3.1 The income tax release is the most recent and substantial deployed under the Change Program banner. Events involved with the FBT release are also discussed in so far as they are relevant to the income tax release.
3.2 This chapter generally follows the main events in chronological order. The main exception relates to events occurring over the period February 2010 to June 2010. These events are grouped into three specific topic sections:
- what taxpayers and tax practitioners experienced during the February-June 2010 period
- a reconciliation of the main problems encountered by the ATO with its public communications
- what the ATO experienced during the February-June 2010 period.
Events leading up to the income tax release's deployment
The December 2007 rescheduling of Release 3
3.3 The income tax release was initially intended to be deployed in June 2008 as an element of the larger Release 3 package. However, as previously mentioned, Release 3 encountered problems, including substantial schedule slippage, difficulties in locking down design and expansion in scope by legislative change.
3.4 The ATO formally reviewed the Change Program schedule in December 2007. As a result, the ATO split the Release 3 package into a number of smaller releases:
- Release 3.0 — which was deployed in January 2008
- the FBT release — which was deployed in April 2008
- the Lost Members Register release — intended to be delivered during August-October 2008
- the Super A and Company Tax release (including the Superannuation Holding Account, Superannuation Co-contributions and Member Contributions Statements for Super and Company Tax) — intended to be delivered in January 2009
- the Interpretative Advice and Assistance release — intended to be deployed around June 2009
- the First Home Savers Account release — intended to be deployed in June 2009
- the Super B (including Superannuation Guarantee) release — intended to be deployed in June 2009
- the Individual Income Tax release — intended to be deployed over an extended production testing phase from around April 2009 and deployed into production in December 2009 or January 2010
- the Business Activity Statement release — intended to be delivered by June 2010.
3.5 The ATO's plan in December 2007 was to release the ICP system's income tax functionality in two releases: the company tax release and the individual income tax release (see above). However, in February 2008, the ATO concluded that the delivery of the ICP system's income tax functionality would need to be rescheduled. Work continued towards delivering the required software while the rescheduled plan was being prepared.
The FBT release's implementation and the independent assurers' reports
3.6 While work was continuing on how the plan should be rescheduled, the ATO deployed the FBT release in April 2008. The FBT release was intended to be the 'proof of concept' for the ICP system. As expected, the FBT release encountered several significant problems, such as its deployment extending longer than originally planned.
3.7 By 4 June 2008, the ATO was considering rescheduling the other releases of the Release 3 package (outlined above). In particular it noted that:
- ... it is not considered feasible to deliver all three functions (company income tax, individual income tax, remainder of superannuation) as recently proposed by Accenture for deployment in December 2008
- deferring the deployment of individual income tax increases our exposure to policy changes which will require solutions to be developed in both ICP and legacy systems
- under the original Release 3 deployment schedule ICP and legacy income tax systems were to be run in parallel for up to 6 months to build confidence in ICP and enable a simpler and lower risk cutover. This approach remains attractive.
- [there are] challenges and [the ATO] asked for a preferred release schedule be developed, in collaboration with business, and presented at the 18 June CPSC [the ATO's Change Program Steering Committee]. The schedule should balance feasibility with the need to deliver functionality sooner rather than later and clearly identify high level business and client experience impacts and trade-offs.
- [The ATO] asked the Independent Assurer [Capgemini to] provide an assessment of the preferred schedule.9
3.8 Following deployment of the FBT release in April 2008, the ATO engaged another independent assurer, Aquitaine Consulting (Aquitaine), to review 'what has happened in the Change Program to bring it to its current position with regards to delivering, or non-delivery of outcomes' and to provide advice on the forward strategy on the proposed Release 3 rescheduling, amongst other things10.
3.9 Aquitaine made six key findings:
General — The Change Program [CP] team is currently at a low point of morale and energy, due to the length and intensity of the program to date, but more particularly due to the poor delivery to date. This must be addressed to allow the team to rebuild energy and enthusiasm for the task ahead.
Team Dynamics — the senior CP executive team have become somewhat dysfunctional and are consequently not leveraging their respective and combined strengths well. This is a strong team but also requires strong leadership to get the best from them.
Business Engagement — It is well acknowledged with the Program and major sub-plans that the business engagement between the CP and business lines has been poor. This has directly contributed to schedule and quality impacts due to a lack of meaningful involvement in determining the final systems design as well as to the testing and review of the final deliverables.
Program Management and PMO [Program Management Office] — the Accenture PMO has not been making use of quantitative reporting techniques and milestone tracking, but rather has emphasised the use of subjective and qualitative reporting. This makes it very difficult for the ATO to understand exactly where they stand at any point and to form an assessment of the risks to delivery.
The Role of the Independent Assurer [IA] — The IA role is considered critical to providing the ATO with high quality, objective and trusted advice, independent of Accenture and the CP itself. This is not occurring currently. . This notwithstanding, Capgemini has identified many significant issues that the ATO have not responded to. .
Quality Practices — Accenture has a high standard of quality processes that are documented for the CP, but these are not being followed in practice. These deficiencies are resulting in late and unexpected schedule blowouts due to high levels of defects emerging late in the process, and also in a poor standard of implementation into production use. The very high level of incidents over a number of weeks for Release 3.1 FBT places client experiences at risk. If this pattern is repeated for future releases, the ATO could suffer reputational impacts.
Based on these findings, we consider that significant changes are required in the running of the Program to ensure a high confidence on delivery of future releases. These changes will require longer delivery times to increase the quality of testing, in particular. The current plans for the January 2009 release (company tax and the first Superannuation release 'Super A') have several months contingency that should be able to absorb these additional tasks, but this will require verification during detailed planning that is still to be completed by the respective project teams.11
3.10 Aquitaine also commented on the forward scheduling for future releases and observed that the schedule had a high degree of parallel activity. It commented:
The schedule at present for the Company Tax and Super A release in January 2009 has a very large degree of parallel activity ... In addition, key testing activities such as UAT [User Acceptance Testing] are expected to be completed in parallel with other Product Testing activities, which is highly unrealistic.
Given the design close-off and build quality issues seen in 3.1, this plan appears unrealistically optimistic. In addition the consequences for the ATO of a poor quality result for the company tax release, including potentially delayed refunds from large corporations, would especially be serious for the reputation of the ATO.
A more quality-controlled approach with clear quality checkpoints is therefore recommended . In particular, as a minimum, checkpoints are recommended at [End of Design; End of integrated product test and partnership testing — start of user acceptance testing; End of performance testing; End of user acceptance testing/start of pilot; end of pilot, start of production].12
3.11 Aquitaine made 16 recommendations, which included:
Quality Practices ...
4. The introduction of a formal user acceptance testing phase with clear entry and exit criteria and emphasising the exercise of end-to-end business scenarios. It is expected that a well tested system at the end of UAT will have no serious defects, allowing the pilot phase to focus on resolving issues of process and procedure, documentation and education.13
3.12 The ATO has advised that it has a framework for tracking its implementation of all agreed IA recommendations. The IGT has not independently assessed the ATO's implementation of these recommendations. However, the ANAO has publicly reported in its strategic review of the Change Program (up to and including the deployment of the FBT release) that the ATO had acted on the IAs' recommendations:
The Tax Office has since acted on the recommendations of several specially commissioned reviews examining the implementation phases to date, resulting in improved business practices, work schedules and accountability arrangements, thereby strengthening overall governance.14
3.13 Capgemini also conducted a post-implementation review of the FBT release to identify the factors in the build and test phases that led to the overall instability of the release. In July 2008, it alerted the ATO to its preliminary findings:
The Change Program [CP] made a conscious decision to proceed with the FBT release, given the challenges that the release faced. As a result, the quality of the overall solution was impacted.
Based on our preliminary findings, we have identified two key factors that contributed to the perception of quality issues with the FBT release:
- Issues in Design, Build and Test:
- Test stage gates were not enforced.
- There was insufficient test coverage during the technical delivery to support the implementation of a new technology platform.
- The Testing environment did not functionally replicate the production environment to enable end to end testing (for example, Outbound architecture).
- Testing was not accurately supported by converted test data.
- Inconsistency in understanding the different objectives and roles of each phase of testing within the Release.
- The different interpretation of the definition of Defects Severity and the multiple, disparate reporting of the defects.
- The execution of the go-live support run by the Change Program Support Team (CPST) was not consistent with BESS standard of practices, as a result, a number of business issues were lost, leading to reduced confidence by the business. Consequently, there is no acknowledged single source of reporting that provides a consistent picture of the actual status in production.
- Severity 1 and Severity 2 criteria were defined, but were subjected to different interpretation by the Business and IT. Consequently there are different views on the quality of FBT from Business and CP perspective. This lead to a difficulty for the CP to understand and prioritise 'true' Severity 1 issues that occurred in production.15
3.14 In its final report, Capgemini found the following causes:
- Governance & Leadership — lack of quality enforcement; basic test reporting; schedule pressures; continuous scope creep
- Engagement & Collaboration — disconnect between Business and Change Program regarding issues in production; lack of common understanding of role and responsibilities in Test
- Skills & Capabilities — inconsistent use of processes & tools; insufficient build and test knowledge and experience
- Planning — drops too frequent in Test; underestimation in build and test activities; converted data not able to support test;
- Complexity — complexity of the architecture; complexity of the releases; business complexity.16
3.15 Capgemini made 16 recommendations (which are set out in Appendix 14) for improvements that it considered should be applied to all future releases.
3.16 Capgemini also expressed concern with the scheduling of the future releases. It commented that lessons from the prior releases had not been learnt in relation to, amongst other things, estimating and forecasting the resources and time needed to complete the releases, the scheduling contingencies and what should trigger a contingency. In particular, it stated:
Principles for Delivery
In the agreed and endorsed Delivery Methods and Plans, the delivery approach contains many valuable elements. Historically, the IA [Capgemini] has observed deviations from the delivery principles in the actual execution, and would like to see specific measures in place that ensure best practices and the delivery approach are rigorously followed. This will ensure that the solution delivered will be aligned to the documented Quality Plans.
29. In previous reports, the IA has reported that build activity eroded into testing, and that the production environment was used as testing bed. There have been many defects emerging after technical deployment into production because of insufficient testing and the lack of a real Level 4 environment that mirrors the exact environment in production, as seen since Release 3.1a FBT has gone live. The IA expects the Change Program to adhere to rigorous quality standards with regard to IPT, Partnership Testing, UAT [User Acceptance Testing] and Business Pilot, including the use of a true Level 4 environment that enables proper test of the system before it goes into production. This will help prevent the majority of defects from emerging in production.
30. In the previous releases, the IA observed that there has been multiple occurrences of late design change requests leading to the slippage of design schedule. This then has a cascading effect on the downstream activities affecting the overall delivery schedule. It is common and inevitable that requirements constantly change and the business knowledge is ever-evolving. The IA expects that the Change Program adheres to the design stage schedules that are agreed and endorsed in the plan, and most of all, that the CP implements the new Design Approach. ... 17
3.17 The ANAO also reviewed the ATO's implementation of the Change Program up to the point of the ATO's implementation of the FBT release. Amongst other things, the ANAO commented that:
35. The Tax Office initially established appropriate governance arrangements for the management of the Change Program that were commensurate with the project's anticipated size and complexity as understood in 2004. The Tax Office has since acted on the recommendations of several specially commissioned reviews examining the implementation phases to date, resulting in improved business practices, work schedules and accountability arrangements, and thereby strengthening overall governance. ...
The task ahead
48. Notwithstanding the experience to date, the scale and complexity of the tasks yet to be completed means that the Tax Office still faces significant challenges in finalising the project to a satisfactory standard required for the systems which automate most of Australia's tax administration. There is a significant risk that the deadlines for the completion of further releases may be put under pressure or that functionality in the original scope of the Change Program will be reduced so as to meet current budget and timetable expectations.
49. The experience of the Release 3 FBT implementation has highlighted the importance of end-to-end testing, business pilot with actual production data and full involvement of Tax Office business lines. In addition, there was a need to validate the compliance of the new systems against agreed standards and requirements, including legislative requirements. This will be particularly important for the income tax phase of Release 3 which delivers systems that will automatically finalise tax liabilities and credits for almost all of Australia's approximately 14.5 million tax returns. ...
50. The Tax Office's experiences to date underlines the importance during the remainder of the Change Program of:
- Closer monitoring of significant risks and correspondence mitigation strategies, and setting higher, more verifiable standards for 'fitness for purpose' over the quality of work completed by the contractor;
- Following sound project management practices during the design, development and assurance stages for future ICP releases; and
- Requiring that prior to the release of ICP software into production, end-to-end testing, business pilot with actual production data and assurance processes are completed with the full involvement of Tax Office business areas (as defined in the [ANAO report's] Glossary "end-to-end testing" requires assessment of systems on a fully integrated basis.)18
3.18 The ANAO made four recommendations:
Recommendation No 1
The ANAO recommends that, in order to better manage risks to the Change Program, the Tax Office more effectively utilise its available assurance framework (compliance assurance, internal audit, the contracted independent assurer), including end-to-end system testing involving operational areas, during the remaining implementation phases of the Change Program.
Recommendation No 2
The ANAO recommends that in order to improve the governance of the Change Program, the Tax Office amend the contract (schedule 2) to clearly set out the high level governance arrangements.
The ANAO recommends that in order to continually improve the performance of those functions transformed by the Change Program releases, the Tax Office review existing tax Office management frameworks to take into account the enhanced performance measurement and reporting capabilities of the new system so as to:
- improve the Tax Office's capacity to evaluate the efficiency, productivity and effectiveness of performance on a whole of Tax Office basis; and
- evaluate the scope to improve performance by the use of methodologies that measure and compare performances at an organisational group level.
The ANAO recommends that in order to improve the strategic management of the Change Program, and having regard to existing management reports, the Change Program Steering Committee periodically receive additional summary, high level reports covering:
- the broad range of costs and benefits attributable to the Change Program; and
- the progress of the Change Program in achieving the strategic goals originally determined.19
3.19 The background for Recommendation 2, as outlined in the ANAO's report, was that Schedule 2 of the contract provided that governance arrangements were to be set out in the Program Management Charter, the Easier, Cheaper, More Personalised (ECMP) Change Program Phase 3 Change Program Charter. However, the ANAO found that the status of the charter was ambiguous, adding to the difficulty in determining the ATO and Accenture's roles under the contract. The ANAO stated that:
2.59 The ambiguity of the status of the Charter, in the context of the purchaser/provider contractual relationship between the Tax Office and Accenture, adds to the complexity of the governance arrangements. In order to clarify the intent of the Charter, as a reference document to assist with administrative and procedural matters, there would be benefit in negotiating an amendment to the contract. This could involve inserting in Schedule 2 of the contract a short description of the governance arrangements instead of the reference to the Charter.20
3.20 The current version of Schedule 2 of the contract is reproduced in Appendix 4.
Forward schedule revisions
3.21 In early August 2008, the ATO reconsidered the scheduling of the company tax release:
At the CPSC we confirmed that the issue as to when to schedule [the] Company Tax [release] was in the clear context that [the] first priority is to be [the] completion of [the] FBT [release] and the delivery of [the] LMR [Lost Members' Register release], and then Super (a) ... in January 09 ...
A draft plan to deliver by January  was prepared and the teams have been working towards this plan whilst the overall R3 [Release 3] replan is completed. However it is not possible to adjust this plan to incorporate the approach to UAT [User Acceptance Testing] and parallel processing that is now considered necessary (see for example the [Aquitaine] report) for confidence in product quality for deployment to business.
Given our inability to guarantee a "pilot" on the current timelines, we have looked at a revised schedule which meets 4 primary objectives:-
- Minimise risk to the Super functionality
- Maintain focus and energy on Companies, but be able to divert resources if necessary to Super
- Maintain a sensible schedule for design and build of the July 09 release — FHSA [First Home Savers' Account], SG [Superannuation Guarantee] etc., and
- Provide an extended parallel run/business pilot for both Company and Individuals Income Tax
As there is no current significant resource contention with Super (a) we believe we should continue to work to the current design, build, test plan for Company Tax so that we have a strong technical platform into which to subsequently merge the IITR [Individual Income Tax Release] products; and then be well prepared to carry out parallel processing from July 09 and subsequent business deployment for both products together — still targeting for this business deployment to be no later than January 10.
It is noted that if we now decide to split Company Tax business deployment from Super (a) there is some additional interface work necessary to connect Super (a) to legacy systems given that Company Tax would not be in ICP. However this can be incorporated into the plan without significant risk. This work is to split MCS [Member Contributions Statement] data from SMSF [Self-Managed Superannuation Funds] returns and reflects what we are doing this year with the combined SMSF/MCS statements. This work is expected to be more than offset by not having to "split" NTS [the National Taxpayer System — a pre-existing legacy system] between individuals and companies.
Because all or most of the Company Tax design, build, test work would continue to the current plan, and in fact there would also be some avoided effort[,] it is not expected that there would be material overall changes to cost or resource requirements. However this is being confirmed by an impact assessment (presently being completed) which will provide a final assessment on changes to effort or costs either for the ATO or Accenture. There would be some deferral of benefits from the later business deployment of Company Tax (estimated at $2m pa based on the Business Case assumptions)
We will confirm the above approach as part of the final R3 Replan approval (including Capgemini input) but seek any further guidance from the ATO Exec now as the detailed replan would need to take this into account.21
3.22 At the ATO's CPSC's 28 August 2008 meeting, a revised schedule for future releases (Release 3 Replan) was endorsed as a baseline against which the future delivery would be managed.
