4.1 The SME business line has as a substantial number of processes and mechanisms to assist with project management of active compliance activities and related programs (such as objection and litigation arising from those activities).

4.2 Submissions to the review expressed dissatisfaction with the project management of many compliance activities. Areas of concern related to the timeliness of compliance actions and degree of communication with SME compliance officers and supporting technical staff to ensure that expectations were shared.

4.3 Notwithstanding the ATO's processes and mechanisms, the review identified further room to improve project management in relation to resourcing, end-to-end case reporting, cycle time flexibility, effectiveness of upstream risk identification processes, automated linking systems, proactive case management and staff understanding of processes and structural changes. These areas are discussed in more detail below.

Government funding and ATO allocations

4.4 Submissions raised a number of concerns with the ATO's project management, including concerns that the level of ATO internal funding allocated to its SME activities may not be adequate to properly resource its intended activities. These submissions raised concerns that the ATO's allocation may affect the quality of interaction between SME officers and taxpayers and their advisers.

SME business line concerns

4.5 Although the SME business line has been allocated funding to conduct the HWI expansion, S4 risk review and WA initiatives, it has expressed concerns in its 2010 Health of the System Assessment (HOTSA) in delivering commitments over the medium and longer term:

Are the right resources in the right places to achieve our present and future outcomes?

  • In 2010-11, we allocated resources to meet our compliance commitments and revenue targets. We have concerns about our ability to deliver future outcomes associated with the Income Tax Investment and HWI programs in the medium to longer term. This concern is compounded by commitments outlined in the 2009 Federal budget around the 'Wealthy Australians' project.
  • The 'Wealthy Australians' project is a cross-business line initiative employing both S&ME and ME&I staff. A continuing large capability build is necessary to equip staff with an understanding of our 'private group' approach. HWI and General Compliance staff have joined these teams to mentor new staff and support structured learning using our Integrated Capability Development System and learning pathways to fast-track capability gains.
  • HWI and General Compliance staff have represented logical recruiting pools as the 'Wealthy Australians' project has expanded. This may create consequential capability issues in light of escalating HWI and Income Tax Investment targets. This is particularly relevant for HWI which also needs to cope with a significantly larger HWI population.52

Governance at the macro level and the ANAO review

4.6 Overseeing the governance development and management of the SME business line's program of work is a business management structure, comprising seven strategic and ten operational committees (not including regional leadership groups) with different foci, and related reporting.

4.7 The Australian National Audit Office conducted a review of the ATO's management of compliance in the SME market, including an examination of case management which focuses heavily on governance at the macro level. Therefore, the IGT has not sought to examine this aspect of the SME business line's operations.

Increased technical resources

4.8 The increased compliance activity carried out by the SME business line will place further demand on the SME business line's technical resources, as well as the COEs and the TCN.

4.9 Within the SME business line, technical support resources have been increased from 30.49 FTE staff in 2006-07 to 47.24 FTE staff in 2009-10. The SME business line's Case Leadership area has been increased from 4.58 FTE staff in 2006-07 to 9.04 FTE staff in 2009-10. The Case Leadership area is fully funded from HWI new policy funding.

4.10 The COEs and TCN were collectively allocated $4.89 million of the HWI funding (from 2006-07 to 2009-10), and $11.3 million from the Income Tax Investment (ITI) and Strategic Compliance Initiative funding. However, this funding to the COEs and TCN is not directly linked to any SME business line activities and is expected to fund increases in other business lines' workloads as well, such as the LBI business line.

4.11 In the IGT's view, it would be helpful to demonstrate how much of the HWI, ITI and Strategic Compliance Initiative funding allocated to the COEs and TCN has resulted in tangible benefits to the SME business line.

Recommendation 4.1

The ATO should develop indicators to measure how funding allocated directly to the COEs and TCN results in benefits to the SME business line.

ATO response: Agree

As part of the TTTDM project a full review of the usage and effectiveness of CoE and TCN resources will occur in order to determine the level of any shift of resources or priorities.

Active compliance case end-to-end reporting

4.12 The ATO has systems that provide snapshots of aggregated cases at certain points in time. Any work to examine the downstream or upstream action (for example, active compliance, objections, litigation) on cases must be done manually. The ATO does not have an automated system which provides end-to-end reporting on individual case workflows.

4.13 However, the SME business line does examine the results of flows of cases within the suite of differing active compliance products, namely 'case sequencing charts'. These case sequencing charts show the output of completed active compliance cases and set out how cases progressed through different active compliance activities. These charts, however, do not link to or examine any downstream activities, such as any objections or appeals, or reconcile liabilities raised with that reversed later.

4.14 The IGT considers that much could be gained from extending the case sequencing charts to include downstream dispute resolution steps and obtain an end-to-end picture of cases. Much could also be gained from capturing downstream ATO costs (such as objection and litigation work) as well as estimated taxpayer costs in conducting the activities to obtain an understanding of the broader economic impacts of SME compliance activities.

