A.11.1 The source material for the description of the problems below is the minutes of the ATO's Nerve Centre meetings and material provided by the ATO and other Government departments. The Nerve Centre is chaired by the Second Commissioner of Taxation and comprises senior ATO officers.

A.11.2 This appendix comprises a graphic of the ATO's income tax processing system (reproduced on the next page) and a table containing descriptions of the identified problems and related public ATO communications.

Summary of main problems (up to 3 May 10)

Image of a chart giving a summary of main problems (up to 3 May 10).

View image enlarged

A.11.3 The number of the problem in the table below corresponds to the graphic on the previous page.

Summary of the main problems encountered (up to 3 May 2010), relevant ATO public communications and impacts on taxpayers and tax practitioners
Number of problem on graphic Description of problem Relevant public ATO communication of the issue and the impact on taxpayers and tax practitioners
1

Income tax returns in error queues

From 10 March 2010, the ATO was encountering errors in successfully inputting around 7000 income tax return forms onto ICP. No Siebel activity was created as a result and the system did not recognise that these returns had in fact been lodged. When tax practitioners and taxpayers called to check on the progress of their return, where those returns encountered these errors they were told by ATO staff that the system was showing these returns as 'not lodged'. The ATO later developed a database to allow ATO staff (such as call centre staff) to input a TFN and see if a return had been lodged for that TFN.

As at 16 April 2010, the number of income tax returns in error queues had grown to almost 9700, with more than 56 per cent being more than 30 days old. The majority of forms were not being manually re-keyed (as at 19 April -750 return forms were identified for manual keying) but were instead being 'replayed' once the root cause fixes were deployed.

As at 23 April, the number of returns in error queues had reduced to around 5000 after the ATO successfully input these returns onto ICP after replaying returns. This left around 500 of these returns more than 30 days old. The ATO identified that almost all of the remaining forms could be successfully replayed after the April release, with manual re-keying only needed of 450 returns.

As at 3 May 2010, only around 2200 of these returns were in error queues with around 200 being more than 30 days in the queue.

Related to this, on 19 April 2010, the ATO identified 19,500 returns that were processed twice in ICP. The ATO was aware that taxpayers and tax practitioners may call the ATO about this. The ATO scheduled to manually cancel around 8000 of these returns from 28 April. As at 3 May 2010 the ATO was investigating an appropriate solution for amendments and schedules.

Relevant ATO communications

No ATO communication in any general broadcast (such as at the Federal Parliament's Joint Committee of Public Accounts and Audit or Senate Economics Legislation Committee's Estimates hearings, in the media, in professional association newsletters/circulars or on the ATO website) explained to tax practitioners why returns which had been received by the ATO were classified by ICP as 'not lodged'.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

Only once ATO call centre staff had access to the newly developed database could they explain whether a return was received or not. This communication depended on taxpayers and tax practitioners initiating the communication.

Impact on taxpayers and tax practitioners

Up to the point in time at which call centres had access to this database, taxpayers and tax practitioners phoned to check on the progress of the return and were told the return was not lodged. Tax practitioners then needed to access their own records to confirm lodgement (e.g. the ELS validation receipts) and then call the ATO again to discuss the problem with ATO staff, only to be told that the matter had been 'escalated'. Taxpayers phoning the ATO to check on the progress of their return and told that the return was not lodged were left with the impression that tax practitioners had lied or were mistaken when they said they had lodged the return on the taxpayer's behalf. When taxpayers and tax practitioners were sure that the return was received by ATO (it's just that the ATO couldn't find it), their confidence was reduced in the ATO's administration.

This problem added to delays in issuing assessments and (for those expecting refunds) contributed to a reduction in expected cash flows.

2

Fatal Form Definition Facility (FDF) errors

From 19 March 2010, the ATO was aware of generic errors that prevented a form from processing. As a result the ICP system would list a return form as 'not lodged'. This error occurred in both automated and manual processes. Although the ATO had a workaround of waiting 24 hours and then trying again, an average of 20 new Infra issues were raised daily for persistent FDF errors. The ATO investigated the root cause and remediation work required.

On 28 April 2010, the ATO identified that a systems fix would address the majority of fatal FDF errors impacting manual processing. The ATO planned to re-key/re-submit all forms that encountered manual FDF errors, which was expected to commence week commencing 3 May 2010. This was dependent on the resolution and deployment verification of a number of Infras:

Infra 833214 — deployed, undergoing deployment verification

Infra 1174054 — scheduled for Wednesday 28 April

Infra 1170095 —scheduled date TBA

Infra 1185025 — scheduled for Thursday 6 May

Further analysis would be required for any FDF errored forms that were not resolved by the above fixes.

Relevant ATO communications

No ATO communication in any general broadcast explained to tax practitioners why returns which had been received by the ATO were classified by ICP as 'not lodged'.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

Only once ATO call centre staff had access to the newly developed database could they explain whether a return was received or not. This communication depended on taxpayers and tax practitioners initiating the communication.

Impact on taxpayers and tax practitioners

Taxpayers and tax practitioners phoning to check on the progress of the return were told the return was not lodged. Tax practitioners then needed to access their own records to confirm lodgement (e.g. the ELS validation receipts) and then call the ATO again to discuss the problem with ATO staff, only to be told that the matter had been 'escalated'. Taxpayers phoning the ATO to check on the progress of their return and told that the return was not lodged were left with the impression that tax practitioners lied or were mistaken when they said they had lodged the return. When externals were sure that the return was received by ATO (it's just that the ATO couldn't find it), their confidence was reduced in the ATO's administration.

This problem added to delays in issuing assessments and (for those expecting refunds) contributed to a reduction in expected cash flows.

3

ELS reporting for tax practitioners not available

Tax practitioners use Electronic Lodgement Service (ELS) reports to track EFT/lodgement/status of their clients to assist in the running of their business.

From 10 March 2010 (at the latest), none of the four ELS reports for tax practitioners were available (that is, the ELS (EFT) report, Solicited Client List, Client Statistics report, and the Unsolicited Due Lodgment reports). However, ELS legacy reporting was available, but it did not provide up to date client details and information.

From 15 March 2010, the ELS (EFT) report was available with a workaround and fixed on 22 March. From 29 March 2010, the ATO was aiming to fix the remaining 3 ELS reports as part of the April release update and have these fixes verified by 5 May and backlog of reports processed by 6 May.

However, as at 22 June 2010 tax practitioners reported to the IGT that they were still unable to get client lists through ELS (after waiting four days and then emailing ATO), and even then the lists were not accurate or up-to-date.

Relevant ATO communications

On 17 February 2010, an ATO communication to tax practitioners ('e-link') said that the ELS EFT reconciliation reports were delayed by 2 days and that the ATO was working to resolve this However, tax practitioners could use the tax agents' portal to request this information, so long as that request was limited.

On 25 February 2010, an ATO communication ('e-link') said that the ATO was working to restore the availability of the Solicited Client List reports and the Client Statistics reports.

On 30 March 2010, the ATO sent an email to tax practitioners saying that the Solicited Client List, Client Statistics report, and the Unsolicited Due Lodgment report were unavailable.

Impact on taxpayers and tax practitioners

Tax practitioners received inaccurate client lists, including receiving details for taxpayers who are not their clients as well as not receiving details of the taxpayers that are their clients. Tax practitioners are unable to deal with the ATO on behalf of these clients because the agent cannot establish that they act for the client when calling the ATO for those clients not on their lists. Tax practitioners also are unsure as to which clients have moved to another tax practitioner and therefore unsure whether to contact them further.

These problems are also related to problems with incorrectly addressed correspondence.

4

Problems with amendment processing

From January 2010, the ATO did not process debit amendments to income tax assessments, whether initiated by either the ATO or taxpayers. The ATO continued to stockpile these amendments. This was due to a number of problems with shortfall interest charge (SIC), tax shortfall penalty and amendment notices. During this time all amendments were held in the safety net, until they were released from 3 May 2010. On 8 April, the ATO aimed to manually remit SIC in cases that suspended after this date.

Problems were also experienced with credit amendments.

Differing problems required different types of resolutions.

1. Incorrect interest calculations

From 10 March 2010, the ATO started processing some taxpayer-initiated credit amendments (debit amendments were held in the safety net pending a fix of the continuing incorrect SIC calculations, and certain credit amendments that were suspended for certain reasons needed approval before being processed) with the knowledge that these credit amendments may underpay the interest on overpayments (IOP). The ATO decided that it was better to provide the refund and later follow up with an IOP payment later (possibly after TaxTime 10).

2. Incorrect effective dates

From 29 March 2010, the ATO became aware that both credit and debit amendments were not being processed with the correct effective dates for SIC calculation purposes. Fixes for these problems were deployed on 10 April and the effectiveness of the fix for debit amendments was verified on 28 April.

