4.1 Stakeholders were concerned that many decisions to raise penalties relating to taxpayer statements had later been reversed (‘unsustained’) due to ATO officers:
- not having sufficient capability to deal with facts and evidence to formulate sustained decisions;
- not requesting relevant information in the first instance such that new information or arguments are provided after finalisation of audits and raising of penalties;
- insufficiently explaining the reasons for their penalty decisions; and
- using penalties as a means to leverage resolution of primary tax disputes.
4.2 Each of the suggested stakeholder reasons for unsustained penalty decisions are discussed in separate sections below.
Dealing with facts and evidence to formulate sustained penalty decisions
4.3 Stakeholders have asserted that some ATO officers lack the capability to appropriately deal with facts and evidence to formulate sustainable penalty decisions. The conduct that has lead them to this conclusion include ATO officers:
- not collecting all relevant evidence to support penalty decisions or inadequately documenting taxpayers’ contentions at audits;235
- not considering all collected evidence,236 using irrelevant evidence, inadequately considering the weight of evidence and not sufficiently testing the reliability of the evidence; 237
- not determining what action a reasonable person would have taken in circumstances such as where the law and its application is complex;
- in determining base penalty amounts, taking into account taxpayer behaviours or actions post-lodgement of the relevant tax return such as the taxpayer not providing written analyses of relevant facts that were not canvassed in the ATO’s position papers; and
- raising higher base penalty amounts in certain compliance projects, such as those on Employee Share Schemes, without appropriate consideration.
4.4 The ATO material, provided in Appendix 4, also indicates that over one-third of ATO penalty decisions were reversed on objection due to ATO officer conduct, including:
- not seeking or requesting critical information or supporting evidence;
- inadequately analysing the facts or evidence; and
- incorrectly applying the relevant law or ATO view to the facts and evidence that was available during the audit.
4.5 An area of concern as observed by the ATO is that some officers have insufficient ability to link evidence with taxpayer behaviours:
The link between facts and evidence and the behaviour it infers is not always made by staff. The penalty representative commented on the fact that the information is often in the cases but the inference to behaviour is not always made. The concept of translating facts and evidence into a behaviour seemed to be a revelation to some and put things into perspective for them. This indicates that more emphasis needs to be placed on this aspect in training packages. (Both [in relation to] facts and evidence and penalties).238
4.6 Furthermore, internal ATO material indicates that where some ATO officers are faced with complexities in dealing with facts and evidence or are not actively managing their case, those officers may run out of time and be left without compelling facts on which to base penalty decisions. These officers may then use the available facts to make a penalty decision which unfortunately may have been incorrect and/or based on irrelevant evidence.239
4.7 Such internal ATO material has also observed that officers may assume that the fact that a case has been selected for audit by the ATO implies that reasonable care has not been taken and therefore consider a penalty must apply. This assumption was thought to indicate a tendency by some staff to determine the penalty first and look for evidence to support it later.240
4.8 The ATO has advised that the means to address the above concerns is through relevant, timely and appropriate guidance material, internal procedures and decision making tools as well as training. These are outlined in the following sections.
ATO guidance material
4.9 The ATO’s staff instructions require its officers to consider the facts and evidence in making penalty decisions:
…penalty decisions must be supported by the available facts and evidence. Conclusions about the entity’s behaviour should only be made where they are supported by facts, or where reasonable inferences can be drawn from those facts.241
4.10 Furthermore, ATO officers are required to have considered the individual circumstances of the case, giving appropriate consideration to the background and experience of the taxpayer.242 Statements similar to the above are also made in the ATO’s internal guidance and training materials, a list of which is provided in Appendices 9 and 10.
ATO procedures, decision making tools and materials
4.11 Certain ATO business lines provide specific procedures on how to conduct a review or audit, with specific sections on penalties. For example, the ATO’s procedures for making penalty decisions in large business audits stresses the importance of gathering sufficient facts, evidence and taxpayer contentions to incorporate into the case’s fact and evidence worksheet. ATO officers are also required to consider the taxpayer’s behaviour, compliance history, degree of cooperation, voluntary disclosures and delays243 and, where penalties are imposed, comprehensive statements of reasons for penalty decisions must be produced.244
4.12 As discussed in Chapter 1, the ATO’s procedures also require all penalty decisions to be reviewed by another officer and, for certain penalty decisions, by an internal panel. These pre-issue quality assurance checks are aimed at ensuring penalty decisions are of the expected quality prior to the decision being communicated to the taxpayer.
4.13 The ATO has recently provided its staff with a number of A3 information sheets to outline key points to consider in making penalty decisions. These A3 information sheets are reproduced in Appendix 9 and reiterate the need for facts, evidence and reasonable inferences to support penalty decisions:
Facts, evidence and reasonable inferences must exist to determine that the entity and agent did not take reasonable care. If they do not exist, the entity has taken reasonable care or is presumed to have taken reasonable care.
If based upon the facts and evidence we have a ‘border line call’, we should gather more information or give the entity the benefit of the doubt and determine reasonable care, rather than assess as a failure to take reasonable care.245
4.14 The ATO also provides its officers a guide to determining compliance related behaviours. This guide contains a number of questions which prompt ATO officers to consider in determining the base penalty amounts and provides the following guidance:
- Gather facts and evidence relevant to your decision. Talk to the taxpayer or their agent, if appropriate. Check ATO systems for information.