Company tax release deferred and combined with later individual income tax release
3.23 This revised schedule (Release 3 Replan), amongst other things, combined the company tax release and individual income tax release into one release. Product testing was to be completed by mid-May 2009, followed by the 'synch' with the TaxTime 2009 code and regression testing with a 6 month Parallel Run and Business Pilot and deployment scheduled for 4 January 2010.22
3.24 The reasons given for the replan were:
- The FHSA product is legislative and must be delivered in July 2009. It is based on CoCons functionality being delivered in January 2009. Thus the priority of management focus and energy must be on delivering SuperA in January 2009.
- Removing Company IT [income tax] from this release takes away the October code-merge necessary in the previous scenario. This effectively provides an extra 8 week buffer for the SuperA release.
- Operations have expressed a desire to have a "pilot" before the deployment of Company Tax functionality. The previous Replan has no capacity between now and end of 2008 to meet that requirement.
- The previous Replan requires technical alterations to NTS to "split" Company Tax processing (which will be in ICP) from IITR processing (which will remain in NTS for 12 months). This is technically complex and adds risk. Avoiding this set of work activities avoids additional delivery risk.
However, we believe we should continue to work to the current design, build, test plan for Company Tax so that we have a strong technical platform into which to subsequently merge the IITR products; and then be well prepared to carry out parallel processing from July 2009 and subsequent business deployment for both products together — still targeting for this business deployment to be no later than January 2010.23
3.25 The ATO also scheduled four dates, called 'Stage Gates', (1 December 2008, 31 March 2009, 30 September 2009 and 1 March 2010) on which it would formally review progress, including assessments of whether the planned timeframes for the smaller releases could be met. TaxTime 2009 was also to be delivered in its current ICT systems (that is, pre-ICP systems or legacy systems) in July 2009.
3.26 However, by October 2008, the design for the company tax and the individual income tax releases had fallen behind the revised schedule by about four weeks. The ATO further revised its schedule to accommodate the delays. Capgemini recommended that the ATO identify and resolve the root causes for the continuous slippage.
3.27 In its October 2008 report, Capgemini observed that:
The Current Status of the Program: …
- In Income Tax, the Change Program has verbally specified that the signoff of Individual Tax design by the 24th December 2008 is critical to achieve the January 2010 technical deployment date. The IA [Capgemini ] endorses this view and has concerns that this date will not be achieved as:
- Tranche 4 design for Individual Tax has not been completed as per the planned completion date, with 58 outstanding Change Requests as at the 3rd November.
- Due to the high dependency of design resources between Tranche 4 and Tranche 5 of Individual Tax, this will have a negative impact on the ability to achieve the 24th December design milestone.
As there is no contingency remaining for Income Tax, missing the 24th December 2008 deadline will cause further pressure on the Change Program to reduce the time originally allocated for the Parallel Run. With the Christmas break, the IA is concerned that this design will not be fully endorsed until the end January 2009.24
3.28 In its November 2008 report, Capgemini found that:
The effort required to design and deliver CRs [Change Requests] is frequently underestimated.
Unanticipated CRs are being approved with limited consideration of the overall impact of the schedule.
71% of the critical resources in the CP [Change Program] are within design creating consequential delays / impacts
Planning has not adapted for a parallel release paradigm, causing compounding impacts.25
3.29 Capgemini recommended that:
Assess CRs to ensure that they can be delivered in the current schedule, with consideration of resource availability, schedule, skills, etc. Reconsider the plan when it cannot be delivered.
Identify, plan and build critical resources into the design schedule and align to program level management of critical resources.
Accenture to inject a design project manager to assist Integrated Design planning and management.26
Income tax release key testing schedule milestones
3.30 The schedule to deploy the income tax release involved key milestones that included certain types of testing. The schedule for testing included, amongst others, the following:
- Product testing — gave an assessment of the quality of the software and whether it was working according to design. At the time of the ATO's August 2008 rescheduling of Release 3, the product testing was initially intended to be completed by the end of May 2009. This was later rescheduled to June 2009 (but was finalised on 15 January 2010 — the same day that the code was started to be packaged and made ready for the production deployment.27
- Parallel Run — , at the time of the ATO's August 2008 rescheduling of Release 3, was intended to be conducted over the period late June to the end of October 2009, but was conducted in two cycles over the period mid-September to late December 2009 in parallel with the product testing. Under the parallel run, the transactions and results delivered by the ICP system's use of real production data were compared with that of the ATO's pre-existing legacy systems to ensure that transactions and results were the same. The ATO has advised that after it compiled all the data conditions for two of the cycles, it considered that any further cycles would not materially add to the benefits of the parallel run. However, a number of ATO functions were not included in the parallel run because the ATO could not faithfully reflect the interactions between different legacy systems due to their structural differences.
- Business Pilot (or pre-deployment pilot) — , at the time of the ATO's August 2008 rescheduling of Release 3, was intended to be undertaken for six weeks from the end of the parallel run, but was conducted in two 4-week cycles over the period October to mid-December 2009 in parallel with the product testing and the parallel run. The business pilot evaluated the readiness of the ICP system design, procedures and infrastructure and allowed the ATO to evaluate true business readiness by testing the design of manual workarounds, business processes and inter-linkages with external parties and other Commonwealth departments. It was intended to enable the ATO to measure business confidence in the end-to-end process incorporating 'an entire client experience' of both internal and external clients for the income tax release. This included:
- The ability to evaluate business confidence for business processes in a true end to end capacity incorporating an entire internal and external client experience
inbound --> forms processing --> accounting --> outbound
- Replicate (as much as possible) the complete income tax environment focussed on the internal and external client experience
- Expose a large group of business users to complete business processes in the new environment who in turn provide support, experience and expertise back in the workplace
- To measure and evaluate the business tools, processes and procedures to support staff transition
- Review interactions between supporting interfaces and legacy systems.28
3.31 Due to the design of the system, the parallel run and the business pilot were not intended to test the code but to test that the configuration of business requirements was correct.
3.32 The reason for the original intention to complete the product testing before the parallel run and business pilot testing began was that this scheduling would minimise business risks by running the system on a stable code base to expose any defects, ineffective business processes or any other matters that may disrupt intended business outcomes:
The Income Tax Release plan endorsed by the CPSC in their meeting on 28 August 2008, approved combining Company Tax and Income Tax functionality into a single Release with the Product Testing to be completed by the end of May 2009, with User Acceptance Testing (UAT) occurring from May to June 2009. UAT would be followed by the ATO undertaking a six month business assurance stage that enabled all levels of business to assess the impact of the new system on the ATO business practices and workforce and put in place actions to manage any change where required. This assurance was to be undertaken on a stable codebase that was exercised via Parallel Run and Business Pilot activities.29
Income Tax release's June 2009 product testing deadline was repeatedly deferred
3.33 Capgemini and Aquitaine continually reported to the ATO on the progress towards deployment readiness.
3.34 As noted above, the deadline for product testing was rescheduled to June 2009. However, from December 2008 to April 2009, Capgemini alerted the ATO that the June 2009 deadline would not be met. For example, in its February 2009 report, it found that:
Income Tax: The IA [Capgemini] continues to consider that the Income Tax delivery is at a high level of risk to meet its planned timeframes as there is no further schedule contingency remaining. This Release has been tracking to schedule, however, the level of unresolved Change Requests allocated to this Release and the below-plan progress of testing could impact on the start date for Parallel Processing.
Progress has been made on finalising the Parallel Process approach. However there is a misalignment between the Business and the Change Program in terms of the intent, purpose and coverage of the Parallel Processing. Further complicating the situation is that agreement between the Change Program (ATO and Accenture) and EAM in terms of roles and responsibilities for the support and management of the Parallel Approach are unresolved. Both of these issues need to be resolved as soon as possible.30
3.35 Although good progress was being made on other Change Program releases, such as Super A, by June 2009, Accenture advised that they:
[were] not seeing progress through product testing for Income Tax. Lots of team changes have been made but not making breakthrough. Pouring extra resources into address — need to see results quickly.
The [ATO] noted concern with the slippage of the date for the delivery of Income Tax into product test and sought clarification of where the extra resources mentioned by [Accenture], would come from. [Accenture] advised that [it would] work through the Income Tax situation and that the resources would be a mix of people freed up after the [Super B, First Home Savers Account and Interpretative Assistance] Release and some externals. The [ATO] sought confirmation that they wouldn't be taken from BAS work. [Accenture] advised that they wouldn't at this stage. …
[Aquitaine] commented that for Income Tax, the re-plan was looking positive for Tax Time 2009 and asked if this was still the case. [Accenture] responded that the number one issue is the need to execute the code which is in place. [It] also noted that the blockers are different than those experienced with FBT. [The ATO] asked when the Tax Time 09 code base would be delivered into the integrated environment as there is a dependency on Tax Time 10 from the 09 code base. [Accenture] advised that the code was ready to go in but timing was an issue. [Capgemini] noted that this was a watch item for the Committee. The acting Chair asked [Accenture] to [advise] what the new expected delivery date for Income Tax was. [Accenture] advised that he would be in a position to provide this information by 3 July. The [ATO] asked that Capgemini and Aquitaine have a look at what is finally proposed to provide the Committee with some assurance. [It] asked that the assessment also cover consequences on other activities i.e BAS, Super B and FHS[A]. [Accenture] reiterated that the Income Tax issues were program management issues which needed to be resolved by Accenture and that additional resources from the Tax Office were not being requested.31
3.36 The successful completion of the product testing required, amongst other things, over 1300 test steps to pass. Capgemini measured, to a large extent, progress on this requirement by assessing the 'Rate of Test Steps Passed'.
3.37 Capgemini predicted the likely completion date for the product testing largely on the basis of the current rate of test steps passed. From April 2009, Capgemini progressively shifted the estimated completion for the product testing from October 2009 to January 2010.
3.38 ATO officers and Accenture explained to the IGT in meetings that there were better metrics to use in order to predict the completion date for the product testing. The rate of test steps passed did not accurately reflect the amount of work needed to be done in order to successfully resolve product testing. The reason is that a test step may not be passed because it contains a number of errors. If the number of errors is small, then less work is required to fix it than if there are large numbers of errors and therefore much more time would be needed to resolve them. Therefore, it was expected that there would be a low rate of test steps passed until the end of product testing was within reach. They explained that, as an alternative, the error rate was a better metric.
3.39 The following diagram visually represents this concept. It does not depict the actual rate of errors or test steps passed.
Number of errors resolved v. number of test steps passed over time
3.40 Notwithstanding this difference of opinion, Capgemini was ultimately more accurate in predicting the actual date for product test completion (which was mid-January 2010).
3.41 The ATO advises that the slippage in completing the product testing was due to a combination of reasons, with the three having the most impact being:
- unavailability of environments for extended periods at critical times — for example, a couple of power outages at the ATO's central data centre rendered testing environments unavailable for around a month while staff focused on restoring the environments for production.
- new legislation implementation action32 — significant work was required to effect new Government policy initiatives in time for TaxTime 2009 taxpayer processing. The resourcing demands imposed by these changes impacted on the building and testing phases of the program.
- the difficulty and level of complexity involved in maintaining pre-existing legacy systems and the ICP system in parallel (including the underestimation of the complexity of 'niche' scenarios) — it required more work than planned.33
3.42 There are also a number of other contributing factors, which are set out at the end of Appendix 7.
3.43 A comparison of the planned testing schedule and the actual testing conducted, together with an explanation of the testing, is also set out in Appendix 7.
Business testing now to operate in parallel with product testing
3.44 The delays in completing the product testing meant that the parallel run and business pilot (business testing) were rescheduled to occur at the same time as the product testing. This meant that the business testing was undertaken on a code base that was several versions earlier than the final code base, giving limited outcomes for the parallel run and business pilot.34 The start date for the business testing was deferred on a number of occasions, with the consequence being that the number of business scenarios and test cases were reduced.
3.45 The ATO identified those functions which were critical to the income tax release's initial deployment and those which could wait to be deployed at a later time. For example, the ATO decided to deploy the Debt Operational Analytics (OA) at a later point in time after January 2010. This delay was estimated to reduce ATO receivables by $310 million for the 2009-2010 year, however, this amount was expected to be materially recovered in future years.35 For the functions that would not be deployed or fixed before the deployment date, the ATO developed manual workarounds.
3.46 However, the business testing that was conducted did provide benefits. It disclosed further errors with the system, the resolution of which created more test scripts that needed further product testing.
3.47 The parallel run also gave the ATO data with which to estimate the potential future workload in production in relation to suspension rates and to roster the staffing accordingly.
Income tax release deployment date now deferred to late January 2010
3.48 In September 2009, the ATO considered that current progress indicated that a 4 January 2010 deployment date for the individual income tax release was unachievable. It decided to aim for (but not commit to) a rescheduled deployment on the Australia Day long weekend — 1 February 2010.
3.49 However, Capgemini advised that the 1 February 2010 deployment date was also at severe risk of not being met. This was because the rescheduled mid-November completion date for product testing would be delayed until mid-December unless test script pass rates for product testing were elevated to 145 from what was 107 at that time. Capgemini also expressed uncertainty around the testing throughput. The ATO noted that there was a severe risk associated with the January deployment, but would work hard towards meeting that date. However, the 'plan will not proceed if not ready'.36
3.50 The ATO also identified Easter 2010 or the end of 2010 as possible alternative deployment dates. If the Easter date was chosen then the ATO would 'need to maintain legacy build (that is, any software changes that were needed to implement any amendments to the tax laws for the ICP system had to also be made to the pre-existing legacy systems) for some time' as there 'would be parallel testing for legacy and Tax Time 10 if there is an Easter deployment'. However, the ATO would assess the progress towards an Australia Day 2010 implementation date at a series of checkpoints and could delay making the decision to go live until mid-January.37
Decision criteria for income tax release deployment
3.51 In early November 2009, the ATO decided to use four criteria to assist it in determining the readiness for deployment of the income tax release:
- production readiness — the system's ability to perform 14 key business scenarios, such as processing of credit and debit assessments, transfer of data to and from external agencies and processing of amendments
- staff readiness — the ATO's ability to use the new system, adapt to new processes and cope with the expected levels of manual workarounds
- systems implementation readiness — the new system, its stability, scalability, performance, conversion of data held in its pre-existing ICT systems (legacy systems) and the arrangements to support the new system once it was implemented
- community readiness — the ATO's engagement with external stakeholders such as tax professionals, other government agencies and service providers.
3.52 A key factor in this framework was the classification of the identified defects (important in determining systems implementation readiness):
- Severity 1 — Critical / Mandatory
- The application/system is not able to run in a production environment. There is no workaround for the problem to allow Users to continue processing with minimal or no loss of efficiency or functionality or legal requirements to be conformed with.
- Sample Indicators: major impact on revenue; major component/application not available for use; impacts on the availability of an external facing system
- Severity 2 — High / Essential
- The incident restricts the usability of the application/system, but the application/system itself is running. There is no sustainable workaround available.
- Sample Indicators: moderate to large number of clients and/or customers affected; slow response times; component continues to fail — intermittently down for short periods, but repetitive
- Severity 3 — Moderate / Required
- The application/system is up and running, but there is a moderate impact on the usability of the application. There is a workaround available.
- Sample Indicators: low customer/client impact; limited use of product or component; there is a workaround available
- Severity 4 — Low / Desirable
- The application/system is running with a minor flaw. There is a workaround for the problem and the usability of the application is not affected.
- Sample Indicators: low38
3.53 The ATO decided that the existence of any Severity 1 defect would preclude deployment.
3.54 Another key factor was the system's performance in relation to the following 14 key scenarios that represent key ATO business functionalities (important in determining production readiness):
- Return processing — Credit assessment
- Return processing — Debit assessment
- Manage lodgement obligations
- Payment processing
- Manage accounts in debit
- Data and transactions exchanged with the Reserve Bank of Australia, Centrelink, Department of Education and Workplace Relations and the Child Support Agency
- Create and review suspense and review items
- Process amendments
- General ledger update and reconciliation
- Client accounts — update and maintain
- Manual generic form processing
- High risk refunds and IDC processing
- Datamarts and Reporting cubes.
3.55 In relation to the community readiness criteria, the ATO had planned a communication and intelligence collection strategy. This strategy included providing information to taxpayers, businesses and tax practitioners on the Change Program, particularly in relation to the income tax release.
3.56 At various stages through the 2009 calendar year, progress reports on the Change Program were given to the range of established ATO business, tax professional and tax agent consultative forums. The ATO also had a range of material on their website detailing the background and impacts of the Change Program.
3.57 The tax professional associations and tax practitioners were consulted about the best time to deploy the new core processing system. Following these consultations it was decided that the December/January period was the best option. It was believed that the primary income tax returns that would be impacted would be those lodged by tax practitioners on behalf of their clients. This was because the 'due date' for self-preparers is 31 October in accordance with the legislative instrument which is tabled with the Parliament by the Commissioner of Taxation. This due date does not alter from year to year. It was also known that historically approximately 5 per cent of income tax lodgments are lodged during the December-January period.