3. SIC calculation not appearing on Notices of Assessment (NOAs)

From 19 April 2010, the ATO considered a proposal to release all the returns in the SIC safety net as it considered that, although the calculation block did not appear on all NOAs, the SIC was calculated correctly and legal advice confirmed that the absence of dates did not compromise the notice. The ATO would release these returns by 4 May and a fix was scheduled for mid-May.

4. Second amendments

Related to this problem, on the 19 April 2010, the ATO identified problems with the processing of second amendments. It placed this work on hold. On 23 April, it identified the root cause as Higher Education Loan Account assessment debts which manifested as an incorrect income tax amendment. The ATO could not identify these cases until after they were received by the taxpayer and therefore decided that these cases would be 'managed post issue'.

5. WINCAS (a pre-existing ATO software program used to calculate liabilities for amendments)

As at 19 April, the ATO processed 3250 amendments as part of its ramp up strategy for ATO-initiated amendments, leaving 2200 amendments yet to be processed. A further 3700 amendments were to be released pending the above SIC remediation work. The ATO aimed to process all the backlog of WINCAS records (approx. 10,000) into ICP on the week of 29 April.

Relevant ATO communications

No ATO communication in any general broadcast explained that debit amendments were not being processed.

No ATO communications of the issue were made in ATO initiated targeted communications (such as emails, letters or outbound telephone calls).

Taxpayers and tax practitioners who initiated a communication (chasing up the progress of the amendment), were told that the problem had been 'escalated'. Taxpayers and tax practitioners made repeated calls checking on the progress to be told the same thing.

Impact on taxpayers and tax practitioners

Taxpayers expecting a refund from an amendment were forced to wait longer than anticipated for their refund, sometimes many months.

Tax practitioners incurred unproductive work in contacting the ATO repeatedly to check on the progress of amendments. If the ATO had initiated clear communication of this problem if and when it first became aware of it, then much of this adverse impact could have been reduced if not avoided.

5

Extended delays in resolving high risk refund (HRR) review items

A high risk refund (HRR) review item flags that a tax return has tripped certain risk filters. This requires an ATO officer to determine whether the return should be subject to further investigation. Refunds flagged as HRRs cannot be automatically issued to the taxpayer without ATO officer review, according to the ATO's business rules.

As at the time of the January 2010 shutdown, the ATO had 1,893 standard High Risk Refund cases toqether with a further 6,798 cases which were being withheld from completion due to potential fraud-related issues. Data regarding the age of the cases on hand is not readily available, however as the large majority were cases on hand as a result of fraud-related issues, it is likely that they had been on hand for some time whilst appropriate action was undertaken.

A number of problems are related to HRRs.

1. Client risk profiles

From 15 March 2010, the ATO identified that incorrect 'client risk profiles' values for a portion of the client base (client risk profile attributes were truncating) would mean that they would get their tax returns or refunds suspended more often. This would increase the potential workload of the ATO to manage refunds. The ATO fixed this problem on 24 March and verified the effectiveness of the fix on 19 April.

2. Delayed resolution of HRRs

Although the total number of review items triggering a HRR review was similar to the previous year, more than half of completed HRR review items took 21 days or more to finalise (a significantly higher proportion than in prior years).

As at 17 May 2010, 20,478 HRR review items had been completed, with 8177 review items in hand.

As at 6 June 2010, 8181 HRR review items were on hand. At the same time in 2009, only 20 per cent of these review items (1589) were less than 15 days old. Whereas at the same time in 2009, 5741 HRR review items were on hand, with 40 per cent less than 15 days old (2264). The ATO advised the IGT that the main reason for the increased number of aged HRR review items in 2010 was that some HRR review items also involved other problems that needed to be resolved before the HRR review item could be removed and the NOA issued — such as those returns which have had their processing suspended because of other problems with the system.

Relevant ATO communications

On 15 April 2010, the Second Commissioner published a general update on the ATO website saying:

'We currently have around 100,000 returns from individuals that we estimate are over 30 days old in our system ...

The reality is that some cases take longer to process and we would always hold some up for legitimate reasons.

For example, we would not release refunds that appeared to be fraudulent or where people may owe money to the Commonwealth, for example, other agencies such as Centrelink and the Child Support Agency. Sometimes, we also check information reported in tax returns where we find discrepancies or need more information on particular claims.

Of the estimated 100,000, approximately 30,000 returns are in this category.'

On 20 April 2010, the ATO published on its website a FAQ document which included the following wording:

'Will any refunds you check be delayed more than usual?

The ATO does delay some refunds so that it can verify they are payable. These checks continue before and after our systems shutdown to upgrade a system.

In order to prevent your refund being delayed, we may ask you to provide information quicker than usual. We may attempt to contact you by phone. But where we cannot obtain information supporting the refund, it may be amended or not issued, depending on the circumstances.'

On 22 April 2010, the ATO published a document on its website ('Income tax processing — current processing problems and how they might affect you'):

'Issue

We may have taken longer that expected to process your income tax return and issue a refund if you are entitled to one. These delays have been temporary, and we apologise for any inconvenience.

How this affects you

Refunds and assessments have progressively been issuing since mid-February, and many people have recently received refunds.

As usual some refunds take longer to issue if they involve complex tax affairs or we need to check the legitimacy of a claim for a refund. It can also take a few days from the time we issue a refund for it to reach its destination as it goes through the mailing and distribution process.'

On 22 April 2010, the ATO provided further information at the Federal Parliament's Joint Committee on Public Accounts and Audit hearing:

'Ms LEY — How many [income tax returns] are outside the service standard? If you would normally have some outside the service standards then maybe that is a number you could include.

Mr Butler — There are 108,000 outside the service standard today [this incorrect figure was later corrected to 188,000]...

CHAIR — How many of those can you attribute to a problem with your e-fixes?

Mr Butler— None. We know all these cases. We are working through them. They are all cases where there is a high-risk refund, there is an error in the return. Our fixes have not caused this problem.

Ms LEY — But they are delayed because of a backlog — would that be fair to say?

Mr Butler — We stockpiled returns for six weeks, as I mentioned, so we had 700,000 returns when we started to use the system again. We have caught up with most of those. They started the processing in the system by the end of February. As of today, there are 15,000 individual taxpayers who are waiting on a refund above 50 days in our system, but they are all cases where there is a good and valid reason the assessment has not gone out.'

On 1 June 2010 at the Senate Economics Estimates hearings the ATO said:

'Mr Butler — There is no backlog of returns because we have fewer returns on hand being scrutinised, as I said before, than at this time last year or the year before. We have not had returns sitting around waiting to go into the system to be processed since early March and we have met all our service standards since 1 April. So there is no backlog of returns right now. Of the returns we have on hand, some would be older than we normally would have at this time of year. But we are down now to individual tax returns. The number that were filed before early April that have not been processed is 6,000 returns. Of that, 3,500 returns are suspected fraud cases or other areas where we will not issue an assessment. So there are 2,500 turns on hand for individuals filed before the end of April that we cannot process. Largely we are waiting for more information from tax practitioners and accountants to finalise them. So there are very small numbers of returns on hand.'

Impact on taxpayers and tax practitioners

These delays in HRR cases contributed to delays in issuing NOAs. For those taxpayers and tax practitioners expecting refunds, this had the effect of reducing expected cash flows.

Tax practitioners incurred unproductive work in contacting the ATO repeatedly to check on the progress of their returns. If the ATO had initiated clear communication of this problem if and when it first became aware, then much of this adverse impact could have been reduced if not avoided.

Additionally, taxpayers and tax practitioners suffered the effects of reduced expected cash flows due to the contribution of this problem to delays.

As a result taxpayers and tax practitioners have reduced their confidence in the ATO's ability to administer the system.

6

Data transfer from the integrated core processing (ICP) system to the tax return database (TRDB) impacting on pay as you go (PAYG) instalments

Data from tax returns processed in the ICP system are 'replicated' on the TRDB. The PAYG system (a pre-existing system which is separate from the ICP system and the TRDB) uses the most recent tax return information from the TRDB to generate PAYG instalments notifications.

From 1 March 2010, the ATO was aware that the TRDB-PAYG interface was not running due to three main issues: the slowness of data being sent from the ICP system to the TRDB; the large number of income tax returns being rejected by the TRDB; and data quality issues in the income tax returns that have been loaded into the TRDB.

The ATO resolved some of the underlying problems by the time of the 31 March 2010 PAYG instalment generate date. However, remaining problems resulted in around 46,000 PAYG instalments being generated on 2008 income figures, even though those taxpayers had lodged their 2009 tax returns.

