5.1 Stakeholders have expressed concerns regarding the ATO’s existing guidance on penalties. They consider that improved guidance is needed in a number of specific areas including:
- taxpayer voluntary disclosures;
- the remission provisions;
- better examples of the application of the law in particular circumstances; and
- consolidation of all materials into a single source of guidance.
Taxpayer voluntary disclosure issues
5.2 Stakeholders considered that greater clarity of the ATO’s administration of the voluntary disclosure provisions is needed to address concerns that:
- affected taxpayers are unable to access the 80 per cent reduction under the voluntary disclosure provisions as they are not always aware that an audit (or ‘examination’) has been commenced because, for example, they are the subject of frequent ATO examination;
- ATO officers, in some cases, require taxpayer admissions of primary tax liabilities before taxpayer disclosures are accepted as ‘voluntary’; and
- ATO officers require taxpayers to provide voluminous amounts of information before such disclosures are accepted as ‘voluntary’.
5.3 As stated in Chapter 1, the voluntary disclosure provisions provide two rates of penalty reduction. First, there is an 80 per cent penalty reduction if the disclosure is made before a taxpayer is advised that an ‘examination’ of their tax affairs is to be conducted.289 Secondly, a 20 per cent reduction may arise if the disclosure is made after such advice and the disclosure was not otherwise known by the ATO, saving the latter substantial time or resources.290 . Hence, it is imperative that the taxpayer is made aware when the examination commences.
5.4 The ATO considers that the term ‘examination’ means any examination of a taxpayer’s affairs291 which is ‘more than the routine processing of forms or applications,’292 for example, audits, risk reviews and other similar activities.293 The ATO has stated that it will treat taxpayers as having been told that an examination is to be conducted when the ATO first makes contact with them or their agent in this regard — such contact may be made orally or in writing.294
5.5 A taxpayer may make a disclosure after being told that an examination is to be conducted and the Commissioner has a discretion to treat such a disclosure as if it was made before the taxpayer was told of the examination.295 The exercise of this discretion results in an 80 per cent penalty reduction. The ATO has stated that, as a general rule, the discretion will be exercised in certain circumstances including:
- where the Commissioner is merely identifying and/or assessing risks, for example a risk review, notwithstanding that this is considered to be an examination; [and]
- where the disclosure is not within the scope of the examination as notified to the entity (that is, it is outside the risk(s) or issue(s) covered by the examination).296
5.6 In relation to the level of information a taxpayer needs to provide to be eligible for the voluntary disclosure penalty reductions, the relevant ATO tax ruling states:
105. The entity does not need to disclose the precise amount of the shortfall amount or scheme shortfall amount. The Revised Explanatory Memorandum to the A New Tax System (Tax Administration) Bill (No. 2) 2000 states, at paragraph 5.129, that ‘telling the Commissioner about the shortfall will require a taxpayer to disclose the relevant facts and other information to enable the Commissioner to adjust the tax-related liability.’ There may be circumstances where it is not practicable for the entity to quantify every adjustment required, or the resulting shortfall amount or scheme shortfall amount. In these circumstances, it will be sufficient if the entity has done everything reasonably necessary to enable or assist the Commissioner to determine the shortfall amount or scheme shortfall amount, even if some further matters of detail still need to be clarified.
106. In the context of false or misleading statements that do not result in a shortfall amount, the entity will be required to disclose sufficient information to enable the Commissioner to:
- correct the false or misleading statement; and/or
- rectify any decisions made or action taken as a consequence of the entity making the false or misleading statement.297
5.7 The ATO’s website also provides guidance on the amount of information needed, however, it is expressed differently to the ruling above. The relevant webpage states that voluntary disclosures should include:
- the amount of each adjustment required, or sufficient information to allow the Commissioner to readily determine the amount of each adjustment, and
- any other relevant information which will assist the Commissioner in determining the correct amount of tax-related liability, payment or credit.298
5.8 Even where additional information is sought later in the process, the ATO requires its officers to treat taxpayer voluntary disclosures as sufficiently complete where that additional information is provided within a reasonable time.299 Overall, the ATO requires its officers to exercise sound judgment in the completeness of any voluntary disclosure.300
5.9 Penalty reductions for voluntary disclosures are aimed at encouraging taxpayers to make disclosures before ‘it becomes obvious that ATO activity is about to uncover a shortfall amount’301 and therefore save a significant amount of time and resources.302
5.10 The ATO will generally exercise discretion to treat voluntary disclosures made before the end of a risk review as eligible for the 80 per cent penalty reduction as such reviews are merely identifying or assessing risks.303 However, where a taxpayer provides certain information after a review has been finalised but before an audit is commenced, a 20 per cent penalty reduction is available.