- Do not wait until the end of the audit or review to obtain information for the penalty decisions. Ask at the earliest appropriate opportunity.
- Be prepared to discuss the facts and evidence with the taxpayer, or their representative.
- Document the contentions they raised and respond to them in your reasons for decision.
- Use false or misleading statement penalty Facts and Evidence Worksheet [discussed below] when you are required to do so.246
4.15 The ITX business line also provides its officers with a Behavioural Observation record. This record focuses officers’ attention on the information needed to identify the level of care taken by taxpayers by posing questions under the following four different categories:
- experience and background of the taxpayer;
- preparation of the business activity statement;
- how the shortfall arose; and
- behaviours of tax agents and service providers.
4.16 The full list of questions in the Behavioural Observation record for each of the above categories is reproduced in Appendix 10.
4.17 The SBIT business line also provides its officers with a penalty decision making tool specific to audits that are conducted on employers’ tax obligations — the employer obligation penalty wizard. This tool determines the penalty and produces a statement of reasons after the ATO officer has entered certain factual information in response to prompted questions. However, the ATO considers that this tool is only useful for more simplistic penalty issues and not those involving considerable judgement.
4.18 In the conduct of reviews or audits that are complex,247 contentious or otherwise involves a high probability of dispute or litigation,248 the ATO requires officers to complete a facts and evidence worksheet which assists ATO officers to, amongst other things:
- determine the material facts and relevant evidence required to support penalty decisions;
- improve the understanding and transparency of ATO officers’ reasoning on relevance of the facts and evidence relied upon in decisions; and
- quickly narrow the issues in dispute.249
4.19 The ATO has advised that it would undertake ongoing quality assurance assessments through its Integrated Quality Framework (IQF) to ensure that ATO officers are using and completing the facts and evidence worksheet appropriately:
IQF should ensure, where mandated, that [facts and evidence worksheets] are completed effectively and progressively with relevant, quality, case information throughout the audit process, in accordance with policy.250
4.20 The ATO has also advised the IGT that it is currently developing a model facts and evidence worksheet that will assist officers to better complete the worksheet by illustrating the ATO’s ‘expectations and what a quality, populated worksheet looks like.’251 The ATO’s current facts and evidence worksheet is reproduced in Appendix 14.
ATO training relating to penalty decision making
4.21 The ATO provides a number of training packages relating to penalty decision making. Many of these packages are delivered at a fundamental level and are electronically self-directed. In particular, the ATO provides six training packages which are either directly related to penalties generally or those penalties relating to taxpayer statements being:
- penalties and interest charges — overview;
- penalty — no shortfall for false or misleading;
- penalty — false or misleading statements;
- penalty — safe harbour — exemption from false or misleading statements;
- penalty — base penalty amount adjustments; and
- penalty for not having a RAP.
4.22 The ATO also provides training packages relating to the use of evidence in decision making, including the following:
- evidence — an introduction;
- evidence — overview risks and issues worksheet;
- evidence — facts and evidence worksheet workshop;
- evidence — facts and evidence and chronology worksheet;
- evidence — analysis and interviewing; and
- evidence — analysis of taxpayer response.
4.23 It is important to note that the ATO’s training material identifies the following key messages regarding evidence:
If there is no piece of evidence to support a fact then it is an assertion rather than a fact, which in most situations will not be useful. Assertions and assumptions have a limited place in ATO decision-making. You may need to obtain further information or evidence.252
4.24 The ATO has advised253 that it is proposing to develop a new penalty decision making training package focused at an intermediate level. The outline of the content provided to the IGT suggests that this package would assist ATO officers to:
- differentiate between the standards of care for false and misleading statement penalties;
- determine what facts may be relevant to making penalty decisions, such as the difference between those facts relevant to the primary tax issue and those facts relevant to the penalty issue; actions of taxpayers in connection with making statements and those actions during audits; and, distinguishing irrelevant facts;
- identify factors that would allow the reduction or increase of base penalty amounts; and
- utilise a legal reasoning model to apply facts to penalty decisions and reference the facts and evidence in written explanations.
4.25 Other relevant ATO training includes that recently provided on active case management and technical decision making which helps officers to focus on the sequencing of questions on penalty issues during compliance activities.
4.26 Decision making on certain penalties, such as those relating to statements, can be complex for a number of reasons.
4.27 Firstly, the law requires ATO officers to make inferences about a taxpayer’s actions and circumstances at the time the statement was made. This process may require considerable analysis of various pieces of evidence, none of which, in isolation, is conclusive proof of those standards of conduct required by the law. Such an analysis involves finely balanced assessments of the reliability and probative value of the evidence, as well as the resolution of any competing inferences that can be drawn from the evidence.
4.28 Secondly, there may be difficulties in gathering evidence establishing the taxpayer behaviours and circumstances at the time that the statement was made which may have been made many years prior.
4.29 Thirdly, although the standard of reasonable care is a settled legal concept, it requires a complex construction involving a hypothetical person with similar attributes and circumstances to the taxpayer at the relevant time.
4.30 Notwithstanding these complexities, the IGT considers there are opportunities to improve ATO officers’ capability in appropriately dealing with facts and evidence in penalty decision making.