3.58 As the timing for deployment of the income tax release moved closer, the communication strategy was aimed to raise awareness of the intended deployment date. In particular, from September 2009, the ATO alerted tax practitioners to the potential impacts that this deployment may have on lodgements that may result in delays in processing of tax returns until March 2010. The ATO urged tax practitioners to lodge as early as possible, and before the end of December 2009, to increase the likelihood of their refund issuing prior to the proposed shutdown. This ATO advice was aimed at allowing tax agents to provide advance notice to their clients and to take any necessary steps to reduce the identified impact.
3.59 By December 2010, it was agreed with members of the ATO Tax Practitioners Forum (ATPF) to establish a Change Program Consultative Group (CPCG). This group was intended to have regular teleconferences from February until 2 March 2010. It was established by the ATO to hear directly from tax practitioners and their representative bodies and associations.
3.60 The ATO also made telephone calls to around 3800 tax practitioners who normally lodged more than 100 income tax returns during December and January to alert them to potential delays that may arise as a result of the deployment.
3.61 From October 2009 through to mid-January 2010, both Capgemini and Aquitaine assessed the work to date against those criteria and reported identified gaps to the ATO.
ATO 22 December 2009 assessment — much more work to be done by end of January to minimise risks
3.62 On 22 December 2009, the ATO's CPSC met. It was presented with a high level ATO assessment of the readiness to deploy the income tax release. Due to the significance of this assessment, we have reproduced substantial extracts from it:
- Overall we would consider deploying Release 3 Income Tax at the end of January 2010 to be 'High Risk' based on the analysis undertaken to date on outstanding defects. However we note that it has been difficult to make an informed assessment of what errors will be outstanding at the time of deployment and the business impacts associated with these errors.
- The key reasons underpinning this assessment include:
- Delays in product test and multiple parallel activities have made it difficult to make an informed assessment of impacts on our business, current estimates for product testing completion are early to mid January 2010
- It has been difficult to assess the status of errors fixed in the production code and the likely number of unknown errors that could manifest themselves after deployment
- Potential reputational risks with loss of confidence in the ATO's ability to calculate assessments and process work within acceptable standards. This will be compounded where additional work is required to be undertaken by tax agents e.g. identification or checking of incorrect assessments and then follow up work to organise the amendments/changes
- Impacts on delivering tax time 2010 (for example, availability of key resources and timeframes for testing)
- Deployment of a system of this magnitude has impacts on both our service standards and actioning work that has been stockpiled during the 'ramp down' and 'ramp up' period. We anticipate that this will require an additional 655 to 856 resources [full-time equivalent staff] during February to June 2010.
- Depending on the nature and size of the issues on hand at deployment — we anticipate that we could manage workarounds that involve up to around 1300 additional resources ... (this excludes any budgetary considerations and is additional to the ramp up of resources as per para 3 above). However if workarounds were of a greater order of magnitude then the associated operational stress would likely make these mitigation strategies unworkable.
- Whilst we consider that we could manage the additional work from the workarounds ... there would be still a substantial impact on our business outcomes. For instance under these circumstances we estimate that between January and June 2010 most returns would not be processed in less than 50 days and this situation is likely to continue into the second half of the calendar year. Industry benchmarks and experience from previous deployment(s) shows that fixing errors and design issues in production can cost up to 4-5 times more than fixing these errors in a testing environment. ...
The following key points are put forward for consideration:
1. Business Impacts
A deployment of this magnitude has significant impacts to the Tax Office's business (assuming the system is fully functional). These impacts have been appropriately factored into our planning. For example:
- Ramp down approach leading up to deployment has been finalised: As a result of ramp down we anticipate:
- Key service Standards will not be met for a number of months following deployment ...
- Significant but manageable impacts on lodgements, refunds, offsetting credit and debit interest
- Workload impacts such as stockpiling of work, back out of activities from NTS and associated workforce planning decisions leading up to deployment (these have been finalised)
- Debt collections will be reduced by $310 million in 2009-10 — of this around two thirds should be clawed back in 2010-11.
- Outstanding concerns remain however, about the large number of outstanding defects and 'system unknowns' which have been evident in the previous releases.
- The last Release 3 Income tax status report shows that there are in excess of 800 outstanding defects, 600 of which are Severity 1 or 2 in nature.....
- Approximately 300-400 errors (predominantly SEV 1) are expected to be fixed between now and mid January — included in these are errors that relate to assessment calculation and subsequent reputation risk if issued into the community
- In excess of 800 issues have been raised in the Pre-Production Pilot. More than half of these are system defects or design changes from our existing systems that the business was unaware of. ...
- Currently a number of fixes are being deployed and then undergoing product testing. ...
- From a business perspective, our key issue will be the number of issues on hand at mid January that have not been corrected and the extent of the workarounds required. ...
- Functionality affected includes lodgment, accounts, debt, account enquiries, ... These impacts may result in returns unable to be processed, returns stuck in the system, lost forms and refunds, account fixes required due to data corruption and impacts on interoperability with third parties.
- Our understanding is that most of these issues will be fixed over the next few weeks. From a business perspective we consider that we could manage workarounds along with increased associated hardship cases with additional resources of around 1300 for the months of April onwards — however if errors on hand required workarounds of a greater magnitude this would cause too much stress on the operational business and would be unworkable. We anticipate that on average an outstanding SEV 1 error has an impact of around 100 to 200 FTE in workarounds and affects around 250,000 to 300,000 clients. ...
- If there is continued delays in the issuing of amendments, the results planned in respect of compliance activities will be impacted and revenue outcomes will be at risk.
- While some of these issues have been manageable in FBT and Superannuation releases, the size, scale and impact of these issues will not be manageable in the Income Tax Release. ...
3. Pre Production Pilot (PPP)
The original objectives and outcomes expected of the pilot have only been partially met: …
The Pre production pilot environment and functional limitations had meant the pilot was unable to reflect the end to end process or the entire internal and external experience.
However, the PPP has helped identify a number of critical defects (refer above) and design issues. For example:
- Defects relating to Medicare Levy, Eligible Termination Payments and Income Averaging …
5. External Readiness
The external community have been provided with the information that can be provided to them at this stage. Our focus has been on tax agents, BAS Service Providers, legal practitioners and large corporates. …
However, it should be noted that other than messages to lodge early and potential impacts on processing in the new year, there has been no direct impact on the external community at this time. With the potential for significant systems errors impacting on certain classes of clients in their assessments or accounts' records, coupled with the general difficulties of a deployment of this size, the level of tolerance from the business community and tax practitioners in particular will be greatly tested.
Through the external forums it is clear that the large corporates, professional associations and tax agents do appreciate that the system will not be without significant impact on the ATO service delivery. As experienced in the [delivery of the] tax bonus [initiative,] as soon as there is an impact on their individual practices there is a point the ATO risks the lose [sic] of patience from the community. This has been sought to be managed through planned communication and intelligence collection processes to keep the external community informed on how to work with the new system. The success of this will not only be influenced by our actions but also the level of leeway given to the ATO over a long period.
Tax professions have advised that while they appreciate the size of the deployment and will be understanding; their members will need to be able to explain to their client's reasons for delay and any inaccuracy. How long this can be accepted will be determined by their general perceptions and feedback based on perhaps isolated instances, rather than the rate of our systems corrections or ongoing contingencies.
Based on the identified systems issues at this time, it is reasonable to assume that there is a greatly increased risk that the tax profession generally or the representative groups could much earlier than previously anticipated, lose confidence in the ATO's data integrity and processing ability or their belief that the system was ready for deployment from their perspective.
6. External Readiness (Third Parties)
External government agencies and other impacted 3rd parties are aware of and ready for the impacts the planned R3 IT changes will have on them. Our ability to interoperate with other agencies such as Centrelink and CSA is still under test and therefore represents reasonable risk to the Go-Live decision. …39
3.63 In terms of the 14 key production scenarios, the ATO assessed the following as having a high risk:
- Return processing — Credit assessment (assuming that conversion issues were resolved, otherwise the rating would be assessed as 'Severe')
- Return processing — Debit Assessment
- Manage accounts in debit.
3.64 The key scenarios, Manage lodgement obligations and Data and transactions exchanged with the Reserve Bank of Australia, Centrelink, Department of Education and Workplace Relations and the Child Support Agency, were rated as an overall significant risk. The remaining scenarios were either rated moderate or low.
3.65 In terms of anticipated delays in return and amendment processing, the ATO estimated that it would not meet its service standards (processing 94 per cent of individual electronic income tax returns within 14 days) until the 2010-11 income year if it could achieve system 'functionality' by May 2010. If functionality was not achieved by May 2010, the ATO estimated that it would not likely achieve these service standards for the 2010-11 income year as well.
3.66 The ATO estimated that around 170,000 taxpayers would ask for priority processing of refunds over the February to April (inclusive) period, requiring up to around 520 full time equivalent staff to action.
3.67 The level of business impacts was related to the level of outstanding defects that needed to be resolved.
3.68 On 19 January 2010, Capgemini's assessment of Severity 1 defects stood at 54.40 Capgemini also advised that a number of unidentified defects were likely to arise in production.
The number of issues and defects raised in Parallel Run and Business Pilot identified that there were and potentially is a substantial number of latent issues that are outside of the scenarios covered in the Product Test. This means that these undiscovered issues will be experienced in Production, with unquantifiable impacts. …
the Capgemini IA [Independent Assurer] consider that despite the best intentions to have additional business testing activities prior to the Income Tax deployment, the technical delivery will largely follow the same pattern as prior Releases with the final codebase not being validated until it is in a Production environment. As a consequence, Capgemini anticipates that, as with prior Releases, the level of issues and defects that arise in Production will be at a level four or more times greater than that identified in the final stage of testing. Combining this with the very high number of Severity 2 defects that are already known and/or expected to arise in the initial months, Capgemini considers the likelihood of substantial business and technical issues to be Very High.41
3.69 The ATO's post-implementation Release 3 reviewer, CPT Global, notes that this assessment of all the known defects was taken at a point in time and the context surrounding this assessment should be understood. Up to the point of deployment, the trend was that a significant number of defects were being identified and resolved each week. It can be predicted that if testing had continued, more defects would have been identified at around the same rate. The implication is that further defects would likely be identified in production, which was generally confirmed by the defects that arose in production — as at 5 May 2010, 395 e-fixes were deployed, an average of approximately 30 per week.
3.70 The ATO has advised that not all of these e-fixes were to fix code defects, as a number were due to the ATO manually manipulating systems controls, such as 'turning on and off' the safety net.
ATO acceptance of likely significant post-deployment defects and the implementation of post-deployment problem mitigation plans
3.71 From the above account, it is clear that the ATO was aware of the risk that significant unidentified problems or defects may arise in production. The ATO's approach to managing those risks was to implement a range of post-deployment problem mitigation mechanisms which included the following elements:
- Transition team — The ATO has advised the IGT that it had intended to retain 20 of the original program development team for a further five months after deployment to identify and fix systems errors, if and when they arose.
- Production pilot — In the first two weeks after deployment, the ATO intended to pilot the processing of tax returns. This involved feeding a small number of returns into the system and verifying the outputs of that processing before issuing any correspondence to taxpayers. This production pilot would be 'ramped up' progressively and checked for performance outcomes.
- Safety net — In December 2009, Accenture developed a 'safety net' which could reduce the adverse impacts of incorrect assessments and correspondence issuing by stockpiling these if they contained any known or suspected defects. It would allow the ATO to suspend a form with particular characteristics from progressing further in the system, such as income tax returns involving primary production averaging calculations. Once the underlying defect affecting the stockpiled forms was fixed, the safety net allowed the ATO to re-process those forms. This mechanism reduced the risk of issuing incorrect assessments to taxpayers, but did so at a cost because there would be significant delays encountered by taxpayers and tax practitioners. However, there was still a residual risk of issuing incorrect assessments where the ATO was unaware of the defect and that defect had progressed through the system.
- Integrated support model — Generally, the integrated support model was an ATO framework for identifying, escalating, prioritising and resolving potential problems encountered. An overview is reproduced in Appendix 8. At the ground level, there were expected to be some 12,000 ATO staff, supported by 600 'expert users', using the new systems and processes after the income tax release's deployment. If, after consulting a list of known issues and workarounds, these problems were unable to be resolved by ATO staff, the problem was to be escalated to an expert user. Expert users were involved in the business pilot and received training on the new systems. Expert users were expected to have daily phone hook ups to exchange observations and experiences. If the expert user was unable to resolve the issue, the matter would be logged as an 'Infra'. The Business Issues Management (BIMs) team met daily to prioritise new Infras and ensure that they were being referred to the appropriate areas for resolution. Those Infras with significant impacts were raised with the Leadership Strategy Group forum, who then would refer the matters to the nerve centre, a forum chaired by the Second Commissioner responsible for the ATO's Operations. In this way senior ATO management were made aware of the most significant defects with the system.
- Release updates — Release updates deploy consolidated changes to the system after sufficient testing. The ATO scheduled the following releases post-deployment: TaxTime 10 Sub-release for 26 March 2010, ITR Stabilisation release for 26 April 2010, and the TaxTime 10 pilot release for 26 June 2010. Other releases were also scheduled for deployment in September/October 2010 and December 2010.
- Emergency fixes ('e-fixes') — Emergency fixes are applied on an ad hoc basis to remedy particular and significant defects, indicating a lack of a stable code base. Generally, these fixes are so urgent that the ATO considers they must be dealt with before the next software update release is deployed. The testing for e-fixes is limited compared to the testing for scheduled release updates. This is due to the urgency to implement these fixes. However, it also imports an increased risk because it may give rise to unintended and significant consequences.
- Workarounds — Non-critical system problems could also be addressed through manual workarounds. Sustainable workarounds were a feature of the ATO's pre-existing legacy systems. Problems with unsustainable workarounds were classified as 'Severity 2' defects (see above). Unsustainable workarounds are by their very nature very costly and difficult to maintain for any extended period.
- Staffing — The ATO also prepared to have at its disposal a large number of staff. In terms of processing returns for previous years, the ATO would normally have around 300 full-time equivalent (FTE) staff. After deployment of the income tax release the ATO aimed to have an additional 440 to 680 FTE staff to help manage the deployment from February through to June 2010, with an ability to draw on an extra 1300 to manage workarounds for any systems defects from January through to June 2010. The ATO could also transfer incoming telephone calls to an external service provider if needed.
- Hardship/Priority processing — The ATO was prepared to apply 'an adjusted interpretation' to the technical definition of hardship to minimise the impact that delayed refunds may have on cash flows.
- External Readiness and Intelligence Knowledge reporting — The ATO implemented a system of capturing community feedback to highlight key topics generating the most enquiries, the community impacts identified and provided a level of insight into the ATO's responses to the community feedback. The framework for this reporting is set out in Appendix 9.
- Full regression testing — Accenture advised the ATO that it would complete full regression testing before the deployment of the income tax release. The regression testing was to cover the income tax, FBT, superannuation and Interpretative Assistance releases. Accenture advises that this testing was completed in January 2010.
- Run ahead — A post-'go live' process where the ATO would run full production files in a parallel test environment prior to running them in a live environment, in order to warn of any potential issues. The process ran for approximately 2-3 weeks.
ATO income tax release — 21 January 2010 'go live' deployment assessment
3.72 On 21 January 2010, the CPSC met to decide whether the ATO was ready to deploy the income tax release. Overall, the ATO's own internal advice was that significant defects would arise in production:42
Significant progress has been made over the past few weeks to complete execution of the inventory of Product Test scripts and to achieve pass rates that indicate satisfactory remediation. Testing of OA functionality and resolution of defects seems likely to be also achieved close to "Go Live" and before the functionality is needed in a production sense.
Despite an unprecedented range of testing, it is virtually certain that significant errors will emerge as processing ramps up. Critical to the decision to deploy is assurance that sufficient capacity exists to effectively deal with these issues as they emerge. In response to this, learnings from previous releases have been accommodated in a revised support structure, and additional resources have been quarantined to be on "standby" as needed.
3.73 The ATO also assessed the risk of key ATO business functionalities:
Key Production Scenarios — at the CPSC of 22 December five production scenarios were considered at risk:
- scenario 1 and 2 (return processing credit assessment and debit assessment);
- scenario 3 (manage lodgment obligations);
- scenario 5 (manage accounts in debt); and,
- scenario 14 (data marts and reporting cubes).
All scenarios were reviewed at a workshop on Monday 11 January 2010 and the results were tabled at the CPSC meeting on 14 January 2010. Further work is required to update these scenarios with the final Product Test Memo listing of outstanding defects. This will be completed before Go Live. Key points are:
- Scenario 1 and 2 risks are mitigated largely through the resourcing to monitor messaging queues and replay messages. In addition the proposed safety net utility will enable forms with potential calculations errors to suspend. While this safety net utility is a blunt tool (that is will not be able to discriminate in terms of variations within a calculation set) it will enable forms not impacted to issue.
- Scenario 3 is dependant on the availability and operational maturity of the treatment plans.
- Scenario 5 is also dependant on the availability and operational maturity of the supporting treatment plans. This scenario also requires payment plans to be operational. The risks here are understood.