Recommendation 4.2

For the purpose of obtaining end-to-end analyses of completed compliance cases, the ATO should extend the use of its 'case sequencing charts' to capture:

  1. the reversal of liabilities in the cases' downstream dispute resolution steps;
  2. the ATO's costs in the cases' downstream dispute resolution steps; and
  3. estimated taxpayer costs for the total activities in cases (that is, cases' active compliance and downstream dispute resolution steps).

ATO response: Partially agree

We will implement the development work currently underway to provide full Siebel based reporting on compliance case outcomes where disputes are lodged. Reporting for cost of the ATO's downstream activity is already available using ATO Unit Cost Analysis data. This data is currently used by the interpretative assistance area to measure the cost of its range of products.

Whilst we are always mindful of the cost of compliance for taxpayers we do not intend to develop a process to estimate taxpayer costs in relation to S&ME compliance activities. It would be extremely difficult and potentially misleading to make valid estimates as all taxpayers would have different cost profiles dependent on their specific circumstances, the complexity of the matters being reviewed or audited and the cost of seeking advice and representation from advisers.

Cycle times for ATO activities

4.15 The ATO's expected timeframes for completing active compliance activities (cycle times) depend upon the type of activity (or 'product') undertaken.

4.16 Many submissions perceived that ATO internal deadlines appeared to influence some SME officers' behaviours — for example, one submission commented that when no deadline was looming an auditor may 'drag their feet', however, when there was a deadline looming an auditor may impose unrealistic timeframes for the taxpayer's response.

4.17 Submissions received from certain ATO staff observed that cycle times in S4 risk reviews were too short to properly assess the risks within the timeframes expected, leading some to 'cut corners' to meet their targets. In any event, these cycle times in S4 cases may have been too short for less experienced officers to properly consider the potential risks.

4.18 The SME business line has since reviewed its cycle time for audit and review products. On 25 August 2010, the SME Executive agreed to that review's recommendations to change cycle times and products. In considering the cycle times the review recommended:

1 Maintain IT [Income Tax] SME Comprehensive Audit and IT HWI Comprehensive Audit

... maintain two Audit Field case products; 730 and 540 day cycle times

... The need to retain an audit product with a 730 day cycle time reflects the long delays experienced for the more complex cases, particularly in regard to cases involving international issues where information requests are made from overseas entities and when dealing with very complex technical issues which often involve delays in obtaining legal advice for ourselves and the taxpayer

... 2 Maintain IT SME PRR [Preliminary Risk Review]

  • It is recommended to maintain the IT SME PRR to fulfil the S4 project commitments, as well as now being used as BAU [Business As Usual] across the line
  • It is recommended that this case product be reviewed in view of decreasing the cycle time once efficiencies can be identified as a result of the Front End Operations initiative

... 8 Park IT SME Comprehensive Risk Review [CRR]

  • This case product meets the 120 day cycle time only 52 per cent of the time
  • The Private Wealth Approach will increase the number of entities in the Group under review and it is therefore expected to take longer to complete
  • Staff have consistently told us that 120 days is too short, taking into consideration waiting times for responses from taxpayers, particularly when extensions are granted (which is very often), issues around time delays resulting from taxpayers wishing to make Voluntary Disclosures etc.
  • It is recommended to create a new case product that combines this case product and the HWI CRR with a proposed cycle time of 180 days

... 9 Park IT HWI Comprehensive Risk Review

  • It is evident that HWI can make improvements in case management practices
  • When combined with the Preliminary Risk Review product the total amount of time allowed for the identification of risks is 300 days, which is considered to be too long
  • 240 days in total is considered to be adequate for the identification of risks; hence a 180 day cycle time for Comprehensive Risk Reviews
  • It is recommended to create a new case product that combines this case product and the GC CRR with a proposed cycle time of 180 days.53

4.19 The following table sets out the current times for completing the relevant SME active compliance activities. 'Direct time' means the time the staff member spends on the case. 'Cycle time' means elapsed time to complete the activity.

Table 2: SME products by direct and cycle times
S&ME Siebel Products as at 18 April 2011
Current Siebel Product Names Comment Direct Time Cycle Time
Internal Reviews
IT SME Internal Review 12 hours 40 days
Specific Reviews
IT SME PRR 8 hours 60 days
ITAPA ACRHV Only for International cases 60 days
IT SME SR Corr HV 8 hours 60 days
IT SME SR Corr 8 hours 60 days
IT Voluntary Disclosure 2 hours 40 days
IT Ind tax haven review HV Only for International cases 9 hours 90 days
Comprehensive Reviews
IT SME Comprehensive Risk Review 15 days 180 days
Specific Audits
IT SME Office Specific Audit 41 hours 180 days
IT SME Spec Audit Corr HV 60 days
Comprehensive Audits
IT HWI comprehensive audit Only for Wealthy Australian 8. HWI 300 hours 730 days
IT SME Comprehensive Audit 62 days 540 days
Agreements
IT complex APA Only for International cases 730 days
IT simplified APA Only for International cases 270 days
IT standard bilateral APA Only for International cases 730 days
IT standard unilateral APA Only for International cases 360 days

Source: Australian Taxation Office

4.20 For objections, the ATO states that it expects to finalise 70 per cent of objections within 56 days of receiving all information requested, or in complex cases within the due date negotiated with the taxpayer.