On 19 April, the ATO switched off the transfer of data from the ICP system to the TRDB after it identified data issues. The impacts of these issues included incorrect PAYG instalment rates on Activity Statements (5324 April 2010 Activity Statements were processed on 12 April using out-of-date TRDB data). From 28 April, the transfer functionality from the ICP system to the TRDB was switched on, but the transfer functionality from the TRDB to the ICP system was switched off.

The ATO decided to verify data before the June 2010 generate date and to deploy fixes before TaxTime 10.

The transfer of data from the ICP system to TRDB also affected other areas of the ATO, including:

  • Pre-fill for e-Tax and tax agent portals read from the TRDB. There was a potential for forms to be completed incorrectly.
  • STAC (a pre-existing system) displayed incorrect or missing tax return form data. There was a potential for ATO staff to provide incorrect information to taxpayers and tax practitioners.
  • Revenue reporting was unable to provide analysis of high level revenue collection information received from the ATO's Revenue Analysis Branch as required.
  • Extracts for Centrelink were compromised. There was a risk of not meeting the 27 April 2010 deadline for inputting the data required for the next scheduled Data Matching Agency cycle with Centrelink, Veterans Affairs and the Families Assistance Office.

Relevant ATO communications

On 15 April 2010, the ATO published a facts sheet on its website saying (amongst other things),

'Check your PAYG instalment rate or amount

If you are affected by an income tax return processing delay, the PAYG instalment rate or amount on your Quarter 2 or Quarter 3 activity statement may still be based on your income tax assessment for the previous income year and will remain so until your current return is processed.

In the interim, if you think the amount or rate we have calculated will mean you would pay more (or less) than your expected tax for the current income year, you may choose to vary your PAYG instalment rate or amount.

You will then use the updated amount or rate for the remaining quarterly instalments in the income year, unless you vary again.

A guide on how to vary your PAYG instalments is available on our website.'

The ATO also sent out this information to tax practitioners as part of the mail out of Activity Statements.

Impact on taxpayers and tax practitioners

A significant number of taxpayers received PAYG instalment amounts based on 2008 income amounts. Taxpayers and their representatives incurred unnecessary expense in contacting the ATO to understand the basis for the ATO-notified PAYG instalment amount. It should be noted that any inaccurate PAYG instalment amount notified by the ATO could be corrected by taxpayers lodging a PAYG instalment variation. If the taxpayer variation underestimates the actual amount for the financial year by more than 15 per cent they are liable for a penalty. Taxpayers would then incur the expense of estimating the PAYG instalment amount and preparing and lodging a variation with the ATO, even though the ATO was in possession of the information to correctly calculate these amounts.

7

Low income tax offset and non residents

Under the tax laws, non-residents are not entitled to the low income tax offset (LITO). From 29 March 2010, the ATO became aware that the ICP system was holding around 17,000 non-resident tax returns in suspense and when the suspense was released the return had the LITO applied. The reason was that the correction of the suspense changed the client to a non-resident, however the LITO calculated previously was not reset. Although this problem was fixed on 12 April, the ATO did not release these returns from suspense until after the April release update (around 28 April).

Relevant ATO communications

No ATO communication in any general broadcast explained why these types of returns were being delayed.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

There is no evidence that ATO call centre staff were able to explain the reasons for delays of these types of returns if these taxpayers or their representatives called to ask why these returns had been delayed.

Impact on taxpayers and tax practitioners

These delays in non-resident LITO cases contributed to delays in issuing NOAs. For those tax practitioners and taxpayers expecting refunds, this had the effect of reducing expected cash flows.

8

Payment greater than liability review item

A payment greater than liability review item is designed to ensure that the ATO does not refund an overpayment that is subsequently dishonoured. The ATO intended that the review item should exist for three days after the payment is made, then automatically close so that the funds could be released.

On 19 April 2010, the ATO became aware that the automatic closing of the review item was not occurring and refunds were being held indefinitely.

As at 19 April, there were around 605,000 review items holding $371 million dollars; with the largest refund amounting to around $203 million, although around 500,000 of affected taxpayers had refunds of less than 50 cents.

The ATO proposed to automatically release on 28 April those review items that were more than three days old and involved a refund of less than $20,000 (allowing the ATO to review large dollar value items before releasing them) and greater than 50 cents (to prevent performance issues expected from 500,000 records).

A data fix was partially deployed on 19 April, but no returns were issued as a result. On 28 April, the ATO changed the criteria for those returns to be released to those which had an absence of a lodgement obligation. This would release about 27,000 returns with payments totalling around $240 million, of which most would be offset by other debts. The ATO proposed to run regular data fixes until a permanent fix was deployed.

This release strategy was refined by 3 May, to divide the affected review items into three groups:

Group 1 — non-payment credits incorrectly triggering this review item — as at 3 May 115 were still remaining;

Group 2 — actual payments that were more than the liability — the ATO intended to release these with some conditions to guard against refunding pre-payments (16,216 review items) and tentatively scheduled the release for 4 May; and

Group 3 — review items on debit cases-the ATO intended to release on 3 May all of these cases as a lower priority clean-up as this review item did not affect debit balance processing (more than 450,000 review items).

The ATO proposed to consider pre-payments where it had received a payment but not yet the form, to ensure that the form had not been submitted but was stuck in error queues or suspense.

Relevant ATO communications

No ATO communication in any general broadcast explained to taxpayers or tax practitioners why these types of credits were being held more than three days.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

Impact on taxpayers and tax practitioners

For those taxpayers and tax practitioners expecting refunds, this had the effect of reducing expected cash flows.

9

Delays with assigning new tax file numbers (TFNs) where feared compromised

The ATO will not issue a NOA if the TFN is suspected to have been compromised (such as someone using a TFN that legitimately belongs to another taxpayer). In these circumstances, under the pre-existing systems, there have been extended delays in assigning a new TFN to people. The ATO intended to build a single back-end register, which would help to reduce timeframes. The ATO did not complete the build of the single back-end register. Approximately 2300 TFNs were thought to be compromised.

Relevant ATO communications

The ATO initiated an outbound telephone campaign to contact all affected taxpayers between 21 April 2010 and 18 May 2010. The ATO advises that a total of 2377 calls were made to both individuals (1468) and tax agents (909) resulting in 1947 successful contacts. Clients were advised that we were:

'working hard to resolve these problems and expect to begin [sic] As a result of these delays the ATO has put in place a number of safeguards to ensure the privacy and protection of your personal tax information.

These safeguards prevent the automatic issuing of assessments and activity on your account until a new TFN has been issued.

Note: In some circumstances we still have the ability to manually undertaken activity on your account following appropriate verification processes.

Until the ATO advises you of your new TFN you may still use the existing TFN for any normal purpose such as completing a TFN declaration or opening a Bank account.

When your TFN is replaced, you will need to quote your new TFN to any institution to which you have previously quoted your TFN, for example, investment bodies, employers, Centrelink, Department of Veterans Affairs (DVA) and superannuation funds Inform the client that the ATO apologises for the delay being experienced in issuing the new TFN."

With the client's permission, operatives worked through a few questions in order to reduce any further inconvenience, such as delays with lodgment or processing of an Income Tax Return

Impact on taxpayers and tax practitioners

These delays in compromised TFN cases contributed to delays in issuing NOAs. For those taxpayers and tax practitioners expecting refunds, this had the effect of reducing expected cash flows.

10

Statement of Account (SOA)/Notice of Assessment (NOA) incorrect Electronic Funds transfer (EFT)/cheque advice

On 30 March 2010, the ATO became aware that NOAs were being issued to taxpayers advising them that refunds were sent to taxpayers' nominated financial institution. However, the ATO had no EFT details for the taxpayer on file and the taxpayer had not asked the refund to be made by EFT. SOAs had also issued with no cheque attached but advised taxpayers that a refund cheque was sent. Around 5800 tax agents representing around 17,000 taxpayers were affected. The ATO started receiving calls from taxpayers and their representatives.

On 14 April, the ATO cancelled the refunds and re-issued the NOAs and SOAs. The ATO deployed an e-fix on 16 April. As at 23 April, it was awaiting verification of the effective implementation of the e-fix, as almost all re-triggered refunds were with the printers, with the remaining 300 still working their way through the ATO's systems. Around 40 still required manual intervention. As at 30 April, 17,608 (98.3 per cent) of the 17,906 affected returns were with the printers. The remainder of the returns were progressing through the ATO's refunder system (a pre-existing legacy system) as they had to be re-processed for a second time.