5.11 Taxpayers are generally notified that an audit will commence at the time the risk review is finalised. In some cases, however, audit notification may be delayed or the issues identified in the risk review may not be the subject of an immediate audit but may become subject of an audit at a later point in time. The IGT is of the view that voluntary compliance can be further encouraged by making the 80 per cent reduction available until the taxpayer is notified of an audit of the issues in question.
5.12 The IGT also considers that there are a number of areas where clearer communications on the treatment of voluntary disclosures is needed. First, different views may be formed on whether a voluntary disclosure was properly made due to long periods of time elapsing between a taxpayer making a voluntary disclosure and the ATO officer considering whether that disclosure would reduce any penalties when making a penalty decision at the end of an examination.
5.13 To prevent disagreements, the IGT considers that ATO officers should clearly inform taxpayers whether they agree that a full voluntary disclosure has been made at the time the taxpayer provides that information or promptly thereafter. Taxpayers could be informed in a number of ways, but any such communications should be confirmed in writing. A recommendation to this effect was made in a previous IGT review, Report into the Australian Taxation Office’s large business risk review and audit policies, procedures and practices.304 Although that review was limited to audits of large businesses, the IGT considers that this approach should be applied in all market segments and all disclosures eligible for a penalty reduction. The IGT considers that this approach should be documented in the relevant ATO ruling.
5.14 In addition, the ATO should improve its public guidance regarding the nature and level of information necessary to qualify for the voluntary disclosure penalty reductions. Without further guidance, a statement such as ‘everything reasonably necessary’305 may appear too vague and lead officers into error by thinking that more information needs to be provided by the taxpayer than is necessary.
5.15 Secondly, an inability to ascertain the commencement of audits for voluntary disclosure purposes may affect taxpayer compliance and perceptions of fairness as taxpayers may miss opportunities to avail themselves of the 80 per cent reduction in penalties.
5.16 Currently, the ATO provides a date by which voluntary disclosures may be made in its review and audit notification letters. Extracts of the relevant wording have been reproduced in Appendix 12.306 However, where an audit is preceded by a risk review, the ATO does not provide a date for voluntary disclosure purposes in its audit notification letters. The IGT is of the view that the ATO should provide the timeframes for voluntary disclosure purposes in all audit notification letters and the potential penalty reductions that may apply.
5.17 Thirdly, where a risk review becomes more than merely identifying and assessing risks, taxpayers may lose their opportunity to benefit from an 80 per cent reduction in penalties. This opportunity can be unfairly lost where prior notification of the change is not given. Accordingly, the IGT is of the view that the ATO could better inform taxpayers when an examination becomes one that is not ‘merely identifying and assessing risks’.
5.18 Fourthly, specific concerns have been raised by taxpayers, who have been subjected to real-time compliance activities, regarding when voluntary disclosures should be made. For example, the ATO has stated that it would accept voluntary disclosures during the finalisation of PCRs,307 however, it is unclear whether the Commissioner would apply the 20 per cent penalty reduction or exercise the discretion mentioned earlier to provide an 80 per cent penalty reduction. It is also unclear how such disclosures would be considered when applying penalties relating to taxpayer statements that do not give rise to shortfall amounts. The IGT is of the view that greater clarity on the application of the voluntary disclosure provisions in such circumstances is needed. Similarly more clarity is needed on whether disclosures made in Annual Compliance Arrangements and Advance Pricing Arrangements can be treated as voluntary disclosures during a subsequent audit.
5.19 Another difficulty arises where ATO officers require taxpayers to admit liability before accepting relevant disclosures as voluntary. In these circumstances, such admissions may hamper the ability of the taxpayer’s legal representative to argue a contrary position in subsequent external review activities.