Penalty decision database
4.31 The IGT considers that one of the difficulties ATO officers face is that they have limited access to previously made penalty decisions and precedents. Without access to such material, officers form their own impressions of good decision making.
4.32 Although the ATO has made numerous penalty decisions over the years, ATO officers cannot easily access these decisions. The IGT considers that the capture and access to these decisions and associated reasoning, including the relevant facts and evidence relied upon, in an easily searchable and retrievable database would be invaluable to ATO officers. Such dissemination of corporate knowledge would assist existing and new staff to elicit principles and guide them to better decision making.
4.33 It would also be useful to provide public access to the above proposed database. The IGT is of the view that providing such access (in a form that addresses privacy and secrecy issues — such as is already done with private rulings) would provide transparency and accountability and thereby increase the confidence of taxpayers and their advisors in the ATO’s penalty decisions. It is possible that initially, some taxpayers and ATO officers may seek to support positions by cases at the extremities. However, this may lead to better and more consistent decisions in the long term.
4.34 Furthermore, some form of precedent or examples of better quality decisions could be extracted from such a database by an ATO penalty specialist group. As the CPIT already undertakes reviews of samples of high quality penalty decisions made within the ATO, it may be best placed to perform this function and make it available to relevant ATO officers.
Penalty decision making tools
4.35 As mentioned earlier, the ATO has already developed specific penalty decision making tools that can assist its officers to appropriately deal with facts and evidence during compliance activities, for example, tools that prompt officers to seek penalty-related evidence. Some of these tools have been introduced recently and, if used and understood correctly, would go some way to addressing some of the concerns outlined above.
4.36 Many of the remaining concerns could be addressed by improving the quality of analysis on the relevant facts and evidence when officers determine standards of conduct and infer taxpayer behaviours. There are difficulties in designing tools to achieve this aim as this type of analysis does not lend itself to prescriptive formulae. Furthermore, merely providing ATO officers with typical factual matrices with corresponding conclusions may discourage officers from performing the required analysis.
4.37 However, the IGT is of the view that an enterprise-wide penalty decision making tool could be developed to assist all ATO officers. Such a tool, at the very least, should provide a strong framework for conducting the necessary analysis, prompt officers to ensure all relevant evidence is obtained and appropriately considered, and the reasoning for the inferences drawn from the evidence are contemporaneously and cogently documented. It should also provide the basis for more efficient and effective internal pre-issue quality assurance of penalty decisions.
4.38 The IGT considers that this penalty decision making tool would be most useful where it is tailored for different areas of the ATO as different areas deal with different types of issues and behaviours. For example, the ITX business line’s behavioural observation record could be incorporated into this tool for that business line as it is useful in drawing out, recording and gathering the material facts and relevant evidence in the context of a transactional-based tax.
4.39 The IGT believes that other business lines could also consider tailoring the penalty decision making tool to suit the peculiarities encountered in their business line. However, any tailoring should ensure that the fundamental objectives of the penalty decision making tool are maintained.
Consolidating penalty decision material
4.40 ATO officers may not always be aware of all the penalty decision making material that is available to them, given the volume and breadth of information available on the ATO’s intranet. Much of the reference material on penalties is currently presented in a passive form on the ATO’s intranet under an area for ‘work processes’.
4.41 Through the use of technology, the range of available material may be seamlessly linked together, providing a single source of formal and informal information for penalties. The ATO has moved towards such an approach on other tax topics, such as transfer pricing, through its e-wiki. The ATO’s e-wiki is an online portal, accessible to all ATO staff which allows many users to add and edit content on a particular subject matter. The e-wiki may also be an effective means to capture, collate and access knowledge across the ATO on penalty issues. For example, existing formal ATO guidance could be accessed from hyperlinks on the e-wiki and informal material, such as that developed as a result of ATO officers sharing and commenting on one another’s experiences and insights, could be captured on the e-wiki itself. In this respect, the e-wiki would facilitate interactive dialogues between officers and sharing of best practice on a real time basis.
4.42 Furthermore, to reduce the risk that ATO officers may not adopt the e-wiki and use it to its full potential, there is a need for a small team to actively manage the e-wiki to ensure its relevance, maximise its useability and reinforce its use by updating it regularly and moderating the content that is submitted to the e-wiki. The CPIT may be best placed to carry out such work given their knowledge and experience with penalty issues.
4.43 As stated earlier, the ATO has developed training packages that aim to provide ATO officers with an understanding of the core penalty concepts and to improve officers’ ability to deal with facts and evidence. The ATO is also proposing to develop a new penalty training package focused at an intermediate level.
4.44 There is a risk that the expected outcomes of training materials will not be achieved if the penalty aspect is considered merely as a component of wider decision making for determining a taxpayer’s liability. Gathering evidence and making penalty decisions relating to statements always requires ATO officers to turn their mind to the standards of conduct or strength of position set out in the law. In this sense, it is a discipline worthy of specific training.
4.45 ATO officers have indicated that interactive case study based training would provide inexperienced officers with a greater level of capability where it was facilitated by experienced ATO penalty specialists.254 The IGT supports this approach, as developing the required analytical skills is more likely to improve when tested under direct supervision of an experienced officer. The IGT considers that interactive case based training should be incorporated in the suite of new ATO penalty training packages.