The ATO advises that it completed the payment of interest to those who are known to be owed greater than $50 in September 2010, as agreed through consultation with tax practitioners and their professional bodies. Amounts less than $50 have not yet been posted to accounts; the proposed course of action is to post the credits to the accounts and then write them off. The credits will then be re-raised when future action occurs on the account. This process is to stop small dollar amounts being released/issued to tax practitioners when they are posted to the account. The issue affects some 14,000 clients; 99 percent are represented by tax practitioners. The average amount of the refund to be paid is $4.

Relevant ATO communications

On 6 April 2010, the ATO sent an email to tax practitioners saying:

'Notices of assessment incorrectly advising refunds paid to bank accounts

Some of your clients may have recently received a notice of assessment which advised their refund was paid electronically to their nominated bank account in instances where they have not provided bank account details.

We have identified the clients affected and will issue their refund via cheque.

Your clients can expect to receive their refund cheque from 12 April 2010.'

Impact on taxpayers and tax practitioners

The ATO communicated directly with tax practitioners via email within one week of becoming aware of the problem. This communication would have helped tax practitioners to avoid unnecessarily contacting the ATO until after 12 April. It is unknown how many tax practitioners and taxpayers called the ATO before this communication to find out what happened. Additionally, the ATO did not update its website or otherwise publicly advise taxpayers. It is also unknown how many of these taxpayers were self-lodgers and had to call the ATO to find out what happened.

ATO call centre staff had scripting to explain the errors and resulting delays. However, these explanations depended on externals initiating the communication.

It should also be noted that the dates of the NOAs that did issue later were not changed to reflect the later date of issue. Although tax practitioners may have been able to explain to their clients the reasons for the delay on the basis of the email, it may have contributed to adverse impressions of their representatives.

11

Notices of Assessment (NOAs) issued but Statements of Account (SOAs) with attached cheques were cancelled

Under the new system, the ATO will issue a NOA and a SOA where a refund is due. If the taxpayer is not paid through EFT then a cheque is attached to the SOA.

On 8 April 2010, the ATO became aware that NOAs were issued which advised taxpayers that their cheque was attached to the SOA, however, the ICP system had cancelled the SOA and therefore no cheque was issued (note that this did not affect those taxpayers electing to have the refund sent to their bank account via EFT).

This problem affected over 140,000 taxpayers, cancelling around $569 million worth of refund cheques. When ATO staff accessed the system, the systems indicated that the cheque had in fact been sent. The ATO became aware that this was a problem on 8 April.

The cause for this problem was that the e-fix for another problem had unintended consequences (that is, Infra 1175974 to fully update GIC before issuing the refund (before calling PCB) combined with the fix to reduce the volume of monthly statements sent to agents). This problem caused the ATO to put on hold its accounting batch processes for these types of taxpayers until 16 April, with all being sent to Australia Post by 19 April.

On 4 May, the ATO resolved this problem by resetting the SOA back to 'approved status' in the system and issued the SOAs with cheques attached.

The ATO also obtained legal advice that the Interest on Overpayments (IOP) was payable. The ATO advises that it completed the payment of interest to those who are known to be owed greater than $50 in September 2010, as agreed through consultation with tax practitioners and their professional bodies. Amounts less than $50 have not yet been posted to accounts; the proposed course of action is to post the credits onto the accounts and then write them off. The credits will then be re-raised when future action occurs on the account. This process is to stop small dollar amounts being released/issued to agents when they are posted to the account.

Relevant ATO communications

On 14 April 2010 the ATO sent an email to tax practitioners saying:

'Refund cheque delays

We have identified an error where some of your clients may have received a notice of assessment without a corresponding statement of account or refund cheque. Due to this error, approximately 140,000 cheques were not printed.

We are fixing the problem and the cheques should be with your clients by the end of next week.'

On 15 April 2010, the Second Commissioner published a general update on the ATO website saying:

'Last week we noticed an increase in calls from people who received a notice of assessment and were entitled to a refund, but the cheque was not included. Unfortunately, approximately 140,000 cheques were not printed. They are now being printed and will be with Australia Post by Monday 19 April.'

On 20 April 2010, the Second Commissioner published a general update on the ATO website saying:

'Will interest be paid on overdue refunds?

Yes, it's a normal part of our operations no matter what the situation. If we take more than 30 days after your income tax return is lodged to issue a notice of assessment and that assessment entitles you to a refund of tax, we will pay interest.

Interest is paid for the period beginning from the 30th day after the day on which we received the return and ends on the day the notice of assessment is issued.

Where such interest is payable, people do not need to ask for it — we will calculate the interest. Interest will usually be paid with the delayed refund.

The interest is paid at the prescribed rate which is currently 3.95% (1 January 2010 to 31 March 2010) and 4.16% (1 April 2010 to 30 June 2010).

How do I know whether I am entitled to interest on my tax refund and when will it be paid?

Many taxpayers whose refund was delayed by our recent processing problems will be paid interest.

You do not need to apply for this interest payment. We are currently working out who was affected and the quickest, most cost-efficient way of calculating and paying you the interest.

We decided to make the interest payments after refunds issued, to further reduce any delays in paying the bulk of the refund to taxpayers.'

On 22 April 2010 at the ATO gave evidence at the Federal Parliament's Joint Committee for Public Accounts and Audit hearing. The ATO said:

'Mr Butler — There were 140,000 cheques that were not printed. We identified that Friday the week before last and then we moved during that particular week, last week, to understand that fully. By Friday of last week we had cheques already with the printers to be printed and sent to taxpayers. By Monday of this week the final batch of those cheques were with the printers. So during this week those cheques will go out.

CHAIR — And when does that error date from? When would the first tax assessment have gone out without a refund included?

Mr Butler — That varied. There were some that would have occurred literally the day before we found the problem and some back to late March. We had a period where we could not process returns and 22 March we started processing again. These were not all taxpayers; they were just taxpayers in a particular situation where they had what is called general interest charge on their account. Other refunds were absolutely going through.

CHAIR — So the ones that did not have any deviation from a normal refund there was no problem?

Mr Butler — That is right.

CHAIR — But you have now identified that it is a specific type of taxpayer who has been caught up in this, as you say, glitch. The other question was how many taxpayers have been delayed by this failure in the system to receive their return?

Mr Butler — We do not see it as a failure in the system. There are two delays. 1 can explain. The first one, as 1 just explained, was to do with the 140,000 cheques.'

On 1 June 2010 at Senate Estimates, the Commissioner said (amongst other things):

'There was a dip in our service standards up to 1 April 2010 much of which was unavoidable. Two glitches with the system delayed some returns and refunds in March 2010.'

On 1 June 2010 at Senate Estimates, the Second Commissioner said (amongst other things):

As the commissioner said, since 1 April we have met all of our service standards in processing returns and as of the end of May we had many fewer returns on hand being scrutinised than in May last year or May the year before. So we did have the two glitches that the commissioner referred to, but essentially we foreshadowed a delay, had a delay and caught up. Since 1 April all new returns have been processed in accordance with the service standards.'

Impact on taxpayers and tax practitioners

The ATO communicated directly with tax practitioners via email within one week of becoming aware of the problem. This communication would have helped tax practitioners to avoid unnecessarily contacting the ATO until after 14 April. It is unknown how many tax practitioners and taxpayers called the ATO before this communication to find out what happened.

Most of the re-triggered refunds were sent to Australia Post on 19 April. Additionally, The ATO did not update its website or otherwise publicly advise taxpayers. It is also unknown how many of these taxpayers were self-lodgers and had to call the ATO to find out what happened.

ATO call centre staff had scripting to explain the errors and resulting delays. However, these explanations depended on externals initiating the communication.

It should also be noted that the dates of the NOAs that did issue later were not changed to reflect the later date of issue. Although tax practitioners may have been able to explain to their clients the reasons for the delay on the basis of the email, it may have contributed to adverse impressions of their representatives.

12

Taxable income on the Notice of Assessment (NOA) incorrectly displayed a zero (the 'result of this notice' calculation is correct)

All NOAs printed on the 9 March 2010 displayed a zero as the taxable income. The ATO identified this during its correspondence verification process and believes that no such NOAs were issued to taxpayers. The ATO computer systems recorded the correct taxable income on the account but the figure printed on the NOA was wrong.

The ATO stopped all accounting batch processes. This meant that no NOAs were issued. Around 160,000 NOAs were affected. The reasons for the problem stemmed from an e-fix applied in early March 2010 — the e-fix applied to Infra 1179379. Fixes were required for already assessed NOAs as well as those in the process of being assessed (that is, those processed by the ICP system before 2am on 5 March but had not gone through the NOA batch).

From 22 March, the ATO began progressively re-processing and issuing NOAs. Further e-fixes were required, but by 29 March the ATO considered that normal processing had resumed. However, the ATO encountered another problem and by 28 April it had stopped around 13,200 NOAs from issuing to taxpayers. The ATO released around 5000 of these after review and the remaining required another data fix prior to their release.

