrative Penalties in Australia, Report No 95 (2002) p 70.

2 Department of the Treasury, National Taxpayer Advocate, 2008 Annual Report to Congress — Volume Two (2008) p 7.

3 Organisation for Economic Co-operation and Development, Guidance Note Compliance Risk Management: Managing and Improving Tax Compliance (OECD Publishing, 2004) p 7.

4 Michael Doran, 'Tax Penalties and Tax Compliance' (2009) 46 Harvard Journal on Legislation 111, p 139.

5 Above n.3, p 7.

6 Above n.4, p 138.

7 9-10; Executive Task Force for the Commissioner's Penalty Study, Report on Civil Tax Penalties (Working Draft of Chapters 1-4 and 8) (1988); Executive Task Force for the Commissioner's Penalty Study, Report on Civil Tax Penalties (1989) pp 45-36.

8 The Internal Revenue Services incorporated these principles into Policy Statement P-1-18 (20 August 1998).

9 Above n.2, pp 7-8.

10 Ibid, p 9.

11 Ibid, p 9.

12 Ibid, pp 9-10.

13 Task Force Report, Making good decisions about tradeoffs is the key to a good penalty system (1989), supra note 10, p III-10.

14 Above n.4, p 123.

15 Ibid, p 123.

16 Ibid, p 112.

17 Ibid, p 112.

18 Ibid, p 112.

19 Ibid, p 131.

20 Department of Finance and Deregulation, The utility maximising criminal: A behavioural approach to designing regulatory penalties (2013) (un-published).

21 Cabinet Office, Institute for Government, MINDSPACE — Influencing behaviour through public policy (2010).

22 Ibid, p 8.

23 Above n.20.

24 ; Franklin Zimring and Gordon Hawkins, 'Deterrence: the Legal Threat in Crime Control' (1973) 3(5) Contemporary Sociology 454; Ann Witte and Diane Woodbury, The Effect of Tax Laws and Tax Administration on Tax Compliance (Working Paper, 1983); Richard Schwartz and Sonya Orleans, 'On Legal Sanctions' (1967) 34 The University of Chicago Law Review 274.

25 Betty Jackson and Sally Jones, 'Salience of Tax Evasion Penalties Versus Detection Risk' (1985) 6(2) Journal of the American Taxation Association 7.

26 -180 and Marjorie Kornhauser, 'A Tax Morale Approach to Compliance: Recommendations For the IRS' (2007) 8(6) Florida Tax Review 599 and Ken Devos, 'An Investigation Into Australian Personal Tax Evaders — Their Attitudes Towards Compliance And The Penalties For Non-Compliance' (2009) 19(1) Revenue Law Journal 36.

27 John Hasseldine, Peggy Hite, Simon James and Marika Toumi, 'Persuasive Communications: Tax Compliance Enforcement Strategies for Sole Proprietors' (2007) 24(1) Contemporary Accounting Research 171; Hite, above n.26, p 161.

28 Josef Falkinger and Herbert Walther, 'Rewards versus Penalties: on a New Policy on Tax Evasion' (1991) 19(1) Public Finance Review 67.

29 Explanatory Memorandum, House of Representatives, Taxation Laws Amendment (Self Assessment) Bill 1992, p 71.

30 Ibid, p 83.

31 Explanatory Memorandum, House of Representatives, A New Tax System (Tax Administration) Bill (No. 2) 2000, para 1.2.

32 Ibid, paras 1.8 and 1.12.

33 Taxation Administration Act 1953, sch 1, subdiv 284-B.

34 Ibid, sch 1, subdiv 284-C.

35 Ibid, sch 1, div 286.

36 Ibid, sch 1, div 288.

37 Ibid, sch 1, s284-10.

38 Ibid, sch 1, s284-25 and s284-75.

39 Also includes another entity exercising powers or performing functions under a taxation law.

40 Taxation Administration Act 1953, sch 1, s284-75(1).

41 Or a tax officer in the course of their duties.

42 Australian Taxation Office, Administration of penalties for making false or misleading statements that result in shortfall amounts, PSLA 2012/5, 25 January 2013, para 16.