4.46 The IGT also considers that interactive case studies would best include cases which seek to address the reoccurring reasons for unsustained penalty decisions, for example:
- cases which contain relevant and irrelevant facts and evidence, to improve ATO officers’ capability in distinguishing between those different facts and evidence;
- cases which have incomplete and ambiguous information, to improve ATO officers’ capability in testing evidence and ensuring that relevant evidence is being collected; and
- cases in which different conclusions can be drawn from the evidence, to improve ATO officers’ capability in weighing up the strengths and weaknesses for the competing arguments to arrive at appropriate decisions.
4.47 Another useful training tool for ATO officers would be to compare examples of good penalty decisions with better penalty decisions. Such examples should be accompanied by an explanation of what aspects of the decisions distinguish the two. Such information could also be provided on the ATO’s internal e-wiki.
4.48 It is important to remember that understanding the concepts in a learning environment is different to applying those concepts to actual cases. This is particularly true in circumstances where ATO officers are required to elicit and consider evidence in a potentially adversarial and uncertain environment.
4.49 The IGT also considers that training should provide a similar experience to the work that is likely to be encountered — for example, only providing incomplete facts and evidence and asking the officer what they would do to determine whether more evidence was needed and how they would formulate and document their decision. Any formal training would also be best followed up immediately with practical application, such as running cases on routine issues under the direct supervision of experienced ATO officers. This on-the-job training would better consolidate the earlier training received and ensure that the new knowledge is applied in practice and retained.
The IGT recommends that for penalties relating to taxpayer statements, the ATO:
- capture and provide public access to all penalty decisions and associated reasoning, including the relevant facts and evidence relied upon, in an easily searchable database;
- extract and make available, to relevant ATO officers, precedent or examples of high quality penalty decisions from the above database;
- develop a penalty decision making tool which requires ATO officers to collect all relevant evidence and provides them with an analytical framework;
- establish a penalties ‘e-wiki’ and ensure that appropriate resourcing is made available to reinforce its use and actively manage the content on an ongoing basis; and
- incorporate into its penalty training packages interactive case based studies, use examples of penalty decisions of different quality and ensure follow up with on-the-job training under direct supervision of experienced ATO penalty decision makers.
Disagree with recommendation 4.1(a)
The ATO disagrees with the recommendation on the basis that it considers decision reports that have had relevant identifiers removed will in the main be of limited utility to taxpayers in understanding the specific factors that led to a particular decision. In addition, implementation of this recommendation would require the development of a new and large database and a significant number of staff being assigned to remove taxpayer identifiers to maintain taxpayer privacy on an estimated 60,000 to 100,000 decisions per year.
The ATO agrees with the objective of the recommendation to increase transparency regarding penalty decisions and will publish results of its quality assurance processes that assess the correctness of penalty decision on a quarterly basis.
Agree with recommendation 4.1(b)
Agree in principle with recommendation 4.1(c)
ATO officers are required to gather all relevant information to enable a penalty decisions to be made during an audit or risk review. Tools exist for this process and the ATO will assess if there is an opportunity to develop further tools to assist with evidence gathering, decision making and/or report writing that are appropriate for different types of cases.
Agree in part with recommendation 4.1(d)
The ATO agrees to review and make improvements to online resources for staff in relation to penalty decision making. The platform and delivery options will be developed in the context of the broader corporate approach to providing online policy and practice information for ATO staff.
Agree with recommendation 4.1(e)
Information not provided during audit
4.50 The ATO and stakeholders indicated that another reason for unsustained penalties was due to information not being provided to ATO officers during audits.255
4.51 Stakeholders acknowledged that some taxpayers may not be as cooperative or be in a position to provide requested material. However, stakeholders also considered that lack of sufficient ATO officer communication with taxpayers was the reason for information being provided after the conclusion of the audit. In this respect, taxpayers expressed frustration with the lack of opportunities afforded by ATO officers, and in some cases resistance, to discuss the relevant issues to enable both parties to better understand each other’s position and identify relevant information to correct any misunderstandings prior to a penalty decision being made.
4.52 ATO information, set out in Appendix 4, indicates that over one-fifth of penalty-only objection cases since 1 July 2012 (24.69% or 41 of 189 cases) were allowed in full or in part due to information requested during audit being provided after the audit was finalised. Furthermore, the information in Appendix 4 also indicates that approximately one per cent of penalty-only objection cases (2 of 189 cases) were allowed in full or in part due to the audit being finalised without the auditor requesting critical information during the audit. Whilst one per cent may not seem significant, as stated in the previous chapter, the ATO’s recording of data in this regard has had its limitations and stakeholder concerns cannot be dismissed by relying on this low percentage alone.