- Scenario 14 has mitigations (or planned mitigations) for scenarios where reports may not be available Day one.43
3.74 The ATO also considered whether it could support the income tax release after deployment:44
This point is made up of several sub points:
- Tax-time 2010. Overall the current status for Tax-time 2010 for ICP is rated amber. Key risks for the Tax-time 2010 release are delivery the Employee Share Scheme measure and finalisation of the scope of change requests associated with Super Co contributions and calculations of assessable income for eligibility of benefits purposes.
At the CPSC of 14 January you agreed that to ensure that the Income Tax deployment does not impact the delivery of Tax-time 2010 it is critical that staffing and environments required to deliver Tax-time 2010 are quarantined — that is kept dedicated to Tax-time 2010 delivery.
Stabilising the Income Tax code base before 1 July 2010 is the key Tax Time 2010 risk.
The detail provided later in this submission under supporting the Income Tax Release in production provides further assurance that every effort is being taken to stabilise the Income Tax code base ahead of the Tax Time processing period from 1 July 2010.
- Delivering deferred functionality, severity two defects fixes, and deferred approved change requests; and, responding to critical production issues — progressing but not completed.
Support manual reconciliation and retrieval of errors in the messaging system
The assessment of capacity to support Income Tax post deployment has been completed. Key points:
- There is sufficient capacity to deliver the known program of work for April 2010 — this is work agreed with Operations, Compliance Subplans and CFO representatives required before the 2010 tax processing cycle. ...
- There is sufficient capacity to support Production across the following areas:
- Deferred ITR defects,
- Mandatory items from the backlog of production defects,
- Unapplied Retro fit items
- Operational reporting (includes queue management and reconciliations)
- BAU [Business As Usual] Productions Support, and
- Technical workarounds
- There is additional capacity to respond to critical production issues that will arise post deployment. 54% of available resources will be retained for this work effort. Critical production defects will be corrected through emergency fixes (e-fixes) and e-fix windows have been established for Tuesdays and Thursday evenings and weekends.
- The level of resourcing has been set to provide maximum capacity respond to critical production incidents. This level of resourcing will be reviewed in April as a transition checkpoint.
- We have assessed the capacity to support manual reconciliations and the retrieval of errors in the messaging system. We have put in place a quarantined workforce that has been sized based on operational experience as well as anticipated workloads that have been modelled based on results from performance testing. In addition to the quarantined workforce we have an additional capacity of 40% that can be quickly re-tasked to provide additional support.
3.75 In relation to the progress in resolving defects, Accenture advised that of the Severity 1 defects, 20 had been tested and awaiting ATO sign off; 20 were in the code, had been executed and were awaiting verification; three had been reclassified according to remediation plans; and the remainder were in the code and awaiting execution. The ATO confirmed that the numbers had changed as a result of rectifying and successfully retesting some of the defects and reclassifying the defects according to mitigation and/or remediation plans (such as fixing them after deployment). As at 21 January 2010, the ATO agreed45 that the number of defects was:
- Severity 1 defects — 0
- Severity 2 defects —229
3.76 Of these 229 Severity 2 defects, the ATO:
- identified 6 defects as e-fix candidates
- scheduled 153 defects for resolution in the April 2010 release update
- scheduled 24 defects for resolution in the December 2010 release update
- was still awaiting scheduling the remaining 46 defects for resolution.46
3.77 Both Capgemini and Aquitaine accepted that the re-evaluation presented significant business risks for the ATO as they considered that it was certain that defects would arise after deployment. However, they advised that the risks could be reduced by the post-deployment problem mitigation mechanisms (outlined above).
3.78 In any event the ATO planned to use the late-April release update to resolve any Severity 1 that might arise and many existing Severity 2 defects that had their resolution deferred:47
3 Planned pre-July ICP Releases: March (FBT [Fringe Benefits Tax] TT10 [TaxTime 2010], Late April (ITR [Income Tax Release]/Maintenance) called "Planned ICP Fix Release April", June (IT TT10) ...
Late April planned ICP release will focus on deferred ITR SEV1 and SEV2 as well as critical post deployment defects that must be included in a release structure versus eFix approach
Rationale for late April is to provide bulk of change as late as possible but before code freeze / cut for final round of TT10 Regression Test.
ATO costs of delaying deployment after February 2010
3.79 Ultimately, the ATO needed to decide whether the risks of deployment (in light of post-deployment problem mitigation mechanisms) outweighed other factors, one of the main ones being the costs of delaying deployment.
3.80 The ATO estimated that delaying the deployment would mean that the next viable date for deployment was in January 2011. This was because this was the next date which provided enough time to fix defects identified after implementation and stabilise the system before preparations for the peak lodgement periods in May-November. Also an April deployment date may not give a sufficient settling in period and therefore was high risk because there was less capacity to gear up to deal with any potential problems.
3.81 The ATO also considered that major ATO data site management issues that were also on the work horizon had the potential to further restrict or delay the Change Program's development if the income tax release deployment was deferred.
3.82 The ATO was aware that delaying the deployment of the income tax release by one year would potentially result in the following:
- increase ATO costs by more than $200 million
- increase ATO costs of around $7-8 million to use pre-existing legacy systems to deliver that year's TaxTime
- a high risk of losing key people over another year, either to other international projects or retirement
- no significant reduction in the risk of unexpected or unknown problems or delays.
ATO independent assurers' assessments — income tax release 'go live' deployment decision
3.83 Both Capgemini and Aquitaine were prepared to support a 'go live' decision, subject to certain conditions.
3.84 Capgemini supported a 'go live' decision because, amongst other things, it had confirmed with the ATO that all pre-existing Severity 1 defects in the product code and conversion were either:
- Reclassified according to mitigation and or remediation plans such as fixing in production or during the weekend conversation, or
- Rectified sufficiently and successfully retested to the satisfaction of the ATO.48
3.85 However, Capgemini advised that their role was to assure the technical implementation of the release on the basis of technical elements only. They noted that while there were significant risks in other areas (that is, non-technical elements), there were mitigation strategies in place for these risks and that, ultimately, it was a decision for the ATO as to whether these non-technical risks were acceptable.
3.86 Aquitaine assessed the systems readiness and rated it as ready to go (noting that it was previously rated not ready to go based on previous conversion issues and lack of clarity around support arrangements, but that these aspects were now covered off). In doing so, Aquitaine assessed staff readiness and external readiness as ready to go live. Key production scenarios were also assessed as ready to go live, with the outstanding defects as minimal because the ATO was well prepared to deal with those risks.
3.87 However, Aquitaine noted that there would be a number of risks. Aquitaine estimated that as at 11 January 2010, there would be an estimated 50,000 individual assessments affected:
A small number of assessment defects (in [key production] scenarios 1 and 2) are still outstanding, but are expected to impact less than 50,000 individual assessments annually, from a total taxpayer base of 14.5 million. Clearly, the ATO needs well developed processes to identify and rectify any errors that come to light through feedback from the community, further minimising any impact on taxpayers;49
3.88 Aquitaine also noted that due to the intended ramp up, activities around the maintenance release and preparation for TaxTime, it would be reasonable to expect widespread delays in processing that would affect most taxpayers across the board until the end of the year.
ATO decision to deploy the income tax release — the 'go live' decision
3.89 The ATO decided, after considering the internal and external advice, to continue with the deployment schedule by deploying the income tax release on the Australia Day weekend, noting that if there was a catastrophic event, it had an option until 31 January 2010 to back out of the new systems.
3.90 An independent post implementation review conducted by CPT Global on the deployment also supported the ATO's decision to go live, but with important situational conditions:
The quality of the ICP software was not as high as it should have been (The ability to Safety Net and stockpile transactions essentially reduced the impact of defects that otherwise would be classified as Severity 1 defects. This in no way can [be] considered as a way to improve software quality.), but it was most likely as good as it was going to get in the short to medium term. A decision to defer implementation would have resulted in additional risks for the project that outweighed the risks of implementing.50
ATO Income Tax Release's Deployment
'Go live' — stockpiled returns, conversion, ramp up and back log catch up
3.91 In preparation for a possible deployment, from 23 December 2009 the ATO had stopped entering any new income tax returns received into its pre-existing legacy systems. It stockpiled any returns received after this date, with the intention of inputting those returns into the new ICP system soon after that new system was deployed. The ATO advises this stockpiling was needed to give the pre-existing legacy systems a month to 'flush through' returns before any conversion of records could take place.
3.92 The income tax release was deployed over the Australia Day long weekend (23-26 January 2010) by converting around 27 million taxpayer records, 32 million accounts and 282 million forms. Accenture reported that a number of e-fixes were applied.
3.93 By 2 February 2010, the ATO had passed the point of being able to 'roll back' the ICP system and use the legacy systems.
3.94 Over the next two weeks the ATO started a pilot process for tax returns — a production pilot. This involved feeding a small number of returns into the system and verifying the outputs of that processing before issuing any correspondence to taxpayers.
3.95 By 9 February 2010, the ATO had caught up on accounts and payments and these were being processed as received. Also, 3700 income tax returns and schedules had been processed and verifications done. Some of the errors found, as explained above, were resolved through e-fixes. Non-critical errors were scheduled for later releases. However, the ATO considered that it was coping with the pace of e-fixes.
3.96 From 15 February 2010, the ATO progressively increased the number of tax returns it entered into the system. By 1 March 2010, all returns on hand (around 1.03 million returns) had been entered into the new system.
3.97 On 2 March 2010, Accenture reported to the ATO that they:
Have caught up on back log. All of the February's forms received are now into system. Ran a batch on those last night. Normal processing will now begin and forms will now be processed as received and not stockpiled.51
3.98 On 2 March 2010, the ATO publicly reported on its website that:
We have processed around one million income tax returns using our new system, including all stockpiled returns and returns received up until the end of February. Refunds and assessments have progressively been issuing since mid-February, and some people have already received refunds ... The majority of refunds for returns lodged in December or January have been issued, and the majority of refunds for returns lodged in February will issue by the end of next week, 12 March 2010 ...
If we take longer than 30 days to process returns, we will pay interest.
As usual, some refunds will take longer to issue — for example, if they involve complex tax affairs or we need to check the legitimacy of a claim for a refund.
Please note, it can still 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. From now on, the majority of people who lodge should receive their refund or notice of assessment within our normal turnaround time of 14 days. If they lodge by paper, individuals should have it within 42 days and non-individuals within 56 days.
If people are expecting a refund and want to check its progress they can call us on 13 28 61 ...
We understand the delays have caused problems for some people, and we are grateful for their patience. Our thanks also to the tax profession for their input, advice and patience throughout this process. We appreciate their efforts to complete and lodge their clients 2008-09 returns and look forward to working with them again as the 2010 tax time period fast approaches.52
3.99 Over the next few days, the content of this information was disseminated at various forums.
Taxpayer and tax practitioner experiences with the new system during February‑June 2010
3.100 Set out in narrative form below are the main concerns raised by taxpayers and tax practitioners with the IGT. This is not an exhaustive list of those concerns, but it conveys the typical problems encountered by affected taxpayers and tax practitioners over the February-June 2010 period and the tone of their interactions with the ATO.
3.101 As previously stated, the ATO's planned communication and intelligence collection strategy included providing information to the community and regular teleconferences with tax practitioners and their representative bodies and associations. This group, called the Change Program Consultative Group, had its first teleconference on 5 February 2010 with twice weekly teleconferences until 2 March 2010, when planned teleconferences were intended to be discontinued. During these teleconferences, issues with the Change Program, including those relating to the income tax release deployment, were raised and discussed.
3.102 The ATO's publicly stated expectations leading up to the deployment of the income tax release were that processing delays would be experienced from end of December through until March 2010. During these scheduled teleconferences no significant concerns or complaints were raised by tax practitioners or their representatives.
Problems created by new ATO Notice of Assessment (NOA) and Statement of Account (SOA)
3.103 From 26 February 2010, some tax practitioners had started to raise concerns with the ATO as they received their clients' Notices of Assessment (NOAs). These initial concerns mainly centred on the design and functionality of the NOA and the related costs. For example, some tax practitioners said that the NOA was lengthy, did not identify the taxpayer on every page, and there were problems with some of the data being read by commercial software and optical character recognition (OCR) equipment. Some tax practitioners stated that their costs had almost doubled due to the increased size and that the SOA and NOA were sent in two separate envelopes. The following is an extract from one of the tax profession representative bodies' submissions. It quotes material that one of their member tax practitioners provided to it.
[The NOA] is in 2 separate documents, 4 pages each. There is a separate page to show how the PAYG and other credits on the assessment notice has been calculated (2 lines only) but no subtotal to indicate that these figures relate to a single amount printed on the face of the assessment notice. No wonder clients cannot read these documents! and there is no reason it would not have easily have fitted on the first page anyway.
The Statement of Account, which arrived 3 days later, has a nil balance, (page 1), 3 entries on page 2, with other confusing YTD figures that are in no way relevant to the point of the statement, with past year figures provided (why on earth???).
... This is such a waste of my time and that of my staff. I am sure it does not bother the ATO because we have to do it all ourselves on the Portal.
Concerns that delays were much longer than expected and confusion with new ATO terminology
3.104 By 5 March 2010, some tax practitioners were also concerned about the delay in issuing NOAs for returns lodged during December 2009. They pointed to the ATO's November and December 2009 communications that stated that delays were expected to be resolved by March. They also pointed to the ATO's recent communications (such as the 2 March 2010 communication extract quoted above) saying that all returns were processed and there was no backlog. Tax practitioners understood this to mean that most of the previously delayed returns were about to issue.
3.105 From 8 March, a number of further problems were identified by taxpayers and tax practitioners. Tax practitioners were now expressing concerns with electronic funds transfer (EFT) reconciliation summaries and confusion on what some of the terminology of postings on the new system meant (such as 'processed date' and 'effective date' and the time between both).
3.106 Tax practitioners were unaware that one of the main material differences between the ICP system and the ATO's pre-existing legacy systems was that the ICP system will post an amount to the taxpayer's account before running credit risk assessments and offsetting amounts against other liabilities. The legacy system posted the amount to the account after running these routines. This means that under the legacy systems, tax practitioners who accessed the tax agents' portal would only see an amount posted to their client's account when a NOA was ready to be issued. In contrast, under the ICP system an amount could be shown on the client's account but a NOA would not be posted for a substantial time later if there were delays experienced after posting — such as credit risk assessments or offsetting against Centrelink debts.
3.107 Another material difference between the legacy and ICP system was the use of unfamiliar terminology or terminology that was familiar but had a different meaning. For example, under the legacy systems, tax practitioners understood 'processed' to mean that the tax return had been assessed by the system and the NOA was to issue (subject to its position in the printing queue). However, under the ICP system, the ATO used the word 'processed' to mean that the tax return form had successfully entered the forms and payment processing module — that is, the ICP system had recognised the form. It did not mean that the form had passed all checks or that the form was not subject to officer intervention or remedial action (for example, because the form had suspended).53
3.108 Tax practitioners also observed that interest was being incorrectly calculated and not being offset against other accounts in debit. Some practitioners also expressed concern that Centrelink were demanding payment from their clients, which was based on incorrect data from the ATO. They claimed that the ATO system was treating negative taxable income amounts as positive and communicating that amount to Centrelink as a positive amount. (Although, the ATO has advised that this was a Centrelink problem — the ATO sent it across as a negative value and Centrelink interpreted it as a positive figure.) This threatened their clients' eligibility to Commonwealth benefits.
3.109 On 8 March 2010, the ATO call centres were unable to deal with the volume of incoming calls. A recorded message told callers that the ATO was unable to answer their calls immediately because of the 'high level of calls'. Until 16 April 2010, no alternative number was given and any calls that did not enter the telephony queues were disconnected. Tax practitioners expressed concerns with the amount of unproductive time that they were spending in dealing with the 'ATO's errors'. Tax practitioners said that they were losing confidence in the ATO call centre's ability to understand and explain what was happening, and at times giving messages inconsistent with those on the ATO's website:
The ATO stated in its press releases that it has processed 1 million returns to date. Previously it stated that they had processed 400,000 returns in the week ending 24 February and would process 300,000 in the week ending 5 March. We told our clients that the word "processing" might not have the same meaning as they would expect because the refunds still needed to go to a mail house and they had to allow another week on top of this. Today, Monday 8 March, a client rang me asking about his refund that he desperately needs. So we rang the ATO and they stated that they still had a large backlog and that they will fast track this taxpayer's refund. However they also stated that this fast tracking will take 14 days. We have received very few Notices of Assessment so far. The only conclusion that we are able to draw is that the ATO is not being truthful in its press releases.
3.110 By 12 March 2010, some of the tax profession representative bodies were concerned with the increasing numbers of complaints from their members and the escalating tone of these complaints. They approached the ATO for clarification. The ATO advised the tax profession representative bodies that they expected delays to be resolved by 12 March 2010. However, tax practitioners continued to observe delays. Some tax practitioners remained sceptical:
Returns lodged before Christmas still not processed as promised, back log caught up by the end of February hasn't happened as promised, call centre team leaders do not call back with answers as promised, "Relationship Managers" ignore faxes, ELS reconciliation reports still not being received. And obviously nobody cares, we are expected to try and work with the mess. Does anybody have any idea when things might start to happen again? The excuses are starting to wear thin and we are getting no support from the ATO.