5.20 The relevant ATO staff instructions make it clear that admissions of liability are not necessary for making voluntary disclosures.308 However, it appears that some ATO officers are not complying with these instructions. In the IGT’s view, one way to improve ATO officer compliance with these instructions would be to increase taxpayer awareness.
The IGT recommends that the ATO:
- amend its guidance material to ensure that the 80 per cent penalty reduction is applied when voluntary disclosures are made after a risk review but before the notification of an audit;
- require ATO officers to clearly communicate whether a voluntary disclosure has been accepted or not together with any applicable penalty rate reduction at the time, or promptly after, the disclosure is made;
- improve its public guidance on the nature and level of information necessary to qualify for voluntary disclosure penalty reductions;
- review all audit notification letters with a view to provide greater clarity as to the timeframes available to make voluntary disclosures and the potential penalty reductions that may apply;
- require ATO officers to inform taxpayers when an examination becomes one that is more than ‘merely identifying and assessing risks’ and specify any applicable penalty reduction rates for voluntary disclosure purposes;
- provide public guidance on the application of the voluntary disclosure provisions to real-time compliance activities, Annual Compliance Arrangements and Advance Pricing Arrangements; and
- improve taxpayer awareness that an admission of liability is not needed to access the penalty reductions.
Agree with recommendation 5.1(a)
The ATO will amend its guidance material on voluntary disclosures to:
- apply the 80% reduction in these circumstances,
- include specific examples to clarify the meaning of ‘notification of an audit’, including where there is a delay between a risk review being finalised and notification of an audit, and
describe where the 80% reduction may not apply, such as deliberate concealment of information in a risk review.
Agree in part with recommendation 5.1(b)
The ATO agrees to acknowledge receipt of voluntary disclosures either orally or in writing for all cases except those undertaken in a high volume environment.
Where further information is required to verify the correct application of the law and assessment of the shortfall amount, the ATO will notify taxpayers that a decision regarding the rate of any penalty reduction would be reserved until all information has been provided and examined.
Where the taxpayer has attempted to make a voluntary disclosure but has not provided information in the approved form, the ATO will continue with its existing practice to contact the taxpayer and give an opportunity to make a voluntary disclosure in the approved form.
Agree with recommendation 5.1(c), 5.1(d), 5.1(e), 5.1(f) and 5.1(g)
Penalty remission issues
5.21 Submissions considered that improved guidance on the ATO’s discretion to remit penalties was needed to address the following concerns:
- the ATO rarely exercising the discretion prior to a penalty being raised; and
- the ATO imposing lengthy, costly and inconsistent processes on taxpayers to obtain penalty remission.
5.22 The ATO has recently released Practice Statements that contain substantive guidance on the Commissioner’s remission discretion with respect to penalties for making false or misleading statements in PSLA 2012/4 and PSLA 2012/5.309 It has also issued PSLA 2011/30 relating to scheme penalties.310
5.23 PSLA 2012/5 states that tax officers must consider the question of remission in each case based on all the relevant facts and circumstances and having regard to the purpose of the provision.311 The following are matters the ATO considers relevant in approaching the issue of remission:
- 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.312
5.24 PSLA 2012/5 also contains a number of factors that are considered not to be relevant when determining whether to remit penalties. These irrelevant factors include the unrelated circumstances of the taxpayer or the tax agent, such as current illnesses after a statement was made and the taxpayer’s capacity to pay the penalty.313
5.25 Further, PSLA 2012/5 sets out the following examples of the circumstances in which the remission discretion could be exercised:
- the mechanical process of the law may otherwise result in an unjust outcome;314
- the taxpayer has taken reasonable care but is liable to a penalty because, for example, of the reckless actions of their registered agent (such that the safe harbour exemption does not apply);315
- double penalty may be avoided in the case of trustees/beneficiaries;316
- imposing multiple penalties would otherwise result in an unjust outcome;317 and
- there are mitigating circumstances. For example, a shortfall amount may represent an amount of tax deferred rather than permanently avoided.318
5.26 Another ATO practice statement, PSLA 2011/30 which addresses penalties relating to schemes, also refers to the remission discretion in section 298-20319 and provides additional guidance on the exercise of the remission discretion. The practice statement is framed in terms of three guiding principles being:
- so there is consistent treatment of penalty rates — the penalty rate is set by law and remission without just cause, arbitrarily or as a matter of course may compromise consistent treatment of penalty rates;
- where it is fair and reasonable to do so; or
- to treat entities in like circumstances consistently.320
5.27 The practice statement also states that ATO officers should consider whether the penalty outcome is harsh, within the framework of the Compliance Model and the Taxpayers’ Charter, having regard to whether:
- the taxpayer made a genuine attempt to comply with their tax obligations considering their personal circumstances, that is, they took all reasonable and sensible steps to avoid entering into a tax avoidance scheme; and
- the taxpayer has a good compliance history; or
- an unjust outcome results for the taxpayer as a result of imposition of the schemes penalty or if the penalty is not remitted.321
5.28 The law does not prescribe when the Commissioner should consider whether penalties should be remitted. However, the ATO requires officers to determine if remission is appropriate before notifying taxpayers of the liability to pay the penalty.322 The ATO’s internal guidance material also provides the following:
To finish the assessment process we make a remission decision, referencing any facts and evidence that support the decision and the appropriate policy document.323
5.29 The ATO expects any taxpayer submissions on the exercise of the remission discretion either to have been made during the audit process or as part of an objection to the imposition of penalties.324
5.30 It could be argued that PSLA 2012/5 discourages ATO officers from exercising the discretion to remit penalties as little guidance is provided with respect to the factors that should be considered with a limited number of specific examples. Furthermore, PSLA 2012/5 does not include a number of factors that should be considered and are listed in the relevant explanatory memorandum, such as a taxpayer’s particular circumstances and compliance history and tailoring the penalty to secure improvements in compliance behaviour.325
5.31 In contrast, a different practice statement, PSLA 2011/30, provides positive aims for the exercise of the discretion together with an analytical structure. PSLA 2011/30 also appears more consistent with the relevant explanatory memorandum as it requires ATO officers to consider:
- whether the taxpayer has a good compliance history;326
- whether a taxpayer made a genuine attempt;327
- how the taxpayer’s personal circumstances are relevant;328 and
- any relevant unjust outcome.329
5.32 In the IGT’s view, PSLA 2012/5 should be reviewed to provide analytical, structured and clearer guidance with examples to facilitate the exercise of the discretion in appropriate circumstances. Care should be taken to ensure that any additional guidance does not inadvertently result in a narrowing of the discretion.
5.33 Practically, situations may arise in an audit context where the taxpayer does not dispute the primary tax that is adjusted but seeks remission of a penalty. In these circumstances, the ATO requires the taxpayer to lodge a formal objection. Using such a process for penalty remission may impose unnecessary costs. The IGT considers that the ATO should provide a simplified process for such taxpayer-initiated requests for remission of penalties. This would be in keeping with the ATO’s previous work in moving towards a more differentiated approach to objection processing.330
The IGT recommends that the ATO review its public advice and guidance on the Commissioner’s penalty remission power to ensure that:
- similar to the approach adopted in PSLA 2011/30, the advice and guidance sets out an objective or purpose for the exercise of the discretion, includes both the positive and negative factors to be considered and provides an analytical structure with examples; and
- the advice and guidance sets out a simplified objection process by which taxpayers may seek remission.
The ATO agrees with recommendation 5.2(a)
The ATO agrees with recommendation 5.2(b)
The ATO will undertake a review of its existing objection processes, including the approved form, with a view to identifying opportunities to improve the taxpayer experience. The ATO notes that while there may be opportunities to further streamline processes, the information required by the taxpayer to enable a review of the remission decision would not change.
Better examples of the application of the law in particular circumstances
5.34 Stakeholders have also stressed the need for clarity of the ATO’s guidance with respect to specific areas and in particular have requested examples to be provided to demonstrate application of the law in more finely balanced circumstances. These specific areas include:
- the application of the reasonable care standard where tax advice was properly sought or where non-tax advice, such as valuations, was different to the ATO’s or was provided on immaterially different facts to those implemented;
- behaviour that falls significantly short of the standard of care, amounting to recklessness;
- penalty adjustments for treating the law as applying in an accepted way pursuant to section 284-224 of Schedule 1 to the TAA where the taxpayer relies on statements of general application;331 and
- the length of time the ATO considers is ‘reasonable’ for the purpose of applying PSLA 2007/11 Administrative treatment of taxpayers affected by announced but unenacted legislative measures which will apply retrospectively when enacted where a legislative proposal has encountered significant delays before enactment.