4.21 The SME business line monitors on a monthly basis the percentage of SME cases that are completed within the relevant cycle times. As at 25 March 2011:

  • the GC area has been tracking at 76.9 per cent cases being finalised within the expected cycle times, with 74.3 per cent of cases on hand still within cycle times;
  • the HWI area has been tracking at 67.3 per cent cases being finalised within the expected cycle times, with 69.6 percent of cases on hand within cycle times; and
  • the WA area has been tracking at 81.1 per cent cases being finalised within the expected cycle times, with 62.2 per cent of cases on hand still within cycle times.

4.22 In the IGT's view, care must be taken in setting cycle times for compliance staff. As the IGT has observed in the large business audits review,54 cycle times for completion may drive behaviours that cause other problems that are difficult to resolve. The SME business line should enable SME officers to extend the cycle times in appropriate circumstances, without adverse impact on management's view of the SME officer and whilst minimising the adverse impacts on the taxpayer. Where these time frames are extended, ATO staff should (as is recommended in Chapter 5) communicate these changes to the taxpayers.

4.23 The IGT is strongly of the view, that the ATO risk review and audit approaches should be designed to minimise unnecessary compliance burdens on taxpayers. It is also important to ensure the likely taxpayer compliance burden is proportionate to the revenue risks involved. The SME business line's extension of cycle times for S4 risk review products by another 60 days may help to reduce some of the behaviours that caused taxpayers and their advisers concern. However, any extension in cycle times should be balanced against the adverse impacts on taxpayers. The ATO should continue to monitor the effectiveness of these cycle times over the range of its products and, in doing so, inform itself of the views of taxpayers and advisers who were involved in the compliance cases.

Recommendation 4.3

In order to appropriately minimise unnecessary compliance burdens on taxpayers and their advisers, the SME business line should:

  1. continue to monitor the effectiveness of cycle times over the range of its compliance products and, in doing so, inform itself of the views of taxpayers and advisers who were involved in the compliance cases; and
  2. enable SME officers to extend the cycle times in appropriate circumstances, without adverse impact on the taxpayer.

ATO response: Agree

We review product cycle times annually and adjust as necessary.

We will use feedback from our S&ME ATO Tax Practitioner Forum in this process.

We will reinforce the current policy where case officers, in discussions with their team leaders, can extend the cycle time of a case where appropriate and, where it is ATO initiated, ensure that the taxpayer understands the reasons and is not adversely impacted.

HWI taskforce workflows

4.24 The SME business line advised the IGT that for the purpose of resource allocation it estimates 50 per cent of PRRs become CRRs and 30 per cent of CRRs escalate to audit. In the 2009-10 year, the case sequencing charts disclose that the percentage was closer to 40 per cent (203 out of 342 PRRs were not escalated for further compliance action).

4.25 For the 2009-10 year, the HWI taskforce area completed 514 cases. On the basis of the case sequencing charts for that year, there have been a number of unproductive active compliance products in terms of protecting revenue and minimising compliance costs. On the basis of the figures in these charts, initial PRRs provide wider coverage at a lower cost to the ATO. As cases escalate to CRRs and audits, the costs increase and so do the strike rates and liabilities raised. The following table summaries those charts.

Table 3: Summary of HWI case sequencing charts for the 2009-10 year
Initial type of case (first in sequence) Number of completed cases Cases with compliance result Liabilities raised in $m Notional tax reversed in $m cost to ATO in $m Strike rate $ return per $1 of ATO cost
Field audit 6 6 136.1 0 0.468 100.00% 290.81
PRR 343 37 31.264 86.6 4.619 10.79% 25.52
CRR 65 21 17.8 9.4 2.92 32.31% 9.32
Internal Review 89 4 22.03 0 1.812 4.49% 12.16
Specific Inquiry 21 2 0.06 0 0.574 9.52% 0.10
Other 13 1 0.03 0 0.178 7.69% 0.17
Voluntary Disclosure 5 5 2.5 0 0.017 100.00% 147.06
Total 542 76 209.784 96 10.588 14.02% 28.88

4.26 The HWI case sequencing data indicates that only certain types of sequences lead to amended assessments, or a direct compliance result. In the IGT's view, this implies that other non-productive activities are imposing a disproportionate compliance burden on compliant HWI taxpayers. This indicates a need for further SME business line work to assess the effectiveness of its upstream risk identification processes in targeting likely non-compliance and reducing compliance costs on compliant taxpayers.