By 3 May, the ATO had decided that the remediation plan was to pay Interest on Overpayments (IOP) for around 70,000 delayed refunds. The ATO advises that it completed the payment of interest to those who are known to be owed greater than $50 in September 2010, as agreed through consultation with tax practitioners and their professional bodies. Amounts less than $50 have not yet been posted onto accounts; the proposed course of action is to post the credits onto the accounts and then write them off. The credits will then be re-raised when future action occurs on the account. This process is to stop small dollar amounts being released/issued to agents when they are posted to the account.

On 3 May, the ATO also identified that generic forms continued to generate NOAs with zero taxable income. The ATO scheduled to fix this on 7 May.

Relevant ATO communications

On 15 March 2010, the Second Commissioner issued a general update which included the following wording:

At our last update on 2 March 2010, we were on track to issue the remaining stockpiled refunds and assessments for income tax returns lodged in February by the end of last week.

Last week we experienced some minor problems which have delayed us issuing some of those remaining stockpiled refunds and assessments while we ensure the integrity of our data ...

We have fixed these minor problems and can start releasing most of these refunds and assessments from today (with the exception of assessments involving non-resident withholding tax).'

On 29 March 2010, the Second Commissioner issued a general update which included the following wording:

'What has happened over the last two to three weeks?

We had largely caught up with the backlog of returns by the end of February, however on 9 March we discovered a problem with the data in some notices of assessment which had been printed but not sent to taxpayers. Unfortunately, this meant we could not send anything for printing and posting until we fixed the problem.

It took us longer than expected to fix the problem and we recommenced sending notices of assessments to be printed and posted on Monday 22 March.'

On 22 April 2010, at the Federal Parliament's Joint Committee for Public Accounts and Audit, the ATO gave the following evidence:

'Mr Butler — Yes. So on 9 March we identified an issue that unfortunately did take us longer than we thought — it took us almost two weeks to fix that and be very confident that it was not going to occur again.

CHAIR — Why did it take two weeks?

Mr Butler — It was complex. It was difficult. We had returns part way through the system. We had to back them out, put the fix in place and thoroughly test that it was not going to cause any more problems. We told the community about that particular issue on 15 March, on our online update — that there was this problem which delayed us. We resumed processing on 23 March ...

Mr Butler — We have been quite overt from early March about what we would do. We actually caught up with the processing at the end of February. So we were very pleased, but we had this one problem and lost two weeks ...

Mr D'Ascenzo — To the extent that we have now found ourselves with unanticipated extra work because of the two-week extra delay that occurred, we have been putting on new staff to push that through. At the earlier point in time, we had not anticipated the fact that we would have the glitch that Mr Butler raised: one of our normal e-fixes impacted on what was going through the system. We had to black out all the systems and that added an unavoidable two weeks to what was already a planned process.

Ms LEY — Which two weeks?

Mr Butler — From 9 March to 22 March.'

At the 1 June 2010 Senate Estimates hearing, the ATO gave the following evidence:

Mr D'Ascenzo — ... There was a dip in our service standards up to 1 April 2010 much of which was unavoidable. Two glitches with the system delayed some returns and refunds in March 2010 ...

Mr Butler — As the commissioner said, since 1 April we have met all of our service standards in processing returns and as of the end of May we had many fewer returns on hand being scrutinised than in May last year or May the year before. So we did have the two glitches that the commissioner referred to, but essentially we foreshadowed a delay, had a delay and caught up. Since 1 April all new returns have been processed in accordance with the service standards.

Impact on taxpayers and tax practitioners

The ATO communicated directly with tax practitioners via email within one week of becoming aware of the problem. This communication would have helped tax practitioners to avoid unnecessarily contacting the ATO until after 18 March. It is unknown how many tax practitioners and taxpayers called the ATO before this communication to find out what happened.

As the ATO caught up on processing by 29 March, it is also unknown how many tax practitioners contacted the ATO during the period of 18 March to 2 April (allowing three days for postage). Additionally, The ATO did not update its website or otherwise publicly advise taxpayers. It is also unknown how many of these taxpayers were self-lodgers and had to call the ATO to find out what happened.

ATO call centre staff had scripting to explain the errors and resulting delays. However, these explanations depended on externals initiating the communication.

It should also be noted that the dates of the NOAs that did issue later were not changed to reflect the later date of issue. Although tax practitioners may have been able to explain to their clients the reasons for the delay on the basis of the email, it may have contributed to adverse impressions of their representatives.

There is also no evidence that the ATO alerted taxpayers or tax practitioners to the re-occurrence of the problems on 28 April or 5 May.

13

Higher Education Loan Accounts (HELA) correspondence issues

The ATO notifies those taxpayers with a Higher Education Loan Program (HELP) or Student Financial Supplement Scheme (SFSS) debt of their liability on 1 June each year where there has been activity on their account in the past 15 months. On 1 June indexation is applied to the balance outstanding. The ATO estimated that around 1.6 million taxpayers have such a debt and that it would generate a SOA for around 1.4 million of these taxpayers.

From 14 April 2010, the ATO identified problems and did not issue any HELA correspondence. It directed this correspondence to a dummy printer, pending resolution of the following issues.

1. 'EAI' and Forms

Forms for second half year debts were posting to the wrong period and HELP debts were suspended as a result. This resulted in incorrect data placed on the taxpayer record, and incorrect reporting to the Department of Education, Employment and Workplace Relations. The consequences were that any individual income tax returns and amendments processed for any income year between the income tax release deployment and 1 June would calculate the incorrect collectible HELP debt and raise a higher compulsory repayment. Also, the incorrect indexation calculated on 1 June would be applied. By 28 April, the ATO scheduled a fix to this error for 7 May. It estimated that around 500,000 new debts received could then be loaded, which the ATO considered must be done before 1 June.

2. Indexation

There were a number of problems with indexation relating to its calculation, performance, indexation start dates, SOA selection, HELP/SFSS correspondence address hierarchies, including: Infra 1181178 — Incorrect date used to calculate indexation and bonuses, resulting in accounts with a nil balance to be reactivated and placed in debt incorrectly; Infra 1180191 Backdated bonus calculations pre-2005 is incorrect; Infra 1203141 Bonus not applied in all <$500 situations; Infra 1170412 Indexation rounding is not correct in all cases; Infra 1170436 Indexation removing small credits; Infra 1189197 HELP/SFSS correspondence uses incorrect address hierarchy; Infra 1214983 Increase 'P&l batch' to 20 threads; Infra 1215013 Change P&l indexation selection to just the 2.4M select clients; Infra 222168 SOA trigger in Post Transaction; Infra 1181178 Change Indexation — does not calculate from the beginning of the account on converted records. The ATO advises that these problems had no impact on tax agents or taxpayers.

The ATO planned to deploy fixes for these problems over the 25 April to 12 May period.

3. Bonus payments

Bonus payments were not being applied under certain conditions: Infra 1190815 Bonus not applied on partial payments/transfer in to HELP accounts; 1193036 Bonus not applied when two payments to different accounts occur on the same day.

As at 3 May, the ATO was building a fix to one of these problems and had completed the fix for the other.

4. Individual income tax return form processing

On 3 May 2010, the ATO identified problems with a number of these assessments that were processed with incorrect calculations for HELP/SFSS. Notices were not being directed to the dummy printer as they were not HELA specific. The ATO intended to identify the impacted taxpayers and re-issue the correct calculations. However, this depended on resolving multiple Infras, which the ATO had scheduled for 18 May.

5. Other issues

The monthly General Interest Charge (GIC) run was triggering indexation and production of the End of Year SOA for HELP and SFSS clients every month. However, indexation was only to be triggered annually on 1 June. The ATO was seeking to implement a fix before the first GIC monthly run.

Relevant ATO communications

No ATO communication in any general broadcast explained to taxpayers or tax practitioners why these errors were occurring.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

There is no evidence that ATO call centre staff were able to explain the reasons for these errors if these taxpayers' representatives called to ask why these errors had occurred.

Impact on taxpayers and tax practitioners

Taxpayers and tax practitioners suffered expenses in contacting the ATO to resolve the problem.

14

Problems with Child Support Agency (CSA) data exchange

Exchange of data between the ATO and the CSA is a multi-step process.

One of the main aims of the data exchange is to enable the sharing of account information for the purposes of offsetting debts between the ATO and CSA and providing income details for child support purposes. There are inbound and outbound data processing components that support these processes. Generally these are: the file that the CSA provides to the ATO indicating clients of interest (the Client of Interest File); the file that the ATO sends to the CSA indicating that a client of interest has a refund (it should be noted that the ATO holds these clients' returns until it receives a response from the CSA in relation to these clients); the file that the CSA sends to the ATO stating that the CSA would like to determine whether some of the refund could be garnished; the file that the ATO sends to the CSA setting out the clients' refunds garnished and the relevant amounts (reconciliation file); the file that the ATO sends the CSA setting out the income of the clients of interest.