43 Ibid, para 18.

44 Ibid, para 18.

45 Ibid, para 21.

46 Ibid, para 22.

47 Above n.42, para 23.

48 Taxation Administration Act 1953, sch 1, s284-90.

49 Ibid, sch 1, s284-75(5).

50 Australian Taxation Office, Penalty relating to statements: meaning of reasonable care, recklessness and intentional disregard, MT 2008/1, 11 July 2012, para 42.

51 Ibid, para 28.

52 Above n.42, para 49.

53 Above n.50, para 33.

54 Taxation Administration Act 1953, sch 1, s284-75(6).

55 Ibid, sch 1, s284-75(7) and s284-75(6).

56 Above n.50, para 99.

57 Ibid, para 101.

58 Ibid, para 102.

59 Hart v. FC of T, (2003) 131 FCR 2003; [2003] FCAFC 105, paras 33 and 43.

60 Above n.50, para 100.

61 Ibid, para 112.

62 Ibid, para 111.

63 Ibid, para 113.

64 Or another entity exercising powers or performing functions under a taxation law.

65 Taxation Administration Act 1953, sch 1, s284-75(1).

66 Ibid, sch 1, s284-90(1).

67 Ibid, sch 1, s284-15(1).

68 Above n.31, para 1.22.

69 Australian Taxation Office, Shortfall penalties: administrative penalty for taking a position that is not reasonably arguable, MT 2008/2, 24 July 2013, para 29.

70 Taxation Administration Act 1953, sch 1, s284-75(3).

71 Ibid, sch 1, s284-90(1).

72 Ibid, sch 1, s284-80.

73 Ibid, sch 1, s284-90.

74 Subsection 4AA(1) of the Crimes Act 1914 provides that the value of one penalty unit is $110 for contraventions occurring prior to 28 December 2012, and $170 for contraventions on or after this date.

75 Taxation Laws Amendments (2010 Measures No 1) Act 2010.

76 Taxation Administration Act 1953, sch 1, s284-90.

77 sch 1, s284-90(1) and s284-224(1).

78 Ibid, sch 1, subdiv 284-D.

79 sch 1, s284-220(1).

80 Above n.42, para 122.

81 Taxation Administration Act 1953, sch 1, s284-220(1)(c) to (e).

82 Note that the base penalty amount will be reduced by 100 per cent if the shortfall is less than $1000.

83 Taxation Administration Act 1953, sch 1, s284-225.

84 Ibid, sch 1, s284-225(1).

85 Ibid, sch 1, s284-225(2).

86 Above n.42, para 140.

87 Taxation Administration Act 1953, sch 1, s298-20.

88 Ibid, sch 1, s298-20.

89 Above n.42, paras 156-157.

90 Taxation Administration Act 1953, sch 1, ss284-150 and 284-145.

91 Ibid, sch 1, s284-150.

92 Ibid, sch 1, s284-160. Note that for income tax amounts adjusted by certain transfer pricing provisions, the relevant percentages to be applied are 25 per cent and 10 per cent respectively, see ibid, s284-145(2), s284-145(2A) and s284-160(b).

93 Australian Taxation Office, Interaction between Subdivisions 284-B and 284-C of Schedule 1 to the Taxation Administration Act 1953, PSLA 2008/18, 4 July 2011, paras 11.

94 Ibid, paras 30-31.

95 Taxation Administration Act 1953, sch 1, div 284; Ibid, para 32.

96 Above n.93, para 34.

97 Ibid, paras 15-16.

98 Taxation Administration Act 1953, sch 1, s298-10.

99 Ibid, sch 1, s298-15.

100 Inspector-General of Taxation, Review into the Australian Taxation Office's use of early and Alternative Dispute Resolution (2012) p 49.