4.53 The law does not prescribe how the ATO is to communicate with taxpayers before a penalty decision is made.256 However, the ATO requires its officers to contact taxpayers and understand their actions before such a decision is made:
9. The following principles should be taken into account throughout the application of the administrative penalty process including any process of review under Part IVC or other reviews undertaken:
…the entity should normally be contacted and given the opportunity to explain their actions before a decision to assess penalty is made. Exceptions to this position are the automated case actioning environment (that is, data matching) or where the facts clearly show that the entity is deliberately disengaged from the tax system.257
4.54 The ATO also requires its officers to tell taxpayers the reasons for any penalty decision and afford the taxpayers an opportunity to discuss the decision:
- tell taxpayers the reasons for any penalty decision and give the taxpayer an opportunity to present their views, discuss the merits of the case and explain any mitigating factors;258 and
- contact taxpayers when considering a penalty decision to give them the opportunity to explain their actions before a penalty decision is made, unless the tax shortfall was assessed in data matching or the facts show that the taxpayer deliberately disengaged.259
4.55 It is also important to note that the ATO has advised the IGT that, generally, there would be no penalty if the ATO is unable to identify evidence which infers the relevant taxpayer behaviours contemplated by the legislation. This approach can cause difficulties in cases where taxpayers are not contactable and the circumstances concerning the relevant statements are unable to be established. Not imposing a penalty in these circumstances might be seen by some as potentially supporting a taxpayer who may not have exhibited expected behaviour. In this respect, the ATO has outlined a number of strategies to assist its officers in dealing with un-cooperative taxpayers during the audit process, including:
- the use of information sources other than the taxpayer, such as the ATO database;
- the use of formal access powers to require the taxpayer to provide the information; and
- considering whether the taxpayer’s behaviour is relevant to a decision to increase the penalty.260
4.56 Taxpayers may provide new material or information after audits are completed for a number of reasons. Although some of these reasons may be outside of the ATO’s control or influence, the IGT considers that the manner in which ATO officers communicate with taxpayers during the information gathering process has a significant influence on taxpayers’ ongoing engagement and willingness to provide information.
4.57 The IGT considers that effective communication between the taxpayers and ATO officers would improve the robustness of initial penalty decisions as regular discussion allows the ATO to continually elicit information from taxpayers that is material to making penalty decisions and before such decisions are finalised. Effective communication also allows taxpayers to achieve better understanding of the ATO’s concerns and reasons for penalty decisions. With this better understanding, taxpayers and their representatives can provide the ATO with information to address any misunderstandings and gaps.
4.58 Effective communication also provides a valuable opportunity to build trust in ATO administration and, ultimately, influence tax compliance in the future. Where there is a breakdown in communication, unnecessary time and resources are expended reviewing penalty decisions that were based on incomplete information.
4.59 Accordingly, the IGT is of the view that the ATO should, whenever possible, provide taxpayers with an opportunity to present information during the audit, by discussing the scope, appropriateness and relevance of the information requested.
4.60 The IGT has mentioned in a number of previous reviews the approach the ATO should adopt in relation to information gathering.261 For example, the IGT’s Review into the Australian Taxation Office’s use of early and Alternative Dispute Resolution, outlined a number of principles in relation to discussing scope, relevance and appropriateness of requests with taxpayers, ensuring taxpayers understand the reasons for the requested information and working with them to minimise impact and cost where documents may be difficult to obtain.262
4.61 The IGT is of the view that the above principles are also relevant to penalty matters and that facts and evidence relating to penalties should be obtained at the same time as material relating to primary tax issues is sought. However, as discussed later in this chapter, ATO officers should not commence discussion about imposition of potential penalties until after the final position paper has been issued.
4.62 It is acknowledged that many of the above principles have already been captured in ATO guidance, particularly in the ATO’s new guidance on information gathering263 . However, the issue has become one of enforcement, that is, ensuring that relevant ATO officers follow such guidance in every instance. In the IGT’s view, this may be achieved through the pre-issue quality assurance checks which are conducted before finalising penalty decisions.
The IGT recommends that the ATO ensure that during compliance activities its officers engage and communicate effectively with taxpayers to collect the facts and evidence relevant to penalties at the same time that they collect such material on primary tax.
The ATO agrees with recommendation 4.2
Explaining ATO penalty decisions
4.63 Stakeholders were concerned that in some cases, taxpayers’ understanding of penalty decisions were hindered because ATO officers did not cogently or succinctly explain the reasons for penalty decisions, for example, by not explaining how the taxpayer’s evidence was treated.
4.64 Recent ATO internal quality assurance work shows that over 15 per cent of cases assessed (9 of 58 cases) had failed to meet the ATO’s standard for accurately and clearly explaining penalty decisions (the ‘transparency’ standard).264 In these cases the ATO considered that the final letter could have been better edited for clarity and some taxpayer behaviours were not documented in the letter.265 Other ATO materials also indicate that the explanations for penalty decisions could be improved.266 For example, the Superannuation business line undertook a cross capability workshop in November 2012 which recommended a review of the final penalty consideration letters that are issued to taxpayers, with a view to improving the simplicity of the language and the clarity of the decision making process.267
4.65 In relation to the content of written reasons for penalty decisions, the ATO requires its officers to:
… set out the findings on material questions of fact and refer to the evidence or other material on which those findings were based.268
4.66 The ATO’s draft decision making training package provides further detail on the content for written reasons for penalty decisions and advises its officers to not only state the officer’s conclusions and list the facts and matters taken into account, but also:
… assess the relevant facts and indicate either expressly or by necessary implication, how the reasoning process took account of each fact and element of the applicable law or ATO view.269
4.67 ATO internal guidance also asserts that further taxpayer input be accepted:
Be prepared to take further input and submissions from taxpayers on the penalty amount to be imposed in their circumstances, given the behaviours that gave rise to the shortfall and to explain your final decision coherently in accordance with the facts, evidence, the law and ATO penalties policy.270
4.68 The ATO also provides guidance on how taxpayer contentions should be addressed in the reasons for penalty decisions:
In your reasons you can make statements to the effect that ‘we’ (the ATO) agree or disagree with the taxpayer’s contention with the reason. If, for example, we disagree you can explain the reason in terms of a difference in the nature or relevance of particular facts. Be specific. We may have gathered facts and evidence that are different to the taxpayer’s facts and evidence and we prefer ours for good reason. The taxpayer may not be applying the ATO view, preferring their interpretation of the applicable law. In the latter case our reason would be that the taxpayer’s interpretation is different to the ATO view and we only apply the ATO view.271
4.69 The ATO has policies and procedures in place which require penalty decisions to include material facts and evidence and, in some cases, ‘comprehensive reasons’.272 However, taxpayers as well as the ATO’s quality assurance work have identified that ATO officers’ explanations of penalty decisions can be improved.