3.111 Some tax practitioners said that their clients were concerned with the delays. The tax practitioners had told their clients that they had already lodged the tax returns but they were being told by the ATO that the ATO had problems with the new system and was slow in issuing refunds. However, when some of these taxpayers contacted the ATO, the call centres said that the system was telling them that the return had not been lodged. Taxpayers questioned tax practitioners and asked the tax practitioner to provide proof that they had lodged the return.
3.112 By this time, tax practitioners and taxpayers observed that the ATO call centres were no longer giving expected dates for issue, but were telling them that the matter had been escalated and to wait another two weeks.
ATO problems with issuing certain taxpayer refunds
3.113 Some tax practitioners also observed that certain refund cheques were not issued to taxpayers:
Just received a statement for a client's income tax account ... but it would appear that the ATO is back to its bad old tricks and retaining refunds due from an Activity Statement and applying the money to the income tax debt, due 15 May 2010. I thought that this was something that we jumped up and down about several years ago. I contacted the ATO and received the party line as read out, but when asking why this was something that was stamped out previously was put on hold for 10 minutes. I will have an answer "shortly", but the service standard is, of course, 28 days. Will not hold my breath.
3.114 On 15 March, the ATO provided another website update:
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.
If you are expecting a refund
For the past two weeks, we have been processing returns within our normal turnaround times. As usual, some refunds will take longer to issue — for example, 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.
If you are expecting a refund and want to check its progress, call us on 13 28 61. If we take longer than 30 days to process returns, we will pay interest.54
3.115 Over the next few days, the content of this information was disseminated at various forums.
3.116 Many tax practitioners, however, remained sceptical:
We all accepted that there would be delays in processing assessments, however it is getting beyond a joke. I checked 21 clients' status on the Portal the other day and to my amazement 12 are shown as "Not Lodged" and the remaining 9 are showing that assessments have issued with "Effective Dates" varying from 24 February to 15 March 2010, yet as of today's date (17th) not one assessment notice has been received. The oldest lodged returns date back to 23 December 2009 and in frustration I contacted the RM [Relationship Manager] section of the ATO. The person from RM has escalated these 2 returns and assures me that another "Case Officer" will contact me about these 2 returns. I won't hold my breath waiting.
I've got numerous cases in my firm (including me as my own client!) where refund due returns aren't being processed anywhere near as quickly as payables in the new system. For example:
- My return — lodged start of Feb 2010 — have been told that the reason it still shows as "unlodged" on the portal is (a) due to a family tax benefit claim, (b) due to a scripting error in the system, or (c) because they're trying to verify some other data. I've been promised a refund by 12 March which has come and gone, new update is 19 March but don't hold your breath, still unlodged on the portal. ATO have confirmed lodgement. Threatening ATO with a hardship release claim because I've got two car registrations and insurances due end of the month!!!
- Group of company returns all lodged on the same day 26 Feb — assessments already received for nil or payable clients, but refund of $59k for one company still showing as unlodged on portal. Refund is entirely due to overpaid PAYG instalments.
- Group of 5 family members — all lodged in the same transmission report — assessments received for payable family members, trust return showing as lodged, but two refunds owing to family members still showing as unlodged on the portal.
There is only so many times we can tell the client to remain patient, but who can blame them when they get the bills to pay but not the money they're owed? What more clear cut evidence do we need that the ATO is systematically not processing refund returns and blaming the "delays" on their change program?
3.117 On 19 March 2010, an extraordinary meeting (teleconference) of the Change Program Consultative Group was held with tax practitioners and their representatives to discuss the progress of returns and ELS reports. The minutes of this teleconference record that, amongst other things, the ATO advised that:
due to recent technical difficulties income tax refunds and assessments were delayed. We have now rectified the technical problem and are planning to forward refunds and notices of assessments to Australia Post early next week. This means that taxpayers should receive their refunds by the end of next week.
3.118 By 22 March 2010, tax practitioners also observed changes to the ATO call centre's responses to their inquiries on progress of assessments — they generally conveyed that the matter had been escalated and to call back in two weeks if the NOA had not been received by then.
3.119 On 22 March 2010, the ATO directly contacted tax practitioners in a special broadcast (mainly by email and facsimile):
Last week, we experienced an issue that meant we had to stop a significant number of refund cheques from being sent out. This did not affect refunds paid by electronic funds transfer (EFT).
We apologise for the delay, have fixed the problem and resumed processing. The majority of these refunds will be delivered by the end of this week.
The date of issue on these cheques is likely to be from the week end 12 March 2010.55
3.120 On 23 March 2010, the ATO held a workshop with tax practitioners to obtain feedback on the NOA and SOA. A number of issues were raised and the ATO advised that it was aiming to 'revamp' the NOA/SOA by 30 June 2010.
Escalating public frustration
3.121 By 24 March 2010, some Federal Members of Parliament and Senators had been approached by their constituents on the issue, with at least one publishing a media release on the problem. Tax practitioners' frustrations were escalating as demonstrated in the quotes below:
Extremely slow processing of refunds & the huge backlog our clients are experiencing. It has gone on too long. Not only are we every day getting phone calls from clients asking where their money is which is very time consuming, they often blame us for the delay rather than the ATO. Living in a small regional town my staff & I are also being stopped in the street by clients asking about their refunds. This happened to me again today. Enough is enough! Our cash flow is also being affected as a number of clients only pay us once they have received their refund.
The ATO [should] pay for a national media campaign acknowledging their problem immediately & give us all a definite date when they will be up to date. They should set up a special hotline for the taxpayer to ring the ATO rather than their tax agent having to spend time on the portal etc trying to find out where their refund! The ATO need to bear the administrative time answering taxpayers queries not the tax agents! ...
I have clients who have not received their refunds when their ITRs were lodged electronically in late December 2009. We have asked for a number of refunds to be "escalated" without much success.
Our cashflow is also being affected as a number of clients only pay us once they have received their refund.
3.122 Some tax practitioners also expressed frustration that the delays in providing refunds was affecting cash flows.
Our client has been waiting for a tax refund of over $100,000 which is recorded on their tax account effective late January but no one I talk to in the ATO can tell me why the refund has not issued. Not to worry! The ATO has escalated the issue and by their own lofty performance standards we should hear something within 2 weeks ... With the 14 days having passed since the matter was escalated, I was then put in contact with the relationship manager area. Someone there then called me within the requisite 72 hours they give themselves to respond. The answer?
They have done all they can and the refund should issue but they can't say when. As this delay is causing the client severe cash flow problems I asked whether there was any other option. Apparently we can call the ATO on 132866 and plead our case. Tried to call, but received the message that they are receiving peak demand at the moment and can't answer our call. Well done ATO.
ATO apologies, concerns with the transparency of ATO communications and continuing problems
3.123 The issue of the delayed refunds was also canvassed with the Prime Minister during a radio interview on 26 March 2010. In response to a question relating to the delays, the Prime Minister commented that 'I get the Treasurer on to your program and go through the complaints which have been made, and how they'll be rectified.'56
On this day the Shadow Assistant Treasurer also met with the ATO on the problems and later stated publicly that 'I was assured that the backlog had been well and truly dealt with.'57
3.124 By 29 March 2010, some tax practitioners were publicly commenting that they had lost faith in how the ATO was dealing with the problem, including their public communications. They raised a range of problems they were experiencing, including impediments to accessing client details on the portal and general delays.
3.125 On 29 March 2010, the ATO published another update to its processing and included an apology:
Processing status of tax returns
I would like to reassure tax agents and the community we are doing everything we can to issue outstanding notices of assessment for 2008-09 income tax returns and I apologise for any inconvenience you have experienced.
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.
In the information below you will find the status of our processing and answers to some of the questions we are hearing from tax agents and people who have been calling us.
Again, I apologise for any inconvenience by this systems upgrade. ...
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.
What if people lodged in December, January or February and still haven't received a notice assessment?
All remaining 2008-09 tax returns are now moving through our system. As per our published service standards, we aim to process 94 per cent of electronically lodged returns within 14 days and 80 percent of paper returns within 42 days.
Some cases may take longer to process where we may need more information from taxpayers. Sometimes we may also closely examine a return to ensure there are no fraudulent claims or we need to ensure claims are legitimate.
If people think their notice of assessment should be with them by now and they haven't received it, please call us on 13 28 61. …
What about people experiencing financial hardship?
We have been working hard to ensure we get refunds to people experiencing genuine financial hardship. To date we have helped over 1,000 people who were in this situation.
If people are in this situation we ask that they do not hesitate to call us on 13 28 61 and we will do what we can to help.
Overall are we happy with the implementation of the new income tax processing system?
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.58
3.126 Over the next few days, the content of this ATO information was disseminated at various forums.
3.127 By 30 March 2010, tax practitioners had started to receive cheques that were held up due to a problem with the SOAs not being sent out. However, it appeared that no interest was paid for the delays.
On 29 March, I received a cheque for over $6000 for a client and the cheque was dated 9 March. As the return was lodged on 22 February, an issue date of 9 March would have been the normal turnaround period that was being achieved under the old system so no interest would have accrued. If the assessment were correctly issued on 26 March which must have been the date of posting, a minor amount of interest would be due. My issue is that an observant client will think I have been sitting on their cheque for three weeks but, actually, the Tax Office should be paying them interest. Rang the ATO and (after a long period waiting for a 'specialist' to look into the matter) first I am told that as the cheque was issued within the 30 day service period as it was raised on 9 March so no interest applies then (second long wait) — it was accepted that today is outside the 30 day 'service period' so the 'specialist' was contacted again (third long wait).
Now the question will be sent off to [the] accounts department for review as the 'activity' was 23 March and then I pointed out it was received today so the assessment must have been posted on 26 March so it gets an escalation number with an action date of 9 April and I know that I will have to spend another half hour in the middle of April to get an apology and the client's few dollars of interest.
I have observed that the Tax Office also seems to have changed their telephone answering system so that when the operator does not know the answer, which is normally the case or I would be able to find out the answer, they check with a 'specialist' and if the facts asked are not quite correct when they ask the 'specialist' you end up on hold for another 15 minutes whilst they try again and again and again ... it has taken so long for the 'specialist' to work things out after receiving the wrong question for the operator that I just keep typing to prevent the steam from lifting the lid!
3.128 On 1 April 2010, the ATO published another apology and an update on its processing:
I would like to reassure tax agents and the community we are doing everything we can to issue outstanding notices of assessment for 2008-09 income tax returns and I apologise for any inconvenience you have experienced.
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.
In the information below you will find the status of our processing and answers to some of the questions we are hearing from tax agents and people who have been calling us.
Again, I apologise for any inconvenience caused by this systems upgrade. …
Total returns loaded to the new system February to 24 March 2010 — 1,086,000
Notices of assessment
Total issued to taxpayers (of which 170,000 issued this week) — 720,000
processing through the system and will be printed shortly — 216,000 (Planned issue date — During the week commencing 5 April)
normally on hand at any given time — 150,000 (Some cases take longer to process where we may need more information from taxpayers. Sometimes we may also closely examine a return to ensure there are no fraudulent claims or we need to ensure claims are legitimate.)59
3.129 The ATO also directly contacted tax practitioners in a special broadcast on 1 April 2010:
Incorrect due date on notices of assessment
Some debit notices of assessment that issued since 23 March 2010 have incorrect due dates between 6 and 9 April 2010. We are aware that these dates do not allow sufficient time for payment.
We apologise for any inconvenience this may have caused. We are fixing the problem and will advise you of an extended due date for your affected clients.
Please do not contact the ATO about this issue.60
3.130 By this time, many tax practitioners were increasingly concerned with the ATO's response to problems:
It is accepted that when major systems upgrades occur, there will be issues and problems that arise that will need to be corrected. The "right" way to approach these issues and problems is to be upfront, open and candid about what has occurred and how long it is expected to take fix the problem. The ATO has instead bombarded us with self-congratulatory "slaps on the back" for managing a major change well, telling us (initially) that delays are fixed and everything will be fine. The original news was that the backlog would be cleared by end of February 2010, then came the "one more week" messages and here, on 1 April 2010, we are still waiting for about three quarters of the assessments relating to returns lodged between 23 December 2009 and the end of January 2010, with some returns still being listed on the Portal as being "Not Lodged" (which we are assured have been received).
3.131 On 6 April 2010, the ATO directly contacted tax practitioners in another special broadcast:
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 2010.61
3.132 By 6 April 2010, a small number of tax practitioners and taxpayers had also made compensation claims. Taxpayers claimed the costs of delays and managing their tax affairs while waiting for the refund. Tax practitioners claimed the costs of having staff idle, the costs in dealing with disgruntled clients inquiring about the progress of their refunds and the reduced number of client refunds from which they recovered their fees.
3.133 On another front, by 8 April 2010, representatives of primary producers said that they had been told by the ATO that:
In January the ATO advised of an upgrade of their computer systems. The computer upgrade when completed had a bug in the new system meaning that it was not able to process income averaging. Primary producers have been told that the ATO therefore will not commit to a time frame for having their income tax returns assessed.
Primary producers have been told that there are 350,000 outstanding income tax assessments and those primary producers make up 100,000 of these, and that the backlog is mainly due to the computer upgrade.
3.134 On 12 April 2010, the Commissioner gave an apology in one of his speeches:
.... Of course, with great change there is a degree of upheaval. We are aware that some agents experienced issues with delays in processing income tax returns and client refunds as we moved to our new systems. I can say that we have now issued 940,000 notices of assessments for individual taxpayers. However, as always we will take more time to look at some returns more closely and overall we intend to be on track to meet normal processing times by the end of April.
These sort of issues can test our relationship, but we have a history of working together to smooth out rough times. Indeed, tax agents have been helping the community meet their tax obligations since the early days of last century. ...
However, as the new system is bedded in we appreciate that there have been issues for some tax agents around client refunds and processing of income tax returns. While we apologise for the inconvenience, some disruption was unavoidable given the scale of our endeavour.62
3.135 However, delays and problems continued to be experienced by tax practitioners and their clients, causing the call centre phone lines to experience peak demand and not connect calls. Some taxpayers and tax practitioners said that they were facing cash flow difficulties and problems in meeting upcoming lodgement obligations:
This assessment & refund backlog situation is getting to a crisis point
- we are a small practice and usually get a large amount of our revenue via the tax refunds for clients — we have clients complaining re late assessments and refunds and yet the ATO is still chasing for outstanding payments. Many small businesses including my own will be relying on refunds to fund other tax payments so it is wrong for the ATO to be chasing payments when they owe money to related parties/directors/shareholders etc.
The combination of no/insufficient tax refunds and the banks not lending is hurting small business big time, our business employs/is supporting 5 different families and is currently experiencing a severe cash flow crisis, please ensure positive action is taken immediately to relieve the situation.
In Mid February when we rang we were told that they would be up to date by the end of February with the processing. To the end of February there were no assessment notices received since before Christmas. ...
It is now one month before I have to have everything finished under the standard lodgement programme.
I am behind again this year — this time because of the Change Programme debacle and (over the last 2 1/2 months) I have wasted hours calling the Tax Office for numerous clients who need help with trying to extract refunds out of the new "System". It reminds me very much of the Tax Bonus times.
I (and presumably others) need your help in requesting the Commissioner to extend the lodgement programme to take this into account.
3.136 On 14 April 2010, the ATO directly contacted tax practitioners again with another special broadcast:
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.63
Questions about ATO accountability and calls for independent scrutiny
3.137 On 14-15 April, the ABC radio program, PM, ran a couple of reports on the Change Program and the problems experienced, including a reference to an internal ATO report that noted the emotive tone of tax practitioner complaints (see for example, a later internal ATO report reproduced in Appendix 9). On 15 April 2010, the Assistant Treasurer announced on the program that he was considering directing the IGT to review the Change Program.64
3.138 On 15 April, the ATO published another update:
Anyone who has not already lodged their 2008-09 tax return, and does so now, should receive their refund or notice of assessment within our normal service standards — 94 per cent of electronically lodged returns within 14 days and 80 percent of paper returns within 42 days.
However, I would like to provide another update on where we are in processing the returns we stockpiled due to our upgrade to the income tax processing system.
While we are experiencing some problems which unfortunately are affecting some people in the community we are working as hard as we can to resolve the problems. ...
Current issues and what we are doing
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.
We currently have around 100,000 returns from individuals that we estimate are over 30 days old in our system. Not all of these will generate refunds. In fact, we would anticipate roughly half might generate a refund, where the remainder would be tax bills.
While this is more than we would normally have on hand, it reflects the shorter processing time we have had given the need to stockpile any outstanding 2008-09 returns while we switched over to the new system. We are working hard to be back to normal processing service standards with this work as soon as possible.
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.
We understand our upgrade has caused frustration and inconvenience for some people and are doing everything we can to ensure any outstanding returns are processed as soon as possible.
For example, we have brought in an additional 320 people, have extended work shifts and are working as much overtime as is possible. We are in the process of bringing on an additional 500 temporary people over the next few weeks.
We have been working hard to ensure we get refunds to people experiencing genuine financial hardship and to date have helped over 1,440 people. If people are in this situation we ask that they do not hesitate to call us on 13 28 61 and we will do everything we can to help.65
3.139 By 16 April 2010, many tax practitioners were frustrated with the perceived level of ATO accountability.
In his ATO Web site update of last night Second Commissioner ... provided "the facts" about the ATO's computer upgrade which included comments such as "the system is working well" sitting beside comments saying that you and me (the Australian taxpayer) are paying for an extra 820 people to come in and fix the system that is working well.
He says the reasons for the delays are due to Centrelink, due to tax debts owing by taxpayers; due to people lodging multiple years of returns and finally due to taxpayers and presumably Tax Agents lodging returns full of errors — for some reason there is no mention of the delays being an ATO problem at all.
3.140 Some tax practitioners also called for compensation as a means to impose a higher level of accountability.
Can you also raise the issue of why taxpayers only receive a reduced rate of interest from the ATO as opposed to the GIC or shortfall rate the ATO charges. The majority of my business clients would be using overdraft facilities etc to operate their business + personal affairs & hence the interest rate they have been charged re delay in receiving refunds is significantly higher than the corresponding interest they have (or are yet to) receive from the ATO. Really there is no justifiable reason for such double standards in today's environment.
I understand that one argument the ATO puts forward for the justification in the difference of the rates is that taxpayers should be encouraged to pay their tax bills & hence a higher rate is charged. However, conversely, the argument applies to the ATO in that they should be encouraged to perform their jobs efficiently & if they can't & cause delays in processing client refunds (for whatever reason) then compensation in the form of at least commercially realistic rates of interest should be paid to the taxpayer.
Given the ATO unbelievable ineptitude together with a reluctance to publicly admit their errors and lack of display of any empathy ... over this long running saga, then surely they need to be encouraged to ensure such errors do not occur in the future by being made to pay a commercially realistic interest from now on in. If this requires legislative change so be it.
The ATO's silence has perpetuated the belief that their processing & other delays have been the tax agents fault rather than the ATO. Us tax agents are bearing the administrative cost of replying to taxpayers queries rather than the ATO. We are not being paid for this yet no doubt the ATO managers / employees are. Thus the question of should the ATO compensate tax agents for the unpaid time we have spent due to their errors needs to be raised as well!
Two matters that need to be emphasised apart from financial loss is the emotional strain placed on work colleagues and serious loss of credibility with clients which will impact on my client base this coming financial year.
3.141 By 16 April 2010, tax practitioners noticed more errors with the date due for payments on NOAs:
We recently lodged a number of tax returns for clients and had advised them that their due date for payment of outstanding tax was to be 5 June 2010 (based on notification from ATO of due dates for payment when lodgment was made by certain dates).
Assessment notices were then issued by the ATO for these customers and detailed a payment due date of 21 April 2010 (directly against their previously published advice). [Note that this date due for payment is different to the error referred to in the ATO's 1 April 2010 email to tax practitioners — set out above] One of my team then spent 40 minutes on the phone to them regarding the date for payment during which the ATO confirmed that the due date should be 5 June but have "refused to confirm" what date the customer should actually pay the assessed amount. They have escalated the situation but that will take our clients over the date due for payment as detailed in the erroneous assessment notices.
This is an absolute debacle as our clients have budgeted to pay their tax payables in June and the ATO appears to have arbitrarily changed the dates — this is placing our clients in an invidious cash flow position. By effectively shortening the payment period by 7.5 weeks with no reason, they are creating difficulties which should not exist.
I know what will happen — for each and every client affected, we will need to get on the phone to the ATO and argue the case regarding payment dates which will take about 1 hour per client. Who is going to pay for this?
3.142 On 16 April 2010, senior ATO staff briefed the Assistant Treasurer and, on 19 April 2009, the Assistant Treasurer directed the IGT to review the Change Program with broad ranging terms of reference.
3.143 On 19 April 2010, senior ATO officers briefed the CEOs of the tax professional bodies and industry associations on the Change Program. The Minutes report that the ATO advised the attendees, among other things, that:
... there have been two issues which had caused the majority of concern:
1) Data provided to Centrelink was incorrect and 2) Cheques not included with NOA. These two issues ultimately caused bigger delays than first thought and both were due to human error.
The system itself has been extensively tested and was working as it should. The problem was caused by the work we had put into it, as well as the staff getting used to running a new system. The second issue was due to cheques not being printed, this has been rectified and the cheques will be with Australia Post this afternoon.
The system upgrade has been the largest system update. [The ATO] reiterated that the ATO has now processed 2 million items through the new system of which close to 900,000 were refunds, the ATO is confident it is working well. There have been some delays, we don't deny, however the crucial aim is to get refunds out.
[The ATO] recognised there was pressure on Tax Practitioners regarding delayed refunds but also in relation to May lodgments. This is not yet been announced however it has been decided to not apply FTL penalty for May lodgments.
[In response to a question regarding whether there were any other issues of significance that the ATO was aware of which would potentially cause major concerns in the next few weeks]. [The ATO] advised that there was nothing we were aware of at this stage, staff are getting used to the system. The new system was built to support Taxtime 2010 and we are very advanced with this process and it is still tracking green which raises confidence. ABR is running more effectively and we are confirming that other future deployments scheduled to occur, for instance AusKey, does not impact on other systems like the portal. [The ATO] advised that [there is an ATO internal] meeting every morning tracking the progress carefully, this meeting now occurs twice a week. If we didn't have the two human errors situations, we would be more confident.
3.144 On 20 April, the ATO published another update:
Last week we said there were 140,000 delayed refund cheques which were being printed. I would like to provide a brief update on those cheques.
Some people will have already received their cheque and we can confirm the balance are in the process of distribution with Australia Post.
We have also issued another 74,000 refunds directly to bank accounts or via cheque since Friday last week. Overall we have sent 898,000 refunds to people and businesses.66
3.145 By 20 April 2010, tax practitioners were noticing that the ATO was providing incorrect information to the Child Support Agency, which affected payments, and had cancelled the issue of numbers of Business Activity Statements. They observed that these problems imposed unrecoverable costs on tax practitioners.
The ATO have thus far been incredibly negligent in their actions. To issue a press release stating that 140,000 refunds cheques did not issue is one thing but to now have them lobbing into my office dated 1 April and post marked 19 April is a disgrace. I now have to phone every affected client to explain to them that I have not been sitting on their refund cheque for almost 3 weeks. The client gets no interest paid by the ATO as the system places it in their account dated 1 April, I even have one here that the client was charged $9 of interest somehow then this was remitted by the ATO (how generous) despite a refund cheque being owed.
On top of this I am expected to somehow attend to my own personal tax return and have that lodged on time.
Even without the cost of potentially losing client, I would estimate the extra work involved mopping up the ATO mess to us at around $50 a client at least (this is at cost not at charge out rates). Multiply this by the hundred or so that a firm our size has affected by this and the damage is around $5k at cost or closer to $15k at charge out value lost.
Not only have we had to organise additional finance to survive which has been exhausted we are faced with Clients contacting the ATO to change address so refund goes to them although we had a signed agreement for their fees to come from their refund. Now we have additional costs to chase our debt and are unable to get a copy of the assessment notice for our records. The ATO should not change addresses when returns are issued by Accountants and Tax Agents.
We have spent unproductive time chasing returns, refunds, assessment notices and when returns would be processed as they appear as not lodged on the portal but were lodged months ago. Some days we spend 2 — 3 hrs on the phone to the ATO.
It takes a week for assessments to be issued after the refund has hit our trust account. We have to manually work through lodgements to work out who the refund belongs too then incur additional costs in sending out the assessment notice when received a week later. We do this as we feel clients have waited long enough for the refund a week later also breaches our guidelines issued by the NIA [National Institute of Accountants] which is 24 hrs.
The new assessment notice is causing problems and having to spend hours explaining to clients what is means. Explaining to finance companies that this is the new assessment notices. The new notice opens up to fraud. As where is their name or TFN [tax file number] on each page. How does the finance company know who earnt what?
If pages get mixed up in the sheet feeder on the copies who does it belong too?
Plus more pages for us to copy and additional postage to send out a larger envelope to take the additional pages.
The majority of people want the old one page assessment back.
The cost in phone calls alone has gone up along with postage and stationery costs.
What a burden to place on small business especially in this difficult financial climate. Did we not suffer enough last year with the additional costs labour to hand out all the bonus cheques that were sent via Accountants and Tax Agents and as instructed by the ATO at no cost to anyone but us poor bastards the Accountants. Who said become an Accountant great job and you would make money. Its only cost me quality of life and money.
3.146 On 22 April 2010, senior ATO officials appeared before the Joint Committee for Parliamentary Accounts and Audit. Amongst other evidence given at this hearing, the following was provided:
Ms LEY—... is it not the case that the IT [income tax] module of the existing system has cost $400 million and that it is not working particularly well at the moment; although, we note that it may at some point in the future? That is half the total budget of the change program. ...
Mr D'Ascenzo — We are starting from a proposition that the IT integrated system is quite a significant achievement in where we are at. Any systems changes of that order would require a range of issues in terms of their bedding down. A lot of the issues associated with people indicating delays were advised to tax agents before Christmas. We said: 'We have to close the system down. This is not the system not working. This is closing down the system while we convert.' Some people heard that, and some people did not, or chose not to, act on it. We had a five per cent spike in terms of increased claims for refunds before December. That was probably not as high as it could have been to try to lessen the impact later on in the year.
Issues of bedding down are of a level that I do not think you can justifiably say that the system is not working. The system is working very well. I am sure that if you get expert opinion about the complexity of what an implementation of this size means and the sorts of issues we have had, you will see that they are the sorts of issues that you would expect from this sort of implementation. I was very concerned with the conversion in January because, if the conversion failed, that would be the system not working, and that would be quite catastrophic in the scheme of things. We have not had that catastrophic failure. We have had expected delays while we implement the new system. We have had, I think, two glitches that have impacted on that. ...67
Mr Butler ... [the first glitch occurred] on 9 March [when] 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. …
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. …
The 140,000 [the second glitch] occurred after that. The assessment went out, but there should have been a statement of account with a cheque. So those are the two issues that happened which have caused delays. As I said earlier this morning, we are very confident that the calculations are correct in the assessments—which is very important, of course, for a tax administration. I guess the environment that we were in was one where, as the commissioner alluded to, there was an increase in the filing of returns before Christmas, though it was not substantial. Tax agents are quite used to getting refunds on electronic returns within two or three days, although our service standard is 14 days. We could not process returns for six weeks and then another two weeks—we had, effectively, eight weeks in which we could not process returns. There have been four months since Christmas, and during the two months we could process them we have tried to do four months' work. We have worked very, very hard to catch up.
CHAIR—For us, representing the people of Australia, you may have tried to warn your tax agents and the taxation community that there could be delays, but that does not mean that they would have absorbed that. There is always planning around getting that tax return back, whether it is by a small business, an individual or the agents who depend on that for their income. So there will be genuine hardship cases. Could you tell us what you are doing to assist in that matter?
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. Right from that point, we made it very clear what we would [do] around hardship. We have produced some refunds in 11/2 hours from the time someone raised a concern with us. We have had agents approach us who might have been waiting on assessments. We have checked those thoroughly and processed returns as quickly as we can. We have just over 3,800 cases processed as hardship. It is not a long period since we started processing on 22 March. People ring us and say that they need the money quickly. We can tell from the system that the refund might go out on, say, next Monday, or something like that, and they have chosen to wait for that. In strict cases we have applied the criteria very openly. We have basically said, 'If you need the money, tell us and we will do everything possible to get you the refund.'68
3.147 On 23 April 2010, the ATO met with a number of key tax profession representative bodies. IGT staff also attended. At this meeting the ATO advised that 'the code, to our knowledge, is not giving rise to errors' and that it was not aware that it had issued any incorrect assessments (apart from those involving operator errors — for example, those processed manually). It explained that there were unavoidable delays because returns were held until the ATO was sure that the assessments were right. It explained that, but for two key errors (the 'glitches' referred to above — the ATO's explanation of these two key errors is set out in Appendix 10), every delay now is due to a valid reason. The ATO considered that it would take 12 to 18 months to 'bed the system down' and kept key Accenture and ATO staff on.
3.148 The ATO also commented that it had relaxed its 'hardship' process to allow those experiencing cash flow problems to receive refunds through the manual processing processes. In some cases, this has allowed people to receive refunds within one and a half hours.
3.149 The ATO also explained that it was reluctant to communicate problems unless it was confident of the diagnosis of the problem. However, the tax profession representatives argued that the ATO needs to give reasons to tax practitioners so that they do not waste time following it up with the ATO.
3.150 At this meeting, the bodies identified five broad impacts on taxpayers and tax practitioners. These impacts are discussed in more detail below.
3.151 Many taxpayers also complained to the Commonwealth Ombudsman. By the end of May 2010, the Ombudsman had received around 220 complaints. The main types of complaints include:
- delays in receiving expected refunds
- delays in receiving superannuation co-contribution payments
- delays in receiving a replacement tax file number (TFN) (where the TFN had been compromised)
- government benefits delayed/changed due to information from the ATO not being received by Centrelink
- inadequate communication from the ATO
- inadequate responses by the ATO when a complaint has been made.
Reconciliation of the main problems encountered by the ATO with the ATO's public communications
3.152 Many tax practitioners were concerned that the ATO's communications did not reflect their experience of what was happening. Some considered that the ATO was not telling the whole story:
I normally do not comment on ATO efficiency as I feel it can be counterproductive. The ATO it seems is ironing out bugs in its new system and once that is done I'm sure that it will work well. But it seems to me that the ATO is not keeping the public informed about late Notice of Assessments. This office is being run off its feet taking client calls about notices of assessment & refunds and then having to ring the ATO to get the standard response that it has been issued & should be here in 1-2 weeks. Then the call to the client to explain.
The ATO should be proactive in advising the public about the lateness of its assessments at the moment and not just spruiking about how many it has issued.
3.153 A discussion of the main problems follows below. However, a reconciliation of the ATO-identified major problems (up to 3 May 2010) and ATO's external communications is provided in Appendix 11. The IGT's observations of those communications are set out in Chapter 4.
ATO experience of problems over February — June 2010
3.154 The ATO was aware of a number of problems or defects with the income tax release from the 'go live' date. The ATO worked hard with Accenture to fix these problems and considered that it could cope with the rate of defects.
3.155 However, on 18 March 2010, Accenture reported to the ATO a sudden increase in defects as a result of the 'big ramp up process'. These defects, amongst other things, contributed to the delays in issuing NOAs.
Significant problems impacting on taxpayers and tax practitioners
3.156 At 30 June 2010, more than 4500 problems had been raised through the ATO's internal escalation process. However, many of these problems did not impact on taxpayers and tax practitioners directly or were not defects with the systems themselves (such as problems with the ATO's procedures for the new systems).
3.157 The IGT has examined the ATO's records up to 3 May 2010. Up to this point in time, the most significant problems with impact on taxpayers and tax practitioners were:
- Income tax returns in error queues
- Fatal form definition facility errors
- Electronic Lodgement Service reporting for tax practitioners not available
- Problems with amendment processing
- Extended delays in resolving High Risk Refund (HRR) review items
- Data transfer from the integrated core processing system (ICP) to the tax return database (TRDB) impacting on pay as you go (PAYG) instalments
- Low income tax offset and non residents
- Payment greater than liability review item
- Delays with assigning new TFNs where these were feared compromised
- SOA/NOA incorrect Electronic Funds transfer (EFT)/cheque advice
- NOAs issued but SOAs with attached cheques were cancelled
- Taxable income on the NOA incorrectly displayed a zero (the 'result of this notice' calculation is correct)
- Higher Education Loan Accounts (HELA) correspondence issues
- Problems with Child Support Agency (CSA) data exchange and debts
- Problems with Centrelink data exchange and debts
- Superannuation co-contributions
- Incorrect diversion of interactive voice response (IVR) calls — where's my refund self help
- Verify super income tax offset
- Incorrect information on Notices of Amended Assessment — previous taxable income shown as $0.00, and impacts Interest on Overpayments (IOP) calculations
- Suspense items contributing to delays in assessing returns and issuing NOAs.
3.158 These problems are explained in more detail in Appendix 11.
Delays in ATO issuing taxpayer Notices of Assessment (NOAs)
3.159 Overall, from the date of the income tax release deployment until 30 June 2010, around 3.87 million tax returns were lodged (compared with around 4.14 million lodged for the same period in 2008)69 and around 145,000 tax returns were on hand at 30 June 2010 (compared with around 217,000 as at 30 June 2008).
3.160 Of the 3.87 million income tax return forms lodged, it is not known how many were assessed and NOAs issued within the ATO's service standard of 14 days of the tax return being lodged or the income tax release's deployment. However, the ATO has advised that of the individual's lodging tax returns, around 2.4 million were lodged over this period, with about 1.3 million (around 54 per cent) being processed and NOAs issued within the 14-day service standard. A monthly break up of the ATO's performance in issuing individual NOAs within its service standard is provided in Appendix 12. It is unknown, however, how much of this delay is attributable to the period in which tax returns were stockpiled.
3.161 It is also not known in relation to these delayed returns, what proportion of the period of delay was attributable to the problems that the ATO encountered. The ATO advises the IGT that it is unable, at this point in time, to collate this information. The ATO has also told the IGT that it does not plan to collate this information for returns lodged prior to 1 July 2010.