Since 25 January 2010, the ATO and CSA experienced problems.

Clients of Interest

Under the ATO's pre-existing systems, the CSA uploading of this file was largely automated and was usually completed overnight. However, under the new systems, the CSA experienced problems in correctly loading records onto their system because of formatting errors in the income tax return transactions sent to the CSA. Some records also went missing in the transfer of data. As a result of these problems, the CSA had to manually input these records onto its system — on average 400 per week (compared with five per month under the ATO's pre-existing systems). Also, due to the substantial increase in ATO manually processed returns (under its post-deployment mitigation strategy of manually processing priority returns) this substantially increased the amount of manual work required by the CSA. This work held up approximately 20,000 income tax-related refunds and 7000 BAS refunds. The CSA estimates that, at its peak, this manual process added 3-4 weeks to the processing of their clients' tax returns. The CSA estimated that it required 12 extra staff to manually remedy these problems.

Incoming CSA data

The ATO also experienced a number of problems in its computer systems with incoming CSA data, meaning that the ATO may not be providing some CSA cases enough or all of the credit to pay off some or all of their CSA debt. The CSA estimated that the ATO released 300-400 refunds which should have been garnished. The CSA must now compensate the CSA client and recover this cost.

From 15 March the ATO system was capable of processing all inbound data from CSA. However, it was unable to action offsets between ATO and CSA, resulting in the holding of refunds where a potential offset existed.

After discussions with the CSA, the ATO implemented a twice weekly exchange of data (a daily process not achievable given the manual intervention required for outstanding systems issues) and run its refunder (a pre-existing legacy system) and Process Credit Balance (PCB) systems every day.

TaxTime 10 problems

Also, as a result of new data fields inserted in the TaxTimelO changes, the ATO and CSA systems 'did not talk to each other'. This meant that post-assessment taxable income data was not being received by the CSA in real time. This affected the processing of CSA assessments for some of its clients. The CSA considered that because of the risk of incorrect CSA assessment it needed to manually refresh the taxable income data for all of its clients. This problem was scheduled to be fixed in September 2010.

Reconciliation data

The CSA also experienced problems with reconciling the garnishee data from the ATO. The ATO had garnished money from the paying parent's income tax refund, but the custodial parent did not receive that money as the CSA was unable to identify the taxpayer concerned. This problem involves around $2 million of garnished amounts and averaged around 10 CSA complaints a week, with some involving threats of violence. The ATO advised that it could implement a fix which would resolve around half of the cases.

Point in time figures

On 7 April, approximately 24,000 refunds were held (together with Centrelink held refunds. The ATO estimated that it held around $25 million in refunds at this stage, with around $6.5 million of this amount waiting more than seven days for the CSA/Centrelink offsetting to occur (increasing to $7.8 million as at 19 April), with 14,000 expected to be released after a successful fix and the remainder to be picked up in a weekly 'batch harness'.

As at 13 April 2010, around 15,500 cases involving around $30 million of refunds were held, comprising the following:

Ready for ATO to send to CSA to request whether offsetting should occur: 214 cases, totalling refunds of $491,000

Awaiting CSA advice whether offsetting should occur: 8994 totalling $23,759,000

Advice received from CSA that offsetting should occur not yet processed: 6177 cases requesting $5,789,000 offsets

As at 23 April, the ATO was holding around $16.6 million in refunds pending the CSA's offsetting. Around $6 million of this amount was delayed due to known issues, with the rest progressing through as 'business as usual'. As at 28 April this amount increased to holding around $20.7 million in refunds pending the CSA's offsetting. Around $7.6 million of this amount was delayed due to known issues (see below), with the rest progressing through as 'business as usual'. As at 3 May, this amount the ATO was holding increased again to around $24.3 million in refunds pending the CSA's offsetting. However, only around $0.5 million of this amount was delayed due to known issues (see below), with the rest progressing through as 'business as usual'.

The following specific action was taken.

INBOUND PROCESSING

1. Client of Interest Input file

As at 23 April, this file was being processed daily. However, by 28 April this was being processed tri-weekly.

OUTBOUND PROCESSING

2. Accounting Batch Harness workaround

From 14 April, the ATO resolved further problems so that it could operate its garnishee batch every day and handed it over to the ICP Accounting Ops area — 20 per cent of cases picked up by 'business as usual' processing and the remaining picked up by the 'weekly Accounting Batch Harness Workaround' (which delayed these returns by up to one week). The ATO decided to continue with this workaround because implementing a permanent fix for the problem was too risky before TaxTime 10 had finished. However, as at 19 April this daily batch was still not run as the ATO was awaiting confirmation from the CSA that a particular fix was successful.

From 23 April this workaround was processed weekly. The oldest backlog at any given time was five days which was then cleared when the weekly Accounting Batch Harness was run. The ATO planned a permanent fix for the August/September release update and a medium-term fix to be deployed before the TaxTimelO code freeze.

3. CSA 'TRIPS' File

As at 23 April, this file was being processed daily. However, by 28 April this was being processed tri-weekly.

4. 'PARV Legacy' file

As at 23 April, this file was being processed daily. However, by 28 April this was being processed tri-weekly. Deduction records generated by PARV contained incorrect year of assessment values. This meant that the year of assessment was populated incorrectly for amended income tax returns and some Business Activity Statement assessments. This caused a large manual workload for CSA, as they could not reconcile their systems. The ATO planned to have a permanent fix to this problem in the August/September release update.

Relevant ATO communications

At the 10 February 2010 Senate Estimates hearing, the ATO gave the following evidence:

'Mr Butler — We will have caught up and be processing returns on a normal basis.

Senator BUSHBY — By the end of February?

Mr Butler — By the end of February. There might be some returns for which, for particular reasons, assessments are not issued. There could be a child support issue, a Centrelink issue or something we are concerned about — a high-risk refund, as we call it. Apart from those, which are relatively smallish in number, the vast majority will go through by the end of the month.'

Impact on taxpayers and tax practitioners

Tax practitioners and taxpayers who made repeated calls were told that the matter had been escalated. Callers were not given a time period for completion which was kept.

Affected taxpayers expecting a refund were forced to wait longer than anticipated for their refund, sometimes many months.

Some 300-400 CSA clients received less than they were otherwise entitled, having social impacts on both the custodial parent, paying parent and children.

15

Problems with Centrelink information data exchange

Exchange of data between the ATO and Centrelink is a multi-step process. The ultimate aim of which is to enable the sharing of account information for the purposes of either reflecting appropriate credits or offsetting debts between the ATO and Centrelink. There are a number of inbound and outbound data processing components that support this process. It should be noted that in relation to Family Assistance Office payments, Centrelink pays benefits based on estimated income which is later reconciled with the income data reported to the ATO. Benefit entitlements are reconciled at the time of assessing the tax return.

The problems generally relate to the sharing of information and the garnishing of Centrelink debts.

From 25 February 2010, the ATO stockpiled 850,000 verified income transactions (Note: one client can have multiple transactions) because of concerns (including that a number of income fields had not been populated) that would cause Centrelink to issue wrong payments to clients affected by the issue. It should also be noted that these figures are at a point in time and do not represent ongoing stockpiles. Similarly, a liability will be raised if the base payment estimate is too high. Notwithstanding this stockpiling of transactions, the ATO continued to process the affected taxpayers' returns (generally after three days) and the affected taxpayers' base Centrelink payments were still made. However, as Centrelink could not verify the income reported to the ATO, it could not assure itself whether payments were correct. These problems (and others encountered as the ATO started to transfer this data to Centrelink) were finally resolved to an extent which allowed the ATO to transfer details for all these clients by 7 April, with all backlog cleared by 19 April. During this period, there were an unknown number of missed opportunities to offset refunds against debts. The ATO also missed opportunities to top up Family Assistance Office entitlements. Incorrect lodgement dates for income tax returns (such as those caused by problems described above) also affected clients' entitlements to top up payments.

Since 1 March, the ATO also experienced a 5 to 6 per cent suspense rate for its mutual client register forms — requiring intervention.

The ATO also stockpiled returns which could potentially offset a Centrelink debt until a strategy was implemented from 29 March to run Garnishee Batch Job processes daily through refunder (a pre-existing legacy system) with a business check output on the ICP system. By 12 April all issues preventing the Garnishee Batch Job to be run daily were either resolved or a workaround applied. Together with CSA held refunds, the ATO estimated it held around $25 million in refunds at this stage, with around $6.5million of this amount waiting more than seven days for the CSA/Centrelink offsetting to occur (increasing to $7.8 million as at 19 April).