Recommendation 4.4

The SME business line should assess the effectiveness of its upstream risk identification processes in targeting likely non-compliance and reducing compliance costs on compliant taxpayers. In conducting this assessment, the SME business line should inform itself from the analysis of the case sequencing charts and analysis of objections cases.

ATO response: Agree

We are implementing a risk differentiation framework (RDF) which will apply across all populations within the S&ME and private wealth markets. This process will support a differentiated compliance approach dependent on our assessment of the risk for each taxpayer.

We will use Siebel case data to determine NFA and early exit rates and feed that data back into the RDF and case selection processes to improve these processes and assist to minimise unnecessary case work.

Income Tax Investment (ITI) — S4 market segment workflows

4.27 As stated in chapter one, the SME business line's contribution to the ITI is, over four years, to risk review all S4 taxpayers, raising $350 million in direct revenue and $630 million in indirect revenue. It started on 1 July 2008.

4.28 The SME business line has based delivery of its contribution to the ITI on the following workflow estimates: a total of 1400 cases, 60 per cent will not progress further than the PRR stage and 60 per cent of cases at the CRR stage will not progress to audit.55

4.29 The following case sequencing charts show the SME business line's S4 cases for the 2009-10 year.

Figure 1: S4 market segment case sequencing charts for the 2009-10 year

Table showing S4 market segment case sequencing charts for the 2009-10 year.

Source: Australian Taxation Office

View image enlarged

4.30 The number of cases reviewed in the 2009-10 year represent approximately a quarter of the taxpayer population in the S4 market segment. In summary, the SME business line raised $12.2 million in direct liabilities and $27 million in notional tax protected in 33 out of 351 cases for a total cost to the SME business line of just over $1.9 million.

4.31 Just under three-quarters of the total number of cases received a lower level of scrutiny from the SME business line (letter review) at a lower cost to the SME business line ($2000 per case), with just under one-quarter receiving an increased level of scrutiny (field review) at a mid-range cost to the SME business line ($13,000 per case). Less than one per cent of cases resulted in field audit with the highest cost to the SME business line (approximately $36,000 per case). Note that the cost to the SME business line only includes compliance staff, not technical officers, case leadership, objections staff or other ATO areas that may be involved in the case.

4.32 As at February 2011, a performance report to the SME Executive stated that for the year to date (as at 24 February 2011):

  • General Compliance Income Tax Investment (S4) commitment comprising of $120 million revenue $70 million cash and indirect revenue of $150 million. This commitment will be measured using a combination of the ITI project and the broader program including S4 market cases. A review of the audit case outcomes in the S4 (ITI) segment during February 2011 is indicating that liabilities are currently tracking below has been planned for 2010/11. While cases numbers are on track liability outcomes are not as strong as predicted for 2010/11 when they were put in place by the original ATO funding proposal for this body of work. We expect a shortfall in planned direct S4 liabilities in 2010/11 of around $30-$40 million based on $120 million original planned outcome for this segment. In terms of indirect revenue planned for the S4 segment RAB [Revenue Analysis Branch of the ATO] has endorsed S&MEs methodology for measuring this outcome and have accepted that to date the program has delivered between $200 million and $300 million in indirect revenue as a result of our engagement and overall activity within this segment.

… We have invested significant senior resources in the risk assessment and review processes for the S4 work and we are confident that the best cases are progressing to audit and that our audit outcomes are sound.56

Wealthy Australians (WA) Project

4.33 The ATO's WA project aims to raise, over a four-year period, $285 million tax liabilities and collect $170 million of these liabilities.

4.34 The SME business line has based delivery of its contribution to the WA project on the following workflow estimates: a total of 75,000 potential cases, 40 per cent will not progress further than the Private group structure questionnaire stage (these questionnaires are discussed further in chapter 6). The ATO has since reported that there are approximately 82,000 potential cases.

4.35 This project is in the early stages of its roll out.

Project management of cases

4.36 The ATO's 'IPEC' model (which stands for Initiate, Plan, Execute and Close) comprises a high level methodology to project manage case work.

4.37 An SME business line workshop with externals identified that 2 of 8 cases examined were not progressed because of the lack of proactive case management.57 The external representative recommended that 'training be provided to ensure case officers understand the importance of continual monitoring and re-communicating with the taxpayers to ensure the cases are completed within a timely manner'.58

4.38 A later workshop59 examined the deeper cause for case plans not being followed. It identified that a level of staff disengagement and knowledge impeded the escalation of errors and problems with procedures and their timely updating. Opportunities for improvement were identified. These were to develop escalation processes for staