The Inspector-General of Taxation’s (IGT) review into the Australian Taxation Office’s (ATO) administration of penalties was prompted by concerns raised by taxpayers, tax professionals and their representative bodies. These concerns related to the legislative framework of the penalties regime, the adequacy of ATO guidance material, the level of and reasons for unsustained penalties and the perceived use of penalties as leverage to influence primary tax disputes. The majority of these concerns focussed on penalties relating to statements that taxpayers make to the ATO to fulfil their tax obligations. The IGT has also considered the ATO’s collection and analysis of penalty information and related systems.
The IGT believes that the objective of the penalties regime to foster ‘voluntary compliance’ may be hindered by a lack of sufficient differentiation between a range of taxpayer behaviours, the inability to receive interest on money paid for unsustained penalties and the broad application of false or misleading statement penalties where no tax shortfall arises.
The IGT has made recommendation to Government to consider the above aspects of the penalty regime. The IGT has also noted that in doing so, it may be opportune for the Government to consider a broader review of the penalties regime, given the recommendations relating to penalties in earlier IGT reviews particularly the Review into improving the self assessment system.
Based on stakeholder concerns, the level of and reasons for unsustained penalties were a focal point of the review. The IGT has found that over the last three financial years, approximately 35 per cent of total penalties raised were later reduced. While adjustments of primary tax amounts may explain some of these reductions, a significant proportion (approximately 25 per cent of total penalties raised) appears to be due to unsustained penalty decisions. The review identified a number of underlying reasons including ATO officer capability to appropriately deal with facts and evidence, information not being provided to the ATO during audits and insufficient explanation of penalty decisions. The IGT has made a number of recommendations in this regard including that the ATO:
- ensure its officers engage effectively with taxpayers to collect the facts and evidence relevant to penalties at the time that they collect the same in relation to primary tax;
- develop a penalty decision making tool that provides officers with an analytical framework and assists them to collect all relevant evidence; and
- ensure ATO penalty decisions provide reasons that include the material facts and evidence, how the law was applied and an explanation of any disagreement with taxpayer contentions.
The use of penalties as leverage to influence primary tax disputes was another concern raised by stakeholders. While the ATO had made some changes to its processes to address such concerns, perceptions of leverage have persisted. The IGT has made recommendations aimed at addressing these perceptions, including that the ATO:
- only require taxpayers to pay penalty amounts after the dispute on the primary tax is resolved;
- delay discussion with taxpayers concerning any application of potential penalties until after any position papers are issued;
- clearly and concisely communicate to taxpayers the reasons for the ATO’s ability or inability to reduce penalties and primary tax during settlement negotiations; and
- publish more statistical information on the quantum of penalties raised and adjusted.
The review also identified opportunities to improve the clarity and practicality of specific aspects of the ATO’s penalty guidance and has made recommendations to:
- improve the guidance on voluntary disclosures and penalty remission;
- provide better examples of the law being applied to particular circumstances; and
- consolidate all publicly available penalty materials into a single location.
The ATO’s collection and analysis of penalty information were also identified by the IGT as an area requiring improvement. It was observed that the ATO was unable to precisely determine the level of unsustained penalty decisions, track changes to penalty decisions over the life of a taxpayer’s case or understand the reasons for penalty decisions being imposed and the characteristics of non-compliant taxpayers at an enterprise-wide level. The IGT considers that such information would improve the ATO’s understanding of the underlying reasons for taxpayer non-compliance and unsustained penalty decisions and enable the ATO to fine-tune its strategies to promote voluntary compliance. The IGT has made recommendation that the ATO standardise its information collection on penalties and undertake systematic analysis of such information. The ATO has only partly agreed to these recommendations, largely due to what it believes are resource constraints.
Another recommendation with which the ATO has disagreed in part relates to increasing transparency by providing public access to all penalty decisions and associated reasoning. The IGT understands that the disagreement is largely due to resource constraints and that the ATO has sought to address the transparency issue to some extent by publishing the results of its quality assurance processes which assess the correctness of penalty decisions.
Overall, the IGT has made ten recommendations including one directed to the Government. The ATO has agreed in whole, part or principle to all of the recommendations directed to it. The effective implementation of these agreed recommendations should result in significant and enduring benefits.