As at 13 April 2010, the numbers in relation to Centrelink comprised:

Ready for ATO to send to Centrelink to request whether offsetting should occur: 1243 cases totalling $2,126,000

Awaiting Centrelink advice on whether offsetting should occur: Nil

Advice received from Centrelink that offsetting should occur: 270 cases — zero offsetting required

As at 23 and 28 April, the ATO was holding around $2 million in refunds pending Centreline's offsetting. Around $1.6 million of this amount was delayed due to known issues (see below), with the rest progressing through as 'business as usual'.

Garnishing tax refunds for Centrelink debts

Due to problems with the data flows between agencies, the ATO delayed until after 30 March 2010 processing of garnishee action for around 2000 Centrelink debtors. Problems were also encountered, until June 2010, in reconciling amounts garnished and remitted to Centrelink. The ATO's manual processing of a number of returns also delayed the reconciliation and remission of amounts to Centrelink

Specific problems are outlined below.

INBOUND PROCESSING

1. Income Verification Request

As at 23 April 2010, this request was processed on an ad hoc basis. Daily processing of Centrelink-initiated income verification requests ceased on 19 April due to issues with the response file (see below). A manual workaround was implemented from 21 April to clear a backlog of 1094 transactions. The ATO intended to commence daily processing once the backlog had been cleared by using a workaround. However, on 22 April, the ATO stopped processing these requests because Centrelink rejected the option of a manual intervention. This required the ATO to resolve the systems problem. The ATO had a backlog of around 1600 transactions, with around 100 received each day. The ATO intended to recommence daily processing once it resolved the problem.

2. Mutual Client Register (MCR)

From 23 April 2010, this register was processed daily. However, around 7 per cent of the MCR forms were suspending as the MCR was not updating for these clients. As at 3 May, the ATO was still investigating the reasons for the rate of suspension.

3. CCTR Input file

From 23 April, this file was processed daily and there was a backlog of around 1200 records.

4. Determinations

From 19 April, these determinations were processed daily with no issues reported.

OUTBOUND PROCESSING

5. Income Verification Response

From 23 April 2010, this file was processed daily. Around 1 percent of the income verification response file was not being sent due to an incorrect reason code. Centrelink-initiated client income verification responses affected by this issue were sent via a manual workaround. The ATO planned to deploy a fix for the two underlying problems on 3 May (Infra 1225629 — two reason code issues with response file: 'Client not Found' being provided when actual income details are supplied; Providing a reason code that income was verified when the correct outcome should be NIL).

6. Income Tax Form Cancellation Notification

From 23 April 2010, this notification was not processed. As at 23 April, there was a backlog of 99 client accounts, 55 had been manually checked with 41 accounts resubmitted due to other 'business as usual' transaction activities. By 28 April, Centrelink rejected manual interventions as an option. The ATO planned to deploy fixes on 7 May to correct missing data in the record and field validation errors for Cancellation Notifications.

7. Family Tax Benefit Wash-up transactions

From 23 April, these transactions were processed daily. However, by 28 April 2010, Centrelink advised that there were missing wash up transactions for determinations sent between 19 to 25 February.

Relevant ATO communications

At the 10 February 2010 Senate Estimates hearing, the ATO gave the following evidence:

'Mr Butler — We will have caught up and be processing returns on a normal basis.

Senator BUSHBY — By the end of February?

Mr Butler — By the end of February. There might be some returns for which, for particular reasons, assessments are not issued. There could be a child support issue, a Centrelink issue or something we are concerned about — a high-risk refund, as we call it. Apart from those, which are relatively smallish in number, the vast majority will go through by the end of the month.

Senator BUSHBY — In respect of the backlog, does the tax office inform other agencies of government about the delays it is experiencing? For instance, is Centrelink informed so that people who are waiting for their 2009 tax returns in order to claim benefits and those sorts of things are not disadvantaged?

Mr Butler — We have engaged with Centrelink for some time. They are fully aware of all the time frames and things like that.

Senator BUSHBY — Would they be aware of individual taxpayers who might be affected and the potential impact on their claims through Centrelink?

Mr Butler — Some of our matching capabilities have not been available since the long weekend shutdown, and Centrelink are well aware of that. The way it essentially works is that we do matching for them. They let us know who they are concerned about and we will let them know if the tax return has been processed or not. They have been fully engaged the whole way through.'

Impact on taxpayers and tax practitioners

Tax practitioners and taxpayers who made repeated calls were told that the matter had been escalated. Callers were not given a time period for completion which was kept.

Around 7200 Centrelink clients received an incorrect Centrelink assessment.

Centrelink clients delayed in receiving their entitlements. Around 11,500 such clients called Centrelink to manually correct their forms. Centrelink estimates a backlog of around 750,000 transactions (note that a client may have multiple transactions).

Taxpayers expecting a refund were forced to wait longer than anticipated for their refund.

16

Superannuation Co-Contributions issues

From 24 March 2010, the ATO identified a number of problems (detailed below) relating to eligibility for, aggregation of and correspondence concerning superannuation co-contributions (CoCons). The ATO identified that a number of fixes had to be deployed before it could execute a CoCons eligibility, aggregation and 'GAC execution run'. Delayed implementation of the fixes for these problems impacted on the ATO's ability to run CoCons aggregation. The ATO considered that it was unlikely to have time to run the CoCons eligibility in March and check the results. It identified that as a result, credit interest will be payable for the delays.

The ATO advises that direct payments to relevant taxpayers, such as certain retirees, were made manually and on time, whereas payments to superannuation funds were delayed in agreement with the relevant funds. Interest would be payable for any payments made more than 60 days in arrears.

Specific problems are outlined below.

1. Remittance Aggregation

On 25 March 2010, corrective action of some review items in the ICP system was deployed.

On 12 April, the ATO deployed a fix to resolve a problem with a corrupted message set in the 'EAI package' that prevented the ATO from issuing any 'RARN correspondence'. However, the ATO discovered another problem while verifying whether the fix was effective. Messages were successfully written to files, however, some mandatory fields were missing (due date, EFT Return Code, Recipient Name and other fields which were potentially missing). 'GAC processing of RARN to ECI' was 100 per cent blocked as a result. Mandatory data was missing. This problem was fixed on 20 April and some of the backlog cleared (that is, January remittances that had been held since 19 January) releasing around $2.5 million of the estimated $30 million held by completing an aggregation run without the initial CoCons eligibility entitlement run.

The ATO intended to run a remittance aggregation on 21 May for remittances held for February, March and April.

2. Co-Cons Eligibility Entitlement run

On 19 April 2010, the ATO identified that a number of implementation changes and fixes were required as a result of the legal conformance outcomes (as a result of changed legal advice) and income tax release go-live. Although, the ATO concluded that the system was working to design, and ICP logic aligned to legislation, several fixes were needed: Infra 1196866 — cannot use date/time update to determine latest ITR (deployed 28 April); Infra 1028900 — correct decimal point issue (deployed 29 April); Infra 1221606 — 2008 forms displays incorrect threshold amount (deployed 29 April); and Infra 1207676 — Member Contributions Statement (MCS) forms cancelling incorrectly. The ATO scheduled deployment for the fixes on 27 April and 4 May. The ATO intended to perform detailed deployment verification over a small sample of clients from 27 April to 6 May. A full CoCons entitlement run over the full population and First Home Savers' Account aggregation was intended to commence from 7 May. This was expected to include over $100 million of new entitlements.

3. First Home Savers' Account (FHSA) Aggregation

By 23 April 2010, the ATO identified that the 'RSA supplier link' was causing FHSA information to be incorrectly redirected to the RSA supplier. A fix to this problem was scheduled to be deployed on 21 May because the fix was dependent on the resolution of another problem with recovery aggregation which was scheduled to be deployed on 14 May.

4. Member Contributions Statement (MCS) remediation

On 23 March 2010, the ATO scheduled a data fix to cancel MCS forms for deployment on 27 March. On 28 April, the ATO identified a process backlog of 893 parent forms, 1406 'OOLR requests' and 169,000 child forms. A fix to this problem was scheduled to be deployed on 14 May because the fix was dependent on the resolution of another problem with the CoCons entitlement run which was scheduled to be deployed on 3 May.

5. Recovery Aggregation

By 23 March 2010, the ATO identified two problems with recoveries. The 'PVA amount' was not being taken into consideration and multiple transactions were being generated. The ATO planned to finish the code fix by 16 April. However, the date for deployment was scheduled for 14 May and expected to run on 28 May.

Relevant ATO communications

The ATO communicated directly to Superannuation Funds via emails and at meetings to notify them of the delays in making payments.