5.35 Voluntary compliance is engendered where taxpayers can easily identify and clearly understand what behaviours are expected of them, especially in circumstances involving finely balanced issues.
5.36 It could be argued that providing specific examples illustrating the ATO’s decisions on more finely balanced issues would address areas of uncertainty for taxpayers. However, care would need to be exercised in drawing analogies from such examples as subtle changes in facts may lead to different outcomes. Therefore, such guidance would need to provide a range of examples to provide a full picture.
5.37 The IGT considers that the effective implementation of recommendation 4.1 to provide public access to a database of all penalty decisions would provide taxpayers with actual examples in a range of circumstances and thereby address the above stakeholder concerns.
5.38 Furthermore, the concern relating to the application of reasonable care to the provision and reliance on valuation advice is an issue that the IGT will consider in his current review of valuation matters.
Consolidation of all materials
5.39 Stakeholders also expressed concern that significant time and effort is needed to determine taxpayers’ exposure to penalties as the relevant ATO advice and guidance is fragmented across a number of different documents, which are listed in Appendix 7.
5.40 In the IGT’s view, consolidating all publicly available advice and guidance on penalties in one location and providing public access to this consolidated material would greatly assist taxpayers to identify and understand what is expected of them and the context in which those expectations exist. Such material could be consolidated by linking the relevant material to a single electronic access point. The US Inland Revenue Service’s electronic Penalty Handbook provides an example of how such material may be consolidated and published.332
The IGT recommends that the ATO consolidates all publicly available advice and guidance on penalties in one location and provide public access to it.
The ATO agrees with recommendation 5.3
289 Or the Commissioner exercises his discretion to treat a voluntary disclosure made after being advised of the examination as if it had been made before being so advised; Taxation Administration Act 1953, sch 1, s 284-225(5).
290 Australian Taxation Office, Administrative penalties: voluntary disclosures, MT 2012/3, 11 July 2012, para 103.
291 Ibid, paras 48-49.
292 Ibid, para 51.
293 Ibid, para 49.
294 Ibid, para 74.
295 Taxation Administration Act 1953, sch 1, s284-255(5).
296 Above n.290, para 133 and para 152 (example 16).
297 Ibid, para 105.
298 Australian Taxation Office, Voluntary disclosures — approved form (24 August 2013).
299 Above n.42, para 150.
300 Ibid, para 147.
301 Above n.290, para 29.
302 Ibid, para 24 and 102.
303 Ibid, para 133.
304 Above n.176, p 156 (Recommendation 10.2).
305 Above n.290, para 105.
306 Australian Taxation Office, 'Active Compliance Steering Committee Submission Paper — Voluntary disclosure — standard notification paragraphs' (18 October 2012), internal ATO document.
307 Above n.152, p 43.
308 Above n.290, para 108; above n.31, para 1.127.
309 Above n.42, paras 155-180; above n.155.
310 Australian Taxation Office, Remission of administrative penalties relating to schemes imposed by subsection 284-145(1) of Schedule 1 to the Taxation Administration Act 1953, PSLA 2011/30, 15 December 2011.
311 Above n.42, para 156.
312 Above n.42, paras 156-157.
313 Ibid, paras 184 — 186.
314 Ibid, para 159.
315 Ibid, paras 161-163.
316 Ibid, paras 164-165.
317 Ibid, paras 166-168.
318 Ibid, paras 173-176.
319 Taxation Administration Act 1953, sch 1, s298-20.
320 Above n.310, para 15.
321 Ibid, para 17.
322 Above n.42, para 11.
323 Above n.284.
324 Australian Taxation Office communication to the Inspector-General of Taxation, 28 November 2013.
325 Above n.31, para 1.140
326 Above n.310, paras 37-38.
327 Ibid, paras 19-20 and 29.
328 Ibid, paras 30-33.
329 Ibid, paras 39-41.
330 Inspector-General of Taxation, Review into the underlying causes and the management of objections to Tax Office decisions (2009) p 7.
331 Taxation Administration Act 1953, sch 1, s284-224.
332 Internal Revenue Service, Introduction and Penalty Relief (25 November 2011).