3.162 Therefore, it is impossible to ascertain the exact extent of delays experienced and the proportion of the lodgement population affected.
3.163 It is also unknown what proportion of these tax returns was relatively simple in nature (for example, salary and wage earners with minimal deductions/tax offsets).
A number of problems giving rise to large numbers of suspended forms, review items and returns held in the safety net
3.164 A proportion of the delayed NOAs were due to income tax returns being suspended in the system, being held up due to review items or in the safety net, and other related issues. Although, a certain degree of 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.
3.165 As at 30 June 2010, around 10 million 'forms' were created in ICP since the income tax release's deployment. A 'form' is a term that includes non-tax return forms (such as payments). Forms were suspended approximately 728,500 times.
3.166 The ICP system also generated approximately 350,000 review items for ATO staff action. The total figures may also include multiple suspensions and review items for the same tax returns.
3.167 These total figures only broadly indicate the potential number of delayed returns because any one return could be subject to many suspensions and/or review items. However, the total figures do reasonably indicate the workload for ATO staff.
3.168 Details of problems adversely affecting taxpayers and tax practitioners are set out in Appendix 11. For example, problems with the data transfers between the ATO and Centrelink and the Child Support Agency also contributed to delays in relation to thousands of cases and millions of dollars in refunds. Further, many thousands of returns were held in errors queues because the ICP system could not recognise the form.
3.169 There were a number of contributing factors which impacted on workloads, having a flow on effect to delays in issuing NOAs and dealing with taxpayers. This required the ATO to employ extra staff, to redeploy other officers from other areas to deal with the problems and to extend the hours of staff to get through peak workloads quicker. During April 2010 staff numbers working on processing tasks was at its peak.
3.170 Over the February-June 2010 period, the safety net held over 180,000 income tax returns for a number of different reasons. This was higher than the 50,000 individual assessments estimated by Aquitaine, in its advice to the ATO at the time of deciding whether to 'go live', to be impacted by the assessment defects. By mid March, 117,500 returns had been released from the safety net. By 9 April 2010, a further 29,000 had been released and by mid-May a further 31,000 had been released. As at the date of drafting this report, 11,000 remain held in the safety net. The following table sets out the types of returns held by the safety net and the periods for which they were held there.
|Date held||Date released||Line of Business||Volumes|
|1/3/2010||8/5/2010||Shortfall Interest Charge (SIC)||18,000|
|11/2/2010||17/3/2010||Entrepreneurs Tax Offset (ETO)||48,500|
|21/2/2010||17/3/2010||Primary Production Averaging||69,000|
|2/3/2010||31/3/2010||Exempt Foreign Employment Income||1,800|
|13/3/2010||31/3/2010||Special Professional Averaging||1,300|
|6/3/2010||9/4/2010||Employment Termination Payments/ Superannuation Lump Sum Payments||26,000|
|21/3/2010||14/5/2010||Non Resident Withholding Tax||13,000|
|28/4/2010||n/a||Super Income Tax Offset||11,000|
Source: CPT Global, Release 3 — Income Tax Implementation Review, report to the Australian Taxation Office, August 2010, p. 30.
Initial ATO reporting inadequate to properly understand processing problems or deploy resources effectively
3.171 The ATO has advised the IGT that the systems reporting which was available immediately following deployment, and the ATO's understanding of the data that the ICP system was providing, impeded the ATO's initial ability to quickly deploy resources to areas of greatest need.
3.172 For example, at one point the ATO was concerned with the increasing numbers of particular types of review items. It deployed significant numbers of staff working overtime to resolve these review items. Managers were aware that thousands had been resolved. However, the subsequent reports appeared to show that these resources had not been effective in reducing numbers. After some investigation, the ATO realised that the time at which a review item was raised by the system and resolved by the staff would affect whether the system subsequently re-raised the same review item. Once this was understood, the ATO was able to develop an effective work around (i.e advising staff to wait 24 hours before telling the system that the particular case had been resolved).
3.173 For the income tax release, only the critical transactional reporting functionality to enable the ATO to operate was developed. The ATO advises that in the lead up to deployment, the ATO did not want to divert resources to developing management reporting which may not give the right sort of information needed. It decided to wait until it developed an understanding of the system in production and how the data was different to the ATO's pre-existing legacy systems so that it could properly build its reporting. This was based on the ATO's experience with developing management reporting in Release 2. In relation to the income tax release, the reporting facility was deliberately delayed because all resources were being used to prepare the release for deployment. Also, some of the reporting functionality may have fallen outside of the contract with Accenture and therefore required extra ATO expenditure.
ATO systems problems preventing timely completion of High Risk Refund (HRR) work
3.174 The ATO also noticed that the system was assigning large numbers of forms for high risk refund review (HRR). These forms were effectively suppressed from moving forward through the system until the compliance risk (that is, risk of unsustainable deduction, refund, etc.) was reviewed by an ATO officer.
3.175 As at 6 June 2010, just over 27,500 returns had been selected for HRR under the new system.70 Of these, the ATO had completed HRR review in just under 20,000 cases, with just over 6500 taking more than 28 days from the date of being flagged for review to being completed and allowed to continue in the system. Of the approximate 8000 cases on hand as at 6 June 2010, just over 2400 were more than 28 days old of being flagged for review.
3.176 The ATO advises that on closer inspection, many of these returns were not awaiting information from taxpayers or being reviewed by officers; they were prevented from being resolved because of other systems problems, such as amendment cases or shipping and entertainers' returns. Stops and starts in the upstream flows of returns also accentuated the peaks and troughs of workloads for ATO staff in the HRR area.
ATO staff diverted from their work to answer telephones
3.177 As part of the contingency plan, the ATO deployed 1200 staff to process forms and handle phone calls. These included staff from other areas (such as the debt and processing area) and temporary staff that the ATO employed as part of its normal Tax Time activities.
3.178 Some frontline staff were experiencing increased stress in dealing with enquiries and complaints as a result of the reduced level of service to taxpayers and tax practitioners. The IGT heard directly from some of these staff that they felt stressed when being asked to tell taxpayers and tax practitioners that their complaint had been escalated and would be dealt with within a certain period of time, when they perceived that nothing would happen within that time period. These ATO officers explained that their perceptions were based on prior experience in which they would escalate a case, see the relevant work item routed to a particular area for action and that work item remain unallocated for substantial periods of time.
3.179 The ICP system was also unavailable for periods of time, which contributed to an intermittent inability to process work.
3.180 ATO staff also experienced impacts in other areas of the Change Program, such as those related to the Case Management System.
ATO audit trail issues as a result of changes to the posting of payments
3.181 The IGT has been advised that most of the payment processing is operating effectively, in certain circumstances. However, the ledgers for the new system do not record the total amounts paid by taxpayers in an easy to follow format. This increases the risk of reconciliation errors and workloads for ATO revenue accounting staff. For example, where one aggregated taxpayer payment is made by cheque for a number of tax liabilities, the new system will not record the face value of the cheque. It will only record the subtotals that are attributable to each tax liability on separate accounts. Furthermore, there is no visible trail to record which payment is transferred to which account, although there are logs that provide this information. This can increase the risk of potential ATO officer fraud.
Manual ATO processing used to minimise impacts
3.182 Manual processing of an income tax return is carried out by the Client Account Services (CAS) area within the ATO's Operations Sub Plan.
3.183 In previous years, the ATO had around four FTE people manually processing hardship cases. From January 2010, the ATO employed 15 people as a contingency plan for the December/January shutdown. The number of staff was increased through February to around 200 people in April, with many working extended hours and substantial overtime. As at 27 May 2010, the ATO had around 7000 hardship cases to process.
3.184 In addition to the post-deployment problem mitigation mechanisms (set out above), the ATO took action to manually process income tax returns and payments. Primarily this work focussed on those taxpayers and tax practitioners who claimed financial hardship. Although the ATO's criteria for claiming financial hardship involved a level of proof of that hardship, from mid-April 2010, the ATO substantially relaxed that standard until July 2010. Effectively during this period a taxpayer or tax practitioner only had to mention the term 'financial hardship' and the return would be manually processed. From 28 April 2010 and 5 May 2010, the ATO allowed people to lodge these applications electronically on the tax agents' portal and ATO website, respectively.
3.185 Processing a return manually is a resource intensive and time consuming exercise. Firstly, an officer must obtain the information that was lodged and electronically captured from systems upstream of the ICP system. The officer must then manually input that information into pre-existing legacy systems and rely on it to provide an assessment based on the information provided on the return form. The electronic print out of this assessment is attached to the Case Management System as a record of the manual assessment.
3.186 The officer then must run the assessment through a stand-alone system which replicates the ATO's risk filters in the ICP system. This stand-alone system was created by CAS staff as an interim measure pending the resolution of problems with the ICP system. If the stand-alone system flags the return for further inquiry then the officer must send an email to an officer in the HRR area for action and await the response before issuing a NOA. If there is no such flag, then the officer sends emails to the Higher Education Contributions Scheme/Higher Education Loan Program, Superannuation and CAS accounting people in the ATO requested them to check whether there is an outstanding debt linked to the taxpayer. Depending on the responses received, adjustments to the assessment are then made.
3.187 The officer then prepares the NOA by manually typing the figures on the NOA into an electronic template (a Microsoft Word document). Another officer must double check that this is done accurately. Following this double-check, the ATO officer must go onto the ICP system and post the total amount on the NOA as a 'sundry item' on the taxpayer's account. This posting is made at this stage because the ICP system has not processed the tax return on the system. If the total amount of the NOA is a refund due to the taxpayer, the case is referred to another ATO officer for approval to disperse monies. Once approved, a hardcopy cheque is manually prepared on another system. The cheque is then printed and is either sent in the post to the taxpayer, or, if the taxpayer requested an EFT transfer, it is physically taken by the ATO to the Reserve Bank. From 12 April 2010, the Reserve Bank had agreed to clear the cheque and transmit to the taxpayer's bank overnight. This reduced the time taken for the cheque to clear by a number of days.
3.188 The above manual process can involve more work if there are multiple returns or matters of complexity (such as income averaging).
3.189 After the refund is issued, the ATO will need to complete remedial work in the future to update the new systems to reflect the manual assessment, payment and correspondence. This remedial work is not expected to take place until after October 2010. The ATO is awaiting systems fixes so that it can re-run the income tax return through the ICP system to update the systems with the correct postings data. The ATO has deferred this work until after October 2010. Unless, the systems are able to automate this process, staff will be required to manually populate all the required fields on the system — a considerable resource intensive exercise.
Tax practitioner calls for reparation and the ATO's response
3.190 As noted above, tax professional bodies had approached the ATO about the problems and delays experienced. The ATO had received around 15,000 tax practitioner complaints from 1 March until 31 May 2010 and 3600 taxpayer complaints.
3.191 Tax practitioners, both individually and through representative bodies, have called for various ATO actions as a means to remedy the adverse impacts they suffered. These actions were clearly expressed during a 23 April 2010 meeting with the ATO and include the following.
ATO public apology
3.192 Tax practitioners argued that a combination of the ATO's delays and communication had damaged their reputation with many of their clients. This was because they were of the view that the ATO communications appeared to imply that the tax practitioner was the cause of the delays and errors.
3.193 Typically, taxpayers would ask their tax practitioner about the progress of their returns and the tax practitioners would respond that they had followed this up with the ATO, but because of problems with the new systems it was still being processed. Some taxpayers would compare this explanation with the ATO's public messages that all the backlog had been processed. Some would also call the ATO and, in some circumstances, be told that the return had not been lodged.
3.194 In relation to the problem where SOAs had been cancelled (to which the refund cheque was attached), the taxpayer received their refund cheques around three weeks after the date on the face of the cheque. Many taxpayers were left with the impression that the tax practitioner had been tardy in forwarding their cheque.
3.195 The relationship between tax practitioner and taxpayer is generally one of trust. The tax practitioner holds themselves out to be knowledgeable and to act in the best interests of their client taxpayers. Inherent in this trust is that lodgements and payments are made when the tax practitioners say they have been.
3.196 Tax practitioners wanted the Commissioner to issue a letter explaining the problems and stating that the tax practitioner was not to blame. Tax practitioners wanted a public apology.
3.197 On 29 April 2010, the Commissioner published an open letter on the ATO website which included the following apology.
The introduction of our new income tax processing system has inevitably impacted both taxpayers and tax agents. I apologise if you waited longer than usual for your notice of assessment and/or refund.
I would like to especially thank tax agents for their patience and support while we completed this essential work. Without knowing each individual circumstance, I am not aware of situations where agents have been holding things up. Rather, they have been working with us to ensure the impacts on their clients have been minimised.
If you are due a refund and we have taken longer than 30 days since your return was lodged to issue a notice of assessment, you are entitled to interest.71
Improved quality and timeliness of ATO communications
3.198 Tax practitioners expressed concern that the type, timing and currency of information published by the ATO on known problems with the new system did not allow tax practitioners to take action to minimise the adverse effects of these problems on their business or their clients.
3.199 They asked that the ATO publish a complete list of current issues impacting on taxpayers and tax practitioners (as understood by taxpayers and tax practitioners) that the ATO was aware of, the method the ATO would take in fixing the identified issues and a date by which the ATO either expects to have implemented a fix or the date for a further update on the status. They pointed to a number of instances where information was published too late to help stop tax practitioners wasting time in working out what the problem could be and discussing this with ATO call centre staff (sometimes many times and for prolonged periods).
3.200 On 25 May 2010, the ATO published a list of some problems with the system. The ATO provided an update of known problems and expected resolution dates on 25 August 2010.
Extensions of time to lodge and pay
3.201 Tax practitioner representatives also argued that smaller tax practitioners should receive a blanket extension to lodge until 21 June 2010 for income tax returns and activity statements. They argued that many weeks of tax practitioners' time had been taken up to chase up months of delayed returns and other problems with the system. This was compounded by the unavailability of the tax agents' portal for periods of time. As such, they had been unable to devote much time to preparing for upcoming lodgement obligations.
3.202 Tax practitioner representatives also argued for a blanket extension on times to pay tax debts if clients were waiting on a large refund.
3.203 On 4 May 2010, the ATO agreed to a blanket one-week extension for certain types of lodgement obligations.
The Commissioner has granted a general lodgment deferral for all 2009 individual and trust income tax returns due to be lodged by 15 May to 22 May 2010. Payment (if required) will be due as per the notice of assessment.
5 June lodgment program concession date for individual income tax returns
In the Lodgment Program 2009-10, individuals and trusts who are due to lodge by 15 May are able to lodge by 5 June without penalty, provided that any payment due is also made by this date.
As the 15 May lodgment due date has been extended, the concessional lodgment date of 5 June has also been extended to 12 June 2010 for lodgment and payment.72
Compensation for unproductive tax practitioner work
3.204 Tax practitioners also argued that although taxpayers may be compensated for delays in receiving refunds, tax practitioners were not compensated for the adverse impacts of these delays. They argued that compensation should be paid on the basis of two main grounds:
- for unproductive work in unnecessarily chasing the progress of delayed returns due to a combination of the system's problems and the ATO's communications
- the adverse impacts of reduced expected cash flows.
3.205 Tax practitioners argue that the ATO's communications did not alert tax practitioners to the potential for delays occurring after 1 March 2010. In support, they point to the ATO's communications occurring before and after the deployment of the income tax release. This, they argued, did not alert them to take action to minimise the adverse impacts of potential extended delays.
3.206 In relation to reduced cash flows, some tax practitioners have a business model which pays their client taxpayers the expected refund within a period of time — for example 48 hours. Generally, these tax practitioners pay their clients out of their own business funds after conducting a number of checks (such as whether other Government departments are seeking to garnish any expected refund for those clients). In this business model, the tax practitioner accepts the risk for the cost of money between the time it is paid to their client to the time that it is received from the ATO. The ATO has a public service standard of issuing NOAs within 14 days of a tax return's electronic lodgement in 94 per cent of cases. The general tax practitioner experience has been that tax returns involving relatively simple affairs and conservative claims have been issued within 3-5 days of electronic lodgement.
3.207 The tax professional representative bodies argued that compensation should be initiated by the ATO, as requiring tax practitioners to lodge claims for compensation would exacerbate the adverse impacts they had suffered. They argued that this compensation should be based on an agreed set of factors including the number of tax practitioners' clients, and that they should be involved in the process to ensure the right factors are taken into account.
3.208 They pointed to the Commonwealth Ombudsman's Compensation for detriment caused by defective administration — Fact Sheet 973, which specifically states as a common example of a payment under the Scheme for Compensation for Detriment caused by Defective Administration (the CDDA Scheme) being made where a 'person incurs expenses or loses eligibility for a benefit because ... a computer error results in a delayed payment'. The Fact Sheet also states that avoiding a legalistic approach is best practice as the agency should consider the claim 'from the perspective of a moral obligation and should not involve a compensation minimisation approach'.
3.209 The ATO had, by 31 August 2010, received 80 claims for compensation from taxpayers and tax practitioners. The ATO considered compensation claims received on a case by case basis. However, it decided against initiating steps to provide a process for compensation in the manner requested by tax practitioners:
As is ATO normal practice, if there are tax agents (and taxpayers) who wish to lodge a claim for compensation, they are able to do so. Each claim will be considered on its merits. However, it will be for the claimant, in their circumstances, to demonstrate how the ATO's actions in implementing the Change Program are defective.74
3.210 The ATO has declined providing compensation because it has decided that there has been no defective administration, as outlined below in the ATO's formal response:
Has there been defective administration by the Tax Office?