Impact on taxpayers and tax practitioners

Taxpayers may have suffered lost earnings for payments that were made late to their Superannuation Funds. This would have been mitigated to the extent of the interest the ATO paid for periods occurring after 60 days of delay.

17

Incorrect diversion of interactive voice response (IVR) calls —where's my refund self help

The 'Where's My Refund?' IVR was designed to allow taxpayers to query the status of their income tax lodgement, by providing their TFN to the phone service.

In the situation where a client's lodgement had been received, processed, but a disbursement (refund) record had not been created, the ICP system was incorrectly diverting the client to a contact centre when the IVR should have provided the client with the required information.

Also, the system could not drop the caller into the ATO's main enquiries telephone queue directly due to priority routing given to drop outs, and trunk capacity issues. The ATO implemented an interim solution on 30 April, changing the recorded message to tell callers to telephone the ATO's general enquiries telephone number. A permanent fix was planned to be deployed on 7 May.

This problem attracted negative media attention.

Relevant ATO communications

On 7 April, the ATO changed its recorded response on this telephone number to ask taxpayers to call 13 28 61.

Impact on taxpayers and tax practitioners

Taxpayers were required to make another telephone call to the ATO call centre.

18

Verify super income tax offset

Under the tax laws, only those taxpayers aged 60 years or older were entitled to a 10 per cent offset on the untaxed element of certain amounts.

On 28 April 2010, the ATO identified that the system was calculating a 10 per cent offset on the untaxed element for around 11,000 taxpayers who were between 55 and 60 years old and members of a defined benefits fund,.

The ATO used its safety net to stop these forms from processing. The ATO advises that some tax returns not caught by the safety net were issued resulting in an increased refund. These amounts were needed to be remitted to the ATO.

Relevant ATO communications

No ATO communication in any general broadcast explained to taxpayers or tax practitioners why these errors were occurring.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls)

There is no evidence that ATO call centre staff were able to explain the reasons for these errors if these taxpayers' representatives called to ask why these errors had occurred.

Impact on taxpayers and tax practitioners

Tax practitioners and taxpayers who made repeated calls were told that the matter had been escalated. Callers were not given a time period for completion which was kept.

Taxpayers expecting a refund from an amendment were forced to wait longer than anticipated for their refund, sometimes many months.

19

Incorrect information on Notices of Amended Assessment (NOAAs) — previous taxable income shown as $0.00, and impacts Interest for Overpayment (IOP) calculations

This problem impacted company and super fund amendments. The ICP account was correct. However, the ATO held all NOAAs/SOAs since 27 April 2010 and worked to release non-impacted correspondence from 3 May.

Relevant ATO communications

No ATO communication in any general broadcast explained to taxpayers or tax practitioners why these errors were occurring.

No ATO communications of the issue were made in ATO-initiated targeted communications (such as emails, letters or outbound telephone calls).

There is no evidence that ATO call centre staff were able to explain the reasons for these errors if these taxpayers' representatives called to ask why these errors had occurred.

Impact on taxpayers and tax practitioners

Tax practitioners and taxpayers who made repeated calls were told that the matter had been escalated. Callers were not given a time period for completion which was kept.

Taxpayers expecting a refund from an amendment were forced to wait longer than anticipated for their refund, sometimes many months.

20

Suspense items contributing to delays in assessing returns and issuing Notices of Assessment (NOAs)

A 'suspended' income tax return form means that the return cannot be assessed by the ATO's system without intervention. This means that no amounts will be posted to the taxpayer's account until the problem is resolved.

Since deployment of the income tax release up to 16 June 2010, the ICP system suspended 669,571 times. Although, suspensions are expected as part of the normal operation of the systems, and similar functionality (such as exceptions and error codes) were a feature of the ATO's pre-existing systems, these contributed to the overall delays experienced in processing returns. Suspensions were also symptoms of other underlying problems — for example, the ATO-Centrelink MCR (referred to above).

The ATO advises that it does not plan to determine how long the periods of suspensions contributed to the delays in issuing NOAs.

There were different types of suspensions. Some were easily resolved — for example, taxpayers inserted two blank spaces between words/numbers in the address line rather than one (such '8__Sunny_Street' rather than '8_Sunny_Street'. However, there were also suspensions that needed to be resolved by e-fixes.

The ATO used its substantial numbers of staff to assist in resolving suspensions and manually processing returns for those taxpayers claiming hardship (see Chapter 3 for more detail).

Relevant ATO communications

On 15 March 2010, the Second Commissioner issued an update saying,

At our last update on 2 March 2010, we were on track to issue the remaining stockpiled refunds and assessments for income tax returns lodged in February by the end of last week.

Last week we experienced some minor problems which have delayed us issuing some of those remaining stockpiled refunds and assessments while we ensure the integrity of our data.

There are approximately 200,000 stockpiled assessments yet to issue (of which we estimate 100,000 are refunds). These include assessments which involve a baby bonus, entrepreneur tax offset, primary production averaging, exempt foreign employment income, special professional averaging, eligible termination payments or superannuation lump sum payments and non-resident withholding tax.

We have fixed these minor problems and can start releasing most of these refunds and assessments from today (with the exception of assessments involving non-resident withholding tax).

We remain committed to ensure the reliability of our processes even if this slows us down.'

On 22 March 2010, the ATO released its Tax Agent Magazine in which the Commissioner said,

'Of course, the big move on the technology front for the ATO so far this year is the decision we made in January to proceed with our new income tax system. ...

We are replacing the system we have been using to process income tax returns since the 1970s.

Given the size and significance of the change, there has been a substantial level of testing for this change and, so far, the changeover has been going according to plan.

Nevertheless, any major new system will raise its own challenges, so the continuing patience and support of the tax profession is appreciated.'

On 20 April 2010, the Second Commissioner issued an update which was published on the ATO website saying,

'Overall are we happy with the implementation of the new income tax processing system?

Yes.

While we have had some problems, you would expect that with an implementation of an IT system as large as this one. There have been no critical systems problems. Overall, the new income tax processing system is working well and, as the figures demonstrate, the vast majority of processing has been completed.

We know some people have experienced delays and frustration caused by our essential systems upgrade. Unfortunately, the size of the systems we deal with means they are incredibly complex. Also, given the importance of the tax and superannuation systems to Australia, we need to ensure the reliability of our processes.

We appreciate the patience and support people have shown us and apologise for the inconvenience.'

On 29 April 2010 the Commissioner published a message on the ATO website saying (amongst other things):

'Unfortunately we did run into two unanticipated issues with the new system that caused delays outside what we had originally planned.

One delayed matters for two weeks (which also had an impact on returns still coming in to us), and the other resulted in 140,000 refund cheques not printing. However, these cheques were sent last week.

These sorts of things are not unusual when implementing a system of this size, however it added to the time in which we could not process returns. It meant a longer-lasting impact on taxpayers and tax practitioners than we had originally expected.

Despite the delays, our new system has processed more than two million tax returns, including one million refunds. Since early April we have processed all newly lodged returns as per our service standards (94 per cent of electronic returns in 14 days and 80 per cent of paper returns within 42 days). We took a cautious approach during our ramp up of the processing of returns to ensure the accuracy of the calculations in assessments.

We do not have a stockpile of returns waiting to be processed. However, as is normally the case, there will always be some returns in our system because:

we need to scrutinise high risk refunds that could indicate fraud

there is a tax debt owing or an obligation due to the Child Support Agency and/or Centrelink

there is information missing or incorrect in the return that we need to follow-up with the taxpayer or agent, and/or

people have lodged several years' worth of outstanding returns with their 2008-09 return.

I assure you we have worked extremely hard to minimise the impact of the new system on tax agents and the community.'

At the 1 June 2010 Senate Estimates hearing, the ATO gave the following evidence:

'Mr D'Ascenzo —As I said, from 1 April we were back on normal processing times. There are always some returns that are outstanding. I have indicated that and some of the reasons why some of those returns are outstanding. It is not a question of the system not working. As of 1 April the system has been working to specification.'

Impact on taxpayers and tax practitioners

ATO public communications in relation to this problem do not reconcile with what had actually happened. ATO communications did not indicate the main reason for delays — problems with the system that prevented returns from being assessed and NOAs being issued. In fact, the ATO communications appear to give the impression that none of the delays were attributable to problems with the system.

Tax practitioners incurred unproductive work in contacting the ATO repeatedly to check on the progress of returns . If the ATO had initiated clear communication of this problem if and when it first became aware of it, then much of this adverse impact could have been reduced if not avoided.

Additionally, taxpayers and tax practitioners suffered the effects of reduced expected cash flows due to the contribution of this problem to delays.

As a result taxpayers and tax practitioners have reduced confidence in the ATO's administration of the system.