101 Australian Taxation Office, Correct a mistake or dispute a decision (20 September 2013).

102 Australian Taxation Office communication to the Inspector-General of Taxation, 28 November 2013.

103 Australian Taxation Office, How to object to a decision (25 May 2013).

104 Time limits are set out in section 14ZW to the Taxation Administration Act 1953; Australian Taxation Office, Decisions you can object to, and time limits (18 July 2013).

105 Taxation Administration Act 1953, s14ZZ.

106 Taxation Administration Act 1953, s14ZZC and s14ZZN.

107 Ibid, s14ZZK and s14ZZO.

108 Australian Taxation Office, Code of Settlement Practice (23 September 2013).

109 Australian Taxation Office, Settlements, PS LA 2007/5, 12 June 2013.

110 Australian Taxation Office, Guidelines for settlement of widely-based tax disputes, PS LA 2007/6, 21 May 2012, para 1.

111 Tax Administration Act 1994 (New Zealand), s141A; Inland Revenue, Penalties and interest: Shortfall penalties — Not taking reasonable care (26 March 2008).

112 Tax Administration Act 1994 (New Zealand), s141C; Inland Revenue, Penalties and interest: Shortfall penalties — Gross carelessness (30 August 2006).

113 Tax Administration Act 1994 (New Zealand), s141E; Inland Revenue, Penalties and interest: Shortfall penalties — Evasion (26 March 2008).

114 Tax Administration Act 1994 (New Zealand), s141B; Inland Revenue, Penalties and interest: Shortfall penalties — Unacceptable tax position (26 March 2008).

115 Inland Revenue, Penalties and interest: Shortfall penalties — How penalties can be reduced or increased (26 March 2008) .

116 Tax Administration Act 1994 (New Zealand), s141G; ibid.

117 Internal Revenue Service, Return Related Penalties (24 January 2012), para 20.1.5.3.2.

118 26 USC § 6662 (United States).

119 Ibid.

120 LexisNexis, IRC Section 662 Accuracy-Related Penalties (28 August 2012); Leuhsler v. Commissioner, 963 F.2d 907 (6th Cir. 1992); Above n.117, para 20.1.5.7.1.

121 Internal Revenue Service, Tax Code, Regulations and Official Guidance (9 October 2013).

122 Above n.117.

123 Ibid., para 20.1.5.6.1.

124 Ibid, para 20.1.5.6.1.

125 26 USC § 6662A (United States).

126 Above n.117, para 20.1.5.3.2.

127 26 USC § 6663 (United States).

128 Above n.117, para 20.1.5.8.1.1; 26 USC § 6662 (United States); see also James W. Pratt Federal Taxation 2013 (7th edition, 2013), p 2:44.

129 HM Revenue & Customs, Penalties for inaccuracies in returns and documents (August 2012).

130 HM Revenue & Customs, CH81140 — Penalties for Inaccuracies: Types of inaccuracy: Careless Inaccuracy.

131 Above n.129.

132 Ibid.

133 HM Revenue & Customs, Briefing on new tax penalties.

134 HM Revenue & Customs, Suspending penalties for careless inaccuracies in returns or documents (April 2013).

135 HM Revenue & Customs, CH81130 — Penalties for Inaccuracies: Types of inaccuracy: Inaccuracy despite taking reasonable care.

136 A suite of 9 Australian Taxation Office's documents, including, Australian Taxation Office, Taxpayers' Charter — what you need to know (14 August 2013).

137 bove n.1, p 111.

138 Tony Morris and Michele Lonsdale, Translating the Compliance Model into Practical Reality (2005) p 63.

139 Above n.136.

140 Australian Taxation Office, 'Active Compliance Steering Committee Charter' (4 February 2013), internal ATO document.

141 Ibid.

142 The ATO Executive consists of the Commissioner, the three Second Commissioners and other senior executive roles nominated by the Commissioner.