4.70 In the IGT’s view, the reasons for penalty decisions should succinctly:
- state the findings on material questions of fact and refer to the evidence on which those findings were based;
- provide reasoning by demonstrating how the law was applied to the facts; and
- explain any disagreement with taxpayer contentions.
4.71 Such ATO guidance is given in the ATO’s draft training package. However, the IGT considers that elevating such guidance into the ATO’s staff instructions will assist to improve the overall standard of explanations for penalty decisions.
4.72 The IGT has also observed that some written explanations for penalty decisions comprise several pages. Taxpayers in some market segments insist on detailed explanations for penalty decisions so that they may be able to appropriately consider their review options. However, other taxpayers have found the detailed explanations confusing and have had to seek professional advice to understand the implications and options open to them. The IGT considers that, although it is important to set out the ATO officer’s reasoning in detail, the precise form of the disclosure may need to be tailored to a particular market segment.
4.73 By way of example, a short form disclosure that succinctly and clearly sets out the key components of a penalty decision, including the behaviours observed by the officer and how these were inferred from the facts and evidence might be helpful for micro businesses and individuals. This form of disclosure may be in the form of a standard template tailored to meet the needs of the relevant market segment. However, more detailed explanation can be provided on request.
The IGT recommends that the ATO ensure that any written communication to taxpayers in relation to penalty decisions:
- states the findings on material questions of fact and refers to the evidence on which those findings were based;
- demonstrates how the law was applied to the facts;
- explains any disagreement with taxpayer contentions; and
- is tailored to the needs of the relevant market segment.
The ATO agrees with recommendation 4.3
Penalty as leverage to resolve primary tax issues
4.74 Submissions asserted that penalties were used as leverage to resolve primary tax issues where ATO officers suggested to taxpayers:
- before issuing position papers in audits, that penalties may be imposed without indicating any reasons for this suggestion; or
- after issuing position papers, that any penalty amounts that were imposed may be reduced if the taxpayer discontinued or settled their dispute with the ATO’s view on the primary tax issue.
4.75 In conducting audits of individuals, SMEs and large businesses, the ATO requires its officers to evaluate taxpayers’ compliance risks by collecting information,273 and determining their views on both primary tax and penalty issues.274 These officers then make recommendations to their team leaders or senior officers on the decisions that they consider should be made on these issues.275 Where such approvals have been provided, the decisions, together with the ATO’s reasoning, are communicated to taxpayers either by ‘presenting’ this information to them or by providing initial position papers.276 If taxpayers provide any new information in response, ATO officers are required to update their decisions to take into account the new information277 and seek further approval. Where such further approval is given, a finalisation letter is sent out to the taxpayer.278
4.76 ATO officers in large business audits are also required to communicate and manage the ATO’s position on penalties in a process that is separate to the ATO’s position on primary tax issues.279 The ATO has advised that this communication should ‘ideally [occur] at the same time [that] the final audit position [on the primary tax issue] is communicated’ to the taxpayer.280 Irrespective of when the ATO formally advises taxpayers of the potential imposition of penalties, ATO officers are required to have had an ‘ongoing dialogue’ with taxpayers on the topic of penalties throughout the audit so that ‘the final decision should present them with no surprises’.281 Stakeholders have raised concerns that there is a potential that taxpayers may be coerced into resolving disputes on terms favourable to the ATO where penalty discussions between ATO officers and the taxpayers begin early in the audit process. However, the ATO is of the view that such potential is minimised as most penalty decisions are reviewed by team leaders prior to such decisions being made and communicated to taxpayers.282 Certain penalty decisions, such as those in the SNC business line, are also required to be reviewed by ATO technical panels.283
4.77 In relation to settlement negotiations, the ATO has prohibited its officers from threatening to impose penalties as a lever to settle cases:
52. It is ATO policy that officers must never use threats, either implied or actual, of imposing penalties or interest as a lever to settle cases (see, for example, Caratti v. Deputy Commissioner of Taxation 93 ATC 5192; (1993) 27 ATR 448).284
4.78 The ATO instructs its staff that ‘wherever possible, agreement should be reached in respect of the substantive issues before officers consider settlement of penalties’ and285 then the remission of penalties must be determined on the merits of the case and in accordance with the ATO’s policy documents.286 However, the ATO appreciates that as a matter of practical reality, cases will arise where penalty and interest charges could properly be considered as part of the settlement of the case,287 such as in circumstances where:
- the cost of litigating (including internal ATO costs) is out of proportion to the possible benefits, having regard to the prospects of success (including collection of the tax), and likely award of costs, assessed as objectively as possible;
- there are complex factual or quantum issues in contention, or evidentiary difficulties, or there is genuine uncertainty as to the proper application of the law to the facts, sufficient to make the case problematic in outcome or unsuitable for resolution through the AAT or courts, (for example, where the issue is peculiar to the particular taxpayer, and the opposing positions are each considered reasonably arguable.) This is particularly so where the settlement includes an agreed approach for future income years; [or]
- … unique or special features exist which make it unsuitable for resolution through litigation, for example, a dispute about the valuation of a unique asset.288
4.79 In the IGT’s view, the potential for penalties to be used as a means to coerce resolution of tax disputes in the ATO’s favour will be reduced through the effective implementation of the above recommendations, including:
- recommendation 2.2(a) which is aimed at reducing the financial pressure that unsustained penalties place on taxpayers by not requiring payment of penalty amounts until disputes on the primary tax are resolved;
- recommendation 3.1(d) seeks to improve the transparency through the public release of statistical information on penalty imposition and adjustments on an ATO business line basis; and
- recommendation 4.1 is directed at improving ATO officer capability and providing further transparency and confidence in the system through a public database which captures all penalty decisions and associated reasoning.