26. The answer to this is no.
27. The implementation of the Tax Office's new system is a major upgrade, involving the transfer of a significant amount of data and complex systems. There have been no critical systems problems, and overall it is working well. A considerable number of returns have been processed and refunds have been paid.
28. We have accepted that there have been processing delays brought about by the implementation of our new system, but we do not consider that our actions in managing this implementation give rise to compensation. The Tax Office remains committed to ensure the reliability of our processes and the integrity of our information, even if this slows down the implementation and processing times overall. Given the magnitude of the systems overhaul, we do not consider that the consequential delays in the processing of returns, activity statements and related documents were either unreasonable or avoidable. Specifically, we do not consider that the time taken to implement our Change program and process tax returns amounts to defective administration within the meaning of the CDDA scheme.
29. In determining whether there has been defective administration, the test is not what would or should have occurred in a perfect world, but what a reasonable person would expect given the same circumstances, same powers and access to resources. The reality is that no implementation of a major computer upgrade of the kind undertaken by the Tax Office could be achieved without some delay or minor processing issues. This had been acknowledged by the Tax Office in its public broadcasts, and the timing of the implementation over the Australia Day long weekend in 2010 was chosen due to the reduced impact on taxpayers and tax agents. Accordingly, the fact that there have been delays and some processing issues does not mean that there is defective administration. The assessment of defective administration must be based on what another reasonable agency could achieve with the same circumstances, powers and resources, and such a comparison would not lead to a conclusion that the Tax Office has been defective or unreasonable in its implementation. ...
Should compensation be paid?
33. As we have determined that there has not been any defective administration, there is no basis on which to pay compensation.
34. In relation to taxpayers, if the refund is delayed by more than 30 days after the receipt of the return, then interest is paid under the Taxation (Interest on Overpayments and Early Payments) Act 1983. This is a legislative provision, and is intended to compensate individuals for the fact that they have not been in possession of their money for a period of time. Paragraph 23 of the CDDA scheme stipulates the limitations of the scheme, explaining that the scheme does not apply where there is another legislative or administrative remedy and a further payment would supplement payments set by other specific legislation. As interest is paid pursuant to legislation for delayed refunds, the CDDA scheme should not apply to make a further payment to taxpayers in relation to refunds delayed by the implementation of the Change program. ...
37. The compensation claims received from tax agents have sought reimbursement for idle staff and for loss of drawings/cash flow of the agent during the decline in processing of returns in recent months. These losses are not normally the kind that would be considered compensable under the CDDA scheme, as they are not "real" losses. For example, the claim for loss of earnings is not a quantifiable loss until the end of the financial year, and even then it would be difficult for the tax agent to establish that such a loss was caused by the implementation of the Change program and not other factors. The likely scenario is that there may have been a slight decrease in income during the implementation months, but once the returns were being processed, then the money due to the tax agent should have been paid, and should essentially equate to the amount that would have been paid if the implementation had not occurred.
38. Another argument against compensation is that the tax agents have not done all they could to mitigate any loss. It appears that the tax agents who are most disgruntled are those who take their fees from refunds. This is a business model that the tax agent has chosen to apply, and as such they are responsible for any risks associated with that strategy, including any delay in refunds being received, for whatever reason. Further, tax agents were on notice that there would be some delay in processing returns, and could have modified their fee structure appropriately, for example, to have sought payment in another manner than via the refund.75
3.211 Taxpayer and tax practitioner claims for compensation were declined by the ATO on the above basis.
3.212 Some tax practitioners asked the Ombudsman to review the ATO's decision. They received a response that the Ombudsman could not stand in the shoes of the Commissioner in relation to these decisions and could only examine the process taken to arrive at the decision. However, the Ombudsman also commented that:
We also note that the ATO's apology to tax agents and the community for the inconvenience and frustration caused by the systems delays. However, during the Change Program systems implementation we queried the ATO's actions to resolve systems problems and communicate with stakeholders about the situations as they arose. In our view the delays you and your clients experienced during the recent systems upgrades in the ATO were unacceptable, notwithstanding that some of the problems that arose may not have been predictable.
We recognise that the ATO attempted to make taxpayers and tax agents aware, through various communication channels, of the impending delays. However, complaints to this office show that these communications were not as effective as they might have been. In many cases delays in refunds and issue of amended assessments extended well beyond the timeframes announced by the ATO. We are also aware of instances of sudden systems errors causing further delays beyond those anticipated and publicly announced.
We have also been critical of the ATO's communication with this office during the peak period of Change Program implementation. In our submissions to the Inspector-General of Taxation's review of the ATO's Change Program we raised our concerns about the ATO's communication processes, and the impact of the systems delays on both taxpayers and tax professionals.76
Improve the presentation of the Notice of Assessment (NOA) and Statement of Account (SOA)
3.213 Tax practitioners also expressed confusion surrounding the changes to the NOA and SOA.
3.214 The NOA is the cornerstone of the tax administration system because it expresses the ATO's assessment of tax liability. Various legal rights and obligations arise from this document. The SOA was intended to provide a single account for the various tax accounts that a taxpayer may have.
3.215 The ATO advises that it had consulted with tax professionals on the new design and format of the NOA and SOA. Some tax practitioners, however, have expressed concern that issues identified in these consultations were not addressed in the NOAs and SOAs that were actually issued.
3.216 The ATO had advised that it will consult again in the future to identify, and then take action to rectify tax practitioners' concerns.
TaxTime 2010 (July 2010 to October 2010)
3.217 TaxTime comprises the individual income tax lodgement period (July-October) and the work done in preparation of that period by the ATO.
3.218 Heading into TaxTime 2010, the ATO released a document on 28 June 2010 which stated that it expected delays and that it would do its best to issue NOAs within 14 days.
3.219 During late July and early August 2010, some tax practitioners (notably those with business models that offer taxpayers prompt refunds) advised the ATO that they were experiencing processing difficulties again. Compared to previous years, these practitioners were experiencing an approximate 30 per cent drop in numbers of NOAs issuing within 14 days of lodgement.
3.220 From 27 July 2010, the ATO published website updates on a regular basis providing overall numbers of lodgements, NOAs issued and refunds issued. From 20 August 2010, the ATO included figures on what percentage of returns were processed within its service standard periods, which confirmed that delays of more than 14 days were being experienced by a substantial percentage of those who had lodged returns. These updates showed that as at 20 August, 23 per cent of electronically lodged income tax returns were taking more than 14 days to assess and issue NOAs. On 10 September 2010, the ATO provided percentages of returns assessed and NOAs issued within the service standards since 1 July 2010 on a two-weekly basis. The ATO continued to publish updates which showed that service standards for electronically lodged income tax returns were met by mid-August.
3.221 The ATO experienced some problems in relation to e-tax verification (date of birth), returns involving eligible termination payments and Higher Education Loan Accounts correspondence. ATO sent communications on 10 and 13 August to alert people that these problems had been fixed. The ATO also experienced a problem which effectively delayed some returns due to a bottle neck caused by an imposed limit on the numbers of returns that could be input into the pre-existing 'refunder' system. Once this problem was identified it was quickly addressed.
3.222 On 25 August 2010, the ATO sent the following communication.
Refunds — For the latest news on refund updates and the progress of income tax returns, read the Commissioner's online update.
Pre-filling — Dividend transactions — From the week beginning 23 August 2010, 16 million transactions (93% of last year's financial transactions) have been made available.
Bank interest — From the week beginning 23 August 2010, 18.8 million transactions have been made available.
Tax agents have reported some issues to which the following brief updates apply:
HELP [Higher Education Loan Program] and SFSS [Student Financial Supplement Scheme] amendments — We are processing HELP and SFSS returns but a small number of amended returns (less than 2,000) are still being held. We anticipate this issue to be resolved by the end of August.
Payment slips for companies and super funds — We are working to rectify the issue but advise that payment slips can be printed from the portal.
Incorrect lodgment due dates — Companies newly registered in 2010 have an incorrect due date set. The correct due date is 15 May 2010 and we are working to rectify this issue.
Portal related issues
Clients with two or more income tax accounts — Some agents are receiving a message that implies the portal has failed. We are working to rectify access to these accounts by the end of August. If urgent access to these accounts is necessary, phone us on 13 72 86.
Refund requests failing — Some agents are receiving the message 'no financial information details provided'. We are working to have the correct system message display. Agents should stop requesting refunds until the effective date passes.
Client updates not processed — Some client update lists are not yet processed. If an urgent update is necessary, phone us on 13 72 86.77
9 Australian Taxation Office, Minutes of the 4 June 2008 meeting of the Change Program Steering Committee, p. 3.
10 Aquitaine Consulting, Review of the Change Program at the June 2008 Replan, report to the Australian Taxation Office, Canberra, 15 July 2008, p. 3.
11 ibid., p. 1.
12 ibid., p. 10.
13 ibid., p. 13.
14 Australian National Audit Office, The Australian Taxation Office's Implementation of the Change Program: a strategic overview, Canberra, October 2009, p. 22.
15 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.2, Period covering 1st July 2008 - 31st July 2008, report to the Australian Taxation Office, Canberra, July 2008, pp. 10-11.
16 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.2, Period covering 1st August 2008 - 31st August 2008, report to the Australian Taxation Office, Canberra, August 2008, pp. 4-6.
17 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.1, Period covering 1st June 2008 - 30th June 2008, report to the Australian Taxation Office, Canberra, June 2008, pp. 16-17.
18 Australian National Audit Office, Audit Report No. 8 2009-10 Performance Audit, The Australian Taxation Office's Implementation of the Change Program: a strategic overview, Canberra, 29 October 2009, pp. 22, 24-5.
19 ibid., p. 40.
20 ibid., p. 90.
21 Australian Taxation Office, Attachment to the minutes of the 30 July 2008 meeting of the Change Program Steering Committee, internal correspondence, p. 2.
22 Australian Taxation Office, 3.1.2(a) Summary Replan Pack for CPSC, document presented at the 28 August 2008 meeting of the Change Program Steering Committee, pp. 6-7.
23 Australian Taxation Office, Summary Replan Pack for CPSC, document presented at the 28 August 2008 meeting of the Change Program Steering Committee, p. 6.
24 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.0, Period covering 11th October 2008 - 9th November 2008, report to the Australian Taxation Office, Canberra, October 2008, pp. 2-3.
25 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.0 Period, covering 10th November 2008 - 5th December 2008, report to the Australian Taxation Office, Canberra, November 2008, p. 8.
26 ibid., p. 8.
27 Capgemini, letter to the Australian Taxation Office, 21 January 2010, p. 3.
28 Australian Taxation Office and Accenture, ECMP Change Program Release 3 - Income Tax Parallel Process and Business Pilot Plan, 17 June 2009, p. 14.
29 Capgemini, letter to the Australian Taxation Office, 21 January 2010, p. 2.
30 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.0, Period covering 7th February 2009 - 27th February 2009, report to the Australian Taxation Office, Canberra, February 2009, pp. 3-4.
31 Australian Taxation Office, Minutes of the 24 June 2009 meeting of the Change Program Steering Committee, pp. 2-3.
32 The major legislative initiatives introduced at this time were the Education Tax Refund; the Family Tax Benefit Streamlining Administration; the Higher Education Scheme-Higher Education Loan Program Benefits and the Family Tax Benefit Non Lodger initiatives.
33 An example, is the configuring of the specifications for the imputation offset — it is refundable for all but one type of entity.
34 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.0 - FINAL Period covering 23 December 2009 - 14 January 2010, report to the Australian Taxation Office, Canberra, January 2010, p. 3.
35 Note that Aquitaine Consulting later reported to the ATO that the ATO's Debt area estimated these reductions to be around $570 million, and the Tax Pratitioner and Lodgement Strategy area estimated that lodgement compliance revenues would be reduced by around $80 million: Aquitaine Consulting, letter to the Australian Taxation Office, 21 January 2010, p. 2.
36 Australian Taxation Office, Minutes of the 15 September 2009 meeting of the Change Program Steering Committee, p. 5.
38 CPT Global, Release 3 - Income Tax Implementation Review, report to the Australian Taxation Office, August
39 Australian Taxation Office, Business Readiness: Executive Summary, Business Readiness Assessment for Change Program Release 3 Income Tax, document attached to the agenda for the 22 December 2009 meeting of the Change Program Steering Committee, pp. 1-6.
40 Capgemini, letter to the Australian Taxation Office, 21 January 2010, p. 2.
41 Capgemini, Australian Taxation Office Easier, Cheaper and More Personalised Change Program, Independent Assurer Report Version 1.0 - FINAL, Period covering 23 December 2009 - 14 January 2010, report to the Australian Taxation Office, Canberra, January 2010, pp. 3-4.
42 Australian Taxation Office, Deployment Release 3 Income Tax, document attached to the agenda for the 21 January 2010 meeting of the Change Program Steering Committee, p. 1.
43 Australian Taxation Office, Change Program Steering Committee Briefing Paper, Release 3 Income Tax Go Live Decision Framework, document attached to the agenda for the 21 January 2010 meeting of the Change Program Steering Committee, p. 2.
44 Australian Taxation Office, Change Program Steering Committee Briefing Paper, Release 3 Income Tax - Four key areas for assessment from CPSC of 22 December 2009, document attached to the agenda for the 21 January 2010 meeting of the Change Program Steering Committee, pp. 2-3.
45 Australian Taxation Office, Minutes of the 21 January 2010 meeting of the Change Program Steering Committee, p. 6.
46 Australian Taxation Office, Income Tax Summary Status 20th January 2010, document attached to the agenda for the 21 January 2010 meeting of the Change Program Steering Committee, p. 4.
47 Australian Taxation Office, Income Tax Deployment, Tax Time 2010 and Transition Program of Work Plan: attachment B to Release 3 Income Tax - Four key areas for assessment from CPSC of 22 December 2009, document attached to the agenda for the 21 January 2010 meeting of the Change Program Steering Committee.
48 Capgemini, letter to the Australian Taxation Office, 21 January 2010.
49 Aquitaine Consulting, letter to the Australian Taxation Office, 21 January 2010, p. 2.
50 CPT Global, Release 3 - Income Tax Implementation Review, report to the Australian Taxation Office, August 2010, p. 6.
51 Australian Taxation Office, Minutes of the 2 March 2010 meeting of the Enterprise Solutions & Technology Sub Plan Executive, p. 16.
52 Australian Taxation Office, Latest update from Second Commissioner David Butler - 2 March 2010.
53 It should be noted that the ATO published a description of these terms six months later on 9 September 2010.
54 Australian Taxation Office, Latest update from Second Commissioner David Butler—15 March 2010.
55 Australian Taxation Office, email broadcast to tax practitioners, 22 March 2010.
56 Rudd, Kevin, Interview with Jon Faine, 774 ABC Melbourne, ABC Radio, 26 March 2010.
57 Ley, Susan, Interview with Sabra Lane, PM, ABC Radio, 15 April 2010.
58 Australian Taxation Office, Latest update from Second Commissioner David Butler - 29 March 2010.
59 Australian Taxation Office, Processing status of tax returns - latest update 1 April 2010.
60 Australian Taxation Office, email broadcast to tax practitioners, 1 April 2010.
61 Australian Taxation Office, email broadcast to tax practitioners, 6 April 2010.
62 Commissioner of Taxation, Commissioner's speech to the Association of Taxation and Management Accountants 25th Anniversary Conference, Novotel Hotel, Sydney Olympic Park, 12 April 2010.
63 Australian Taxation Office, email broadcast to tax practitioners, 14 April 2010.
64 Sherry, Nick, Interview with Sabra Lane, PM, ABC Radio, 15 April 2010.
65 Australian Taxation Office, Processing status of stockpiled tax returns - latest update 15 April.
66 Australian Taxation Office, Processing status of stockpiled tax returns - latest update 20 April.
67 Joint Committee of Public Accounts and Audit, Reference: Auditor-General's reports Nos 4 to 21 (2009-10), Proof Committee Hansard, 22 April 2010, Canberra, p. 7.
68 Joint Committee of Public Accounts and Audit, Reference: Biannual hearing with Commissioner of Taxation, Proof Committee Hansard, 22 April 2010, Canberra, pp. 4-5.
69 Note, 2009 figures are not used because of the distortionary effect that the tax bonus had on income tax lodgements in 2009.
70 Note that as at the shutdown of the legacy systems, over 8800 high risk refund cases were in the system. Of these cases around 4000 were being reviewed for fraud, resulting in around 3700 cases being cancelled or allocated for potential prosecution.
72 Australian Taxation Office, General lodgment deferral for 15 May individual and trust income tax returns to 22 May 2010, 4 May 2010.
73 Commonwealth Ombudsman's Compensation for detriment caused by defective administration - Fact Sheet, Canberra, February 2010.
74 Australian Taxation Office, correspondence to the IGT, 23 September 2010, p. 3.
75 Australian Taxation Office, Internal ATO correspondence, 13 April 2010.
76 Commonwealth Ombudsman, correspondence with complainant, 17 August 2010.