143 Australian Taxation Office, 'Compliance Penalty and Interest Forum Charter' (21 February 2012), internal ATO document.

144 Ibid.

145 Ibid.

146 Ibid.

147 Australian Taxation Office, 'CPIT intranet and charter', internal ATO document.

148 Discussed further in Chapter 4.

149 Above n.147.

150 Australian Taxation Office, 'Penalty Statistics 2011-12 — Some statistics on administrative penalties for Active Compliance' (28 August 2012), internal ATO document.

151 internal ATO document; Australian Taxation office, 'SME audit procedures', internal ATO document.

152 Australian Taxation Office, Large business and tax compliance publication (1 July 2013); Australian Taxation Office, Tax compliance for small-to-medium enterprises and wealthy individuals (26 October 2012) .

153 Australian Taxation Office, Penalties and interest — correct a mistake or dispute a decision (21 December 2012).

154 To encourage taxpayers to take reasonable care in complying with their tax obligations in accordance with the ATO's guidelines, see above n.42, para 9.

155 Australian Taxation Office, Administration of penalties for making false or misleading statements that do not result in shortfall amounts, PSLA 2012/4, 25 January 2013 para 9; Above n.42, para 9.

156 Australian Taxation Office communication to the Inspector-General of Taxation, 15 January 2013; Note that there is also a small segment of work done by the ATO where a more senior officer is not the approver.

157 Australian Taxation Office, Issues to be reviewed by the SME Technical Panel, internal ATO document.

158 Australian Taxation Office, IQF, internal ATO document.

159 Australian Taxation Office, 'Indirect Tax — Active Compliance Penalties report 1 July 2012 — 31 December 2012' (26 February 2013), internal ATO document pp 8-9.

160 Australian Taxation Office, Quality improvement and assurance reports, internal ATO document.

161 Inspector-General of Taxation, Review into improving the self assessment system (2012).

162 Ibid, p 117 (Recommendation 4.5).

163 Ibid, p 112 (Recommendation 4.3).

164 Ibid, p 115 (Recommendation 4.4).

165 Ibid, p 111 (Recommendation 4.2).

166 Ibid, p 118 (Recommendation 4.6).

167 Ibid, p 109 (Recommendation 4.1).

168 Joint Committee of Public Accounts and Audit, Report 410: Tax Administration (2008).

169 Ibid, Chapter 6.

170 Ibid, p 148.

171 Inspector-General of Taxation, Review into the Tax Office's Administration of Penalties and Interest Arising from Active Compliance Activities (2005).

172 Treasury, Report on Aspects of Income Tax Self Assessment (2004).

173 Ibid, pp 39-47.

174 Inspector-General of Taxation, Review into aspects of the Tax Office's settlement of active compliance activities (2009) p 26 (recommendation 16).

175 Ibid, p 27 (recommendation 18).

176 Inspector-General of Taxation, Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices (2011) p 156 (Recommendation 10.1).

177 Ibid, p 156 (Recommendation 10.2).

178 Inspector-General of Taxation, Review into the ATO's use of benchmarking to target the cash economy (2012) p 92 (Recommendation 6.1).

179 Inspector-General of Taxation, Review into the ATO's compliance approaches to small and medium enterprises with annual turnovers between $100 million and $250 million and high wealth individuals (2012) p 43 (Recommendation 2.14).

180 Inspector-General of Taxation, Review into the non-lodgement of individual income tax returns (2009) p 9 (recommendation 5).

181 Australian Taxation Office, 'Objection Review Report Draft' (21 February 2012), internal ATO document p 12.

182 Ibid, p 4.

183 Australian Taxation Office, 'S&ME Penalties Review: Update on Progress — November 2012' (November 2012), internal ATO document pp 6-9.

184 Australian Taxation Office, 'ATO Penalties Continuous Improvement Framework' (22 March 2013), internal ATO document.

185 Ibid.