4.80 During the course of this review further considerations were given to addressing any potential or taxpayer perceptions of penalties being used as leverage in broader tax disputes. Some stakeholders have observed that such perceptions may persist as long as the same ATO officer, who forms the technical view on the substantive matter, is also responsible for the penalty decision. In particular, taxpayers may perceive that any disagreements with the ATO officer’s views may influence the penalty decision or that the officer may have a natural inclination to support the merits of their position on primary tax issues by imposing penalties. For example, taxpayers may consider an officer reluctant to acknowledge that the taxpayer’s position is reasonably arguable to avoid conceding that their own technical position may not be absolute.
4.81 During the review, the following three options were proposed to address these perceptions arising before the ATO’s position paper is issued:
- allow ATO officers to consider the penalty issue only after the primary tax matter has been resolved;
- allow ATO officers to collect information pertaining to both primary tax and penalties during audits, but allocate the penalty decision making authority to an independent ATO officer; or
- allow ATO officers to make decisions on both primary tax and penalty issues, but a discussion regarding any application of potential penalties should not commence until after a final position paper on the primary tax issue has been issued.
4.82 The first option would extend the information gathering process and increase taxpayer compliance costs. The second option would require more ATO resources and good co-ordination between the relevant ATO officers. This may prolong the process and may not entirely dispel perceptions of leverage given the communications that are likely to take place between the ATO officers.
4.83 In the IGT’s view, the third option is preferred as it would enable taxpayers to focus their attention on the primary tax issues unencumbered by suggestions of potential penalty imposition. This option would not prevent ATO officers from collecting information pertaining to penalties during the course of an audit. Taxpayers would be informed that the information being sought is relevant for determining any penalties that may be applicable without entering into any discussions.
4.84 In settlement negotiations, taxpayers may also perceive that penalties have been raised as ‘bargaining chips’ where ATO officers appear more willing to consider reducing penalties rather than primary tax. It should be acknowledged that ATO officers may have more scope to negotiate on penalties relating to taxpayer statements as these penalties may pose more litigation risk due to the complex evidentiary requirements associated with reasonable care and RAP.
4.85 It is possible that taxpayer perceptions that penalties are used as leverage in settlement negotiations may be due to ATO officers using imprecise language such as ‘we can negotiate on penalties, but not on primary tax.’ These types of taxpayer perceptions may be reduced if fuller and more considered explanations are provided to the taxpayer.
The IGT recommends that the ATO ensure its officers:
- in cases where a position paper is to be issued, discussions regarding any application of penalties should not commence until after the position paper has been issued; and
- clearly and precisely communicate reasons for the ability or inability to reduce penalties and primary tax to the taxpayer during settlement negotiations.
Agree with recommendation 4.4(a)
The ATO will reserve discussions regarding the penalty decision (in all cases except for high volume cases or those with low complexity) until after a position paper on primary tax has issued or after the response to an interim position paper has been considered and a final position is ready to be issued to the taxpayer.
Where a taxpayer makes a request to discuss potential penalties at an earlier stage of the audit, the ATO would commence discussions.
The ATO does not expect this practice to prevent the gathering of information and evidence relevant to penalties throughout the audit in accordance with recommendation 4.2.
Agree with recommendation 4.4(b)
235 Australian Taxation Office, 'Quality Improvement and Assurance Monthly Report June 2011', internal ATO document
236 Ibid, p 27.
237 Australian Taxation Office, 'ATO Opportunity for improvement' (23 June 2011), internal ATO document p 3.
239 Australian Taxation Office, 'Compliance Penalties and Interest Forum Minutes' (14 December 2012), internal ATO document p 4.
240 Above n.237, p 3.
241 Above n.42, para 9.
242 Ibid, para 9.
243 'IT large business specific audit', above n.154.
245 Australian Taxation Office, 'Shortfall penalty for making a false or misleading statement' (18 May 2012), internal ATO document.
246 Australian Taxation Office, 'A guide to determining compliance related behaviour', internal ATO document. ITX also have a Behavioural Observation record that has some specific items for ITX.
247 For example, large business audits. See Australian Taxation Office, 'Guidelines for LB&I on the use of the facts and evidence worksheet templates', internal ATO document.
248 For example, comprehensive risk reviews in the PGH business line where there is a risk of dispute or litigation or involves other contentious issues. See Australian Taxation Office, 'Guidelines for PGH officers on when to use the facts and evidence worksheet for audits', internal ATO document.
249 Australian Taxation Office, 'Facts and Evidence worksheet (FEW)' (27 February 2012), internal ATO document.
251 Australian Taxation Office, 'Office Minute: Objection Review — agreed continuous improvements' (23 February 2012), internal ATO document p 3; Australian Taxation Office, 'Active Compliance — Penalties Improvement Work Program' (1 March 2013), internal ATO document; Australian Taxation Office, 'Continuous Improvements — Progress as at 1 March 2013' (1 March 2013), internal ATO document.
252 Australian Taxation Office, 'Decision making — Compliance BSLs: Learner guide' (17 January 2011), internal ATO document p 50.
253 Australian Taxation Office, 'Office Minute: Objection Review — agreed continuous improvements' (23 February 2012), internal ATO document.
254 Australian Taxation Office, 'Compliance Penalties and Interest Forum Minutes' (28 September 2012), internal ATO document.
255 Above n.181, p 12.
256 Taxation Administration Act 1953, sch 1, s298-10.
257 Above n.42, para 9.
258 Australian Taxation Office, 'Large business', above n.152; 'Small-to-medium enterprises', above n.152.
259 Above n.42, para 9.
260 Above n.252, p 28.
261 Above n.176; above n.179; above n.100.
262 Above n.100, p 32.
263 Australian Taxation Office, Our approach to information gathering (3 December 2013).
264 Australian Taxation Office, 'Quality Improvement and Assurance Quarterly Report: this report is based on quality activities conducted by AC Capability during the quarter October — December 2012' (25 February 2013), internal ATO document p 16.
265 Australian Taxation Office, 'Penalties — Continuous improvement quarterly report October to December 2012' (1 February 2013), internal ATO document.
266 Australian Taxation Office, 'Compliance Penalties and Interest Forum Minutes' (7 March 2013), internal ATO document.
267 Above n. 264, p 10.
268 Above n.42, para 189.
269 Australian Taxation Office, 'Decision-making for compliance staff: Learner guide — Draft' (17 October 2011), internal ATO document.
270 Australian Taxation Office, 'False or misleading statement penalty three step process', internal ATO document; Australian Taxation Office, 'Penalty: three step process', internal ATO document.
271 Above n.252, p 57.
272 'IT large business specific audit', above n.151.
273 Australian Taxation Office, 'IT SME audit comprehensive — Contact client and request information', internal ATO document; Australian Taxation Office, 'IT large business comprehensive audit — Obtain relevant information', internal ATO document; Australian Taxation Office, 'Contact client/taxpayer and request information — SBIT', internal ATO document.
274 Australian Taxation Office, 'IT large business comprehensive audit — Establish and evaluate risks', internal ATO document; Australian Taxation Office, 'IT SME audit comprehensive — Address the risks and Sign off recommendations', internal ATO document; Australian Taxation Office, 'Address risks — SBIT', internal ATO document.
275 Australian Taxation Office, 'IT SME audit comprehensive — Sign off decisions', internal ATO document; Australian Taxation Office, 'IT large business comprehensive audit — E-18 Obtain approval of initial risk outcomes for income tax (Large)' (17 October 2013), internal ATO document; Australian Taxation Office, 'Sign off recommendations — SBIT', internal ATO document.
276 Australian Taxation Office, 'IT SME audit comprehensive — Finalise ATO position', internal ATO document; Australian Taxation Office, 'IT large business comprehensive audit — Present ATO findings to taxpayer' (8 November 2013), internal ATO document; Australian Taxation Office, 'Finalise ATO position — SBIT', internal ATO document.
277 Australian Taxation Office, 'Finalise ATO position', ibid; Australian Taxation Office, 'Present ATO findings to taxpayer', ibid; Australian Taxation Office, 'Finalise ATO position — SBIT', ibid.
278 Australian Taxation Office, 'Sign off decisions', above n.275; Australian Taxation Office, 'IT SME audit comprehensive — Communicate the outcomes to the client', internal ATO document; Australian Taxation Office, 'IT large business comprehensive audit — Sign-off risk case outcomes', internal ATO document; Australian Taxation Office, 'IT large business comprehensive audit — Communicate outcomes to taxpayer', internal ATO document; Australian Taxation Office, 'Sign off case — SBIT', internal ATO document; Australian Taxation Office, 'Communicate the outcomes to the client/taxpayer — SBIT', internal ATO document.
279 Australian Taxation Office, 'Present ATO findings to taxpayer', above n.276.
280 Australian Taxation Office, 'IT large business comprehensive audit — Manage position paper process' (7 November 2013), internal ATO document.
282 Australian Taxation Office communication to the Inspector-General of Taxation, 15 January 2013.
284 Above n.108, para 52; Australian Taxation Office, 'False or misleading statement penalty three step process', internal ATO document.
285 Above n.108, para 48.
286 Ibid, para 50.
287 Ibid, para 54.
288 Ibid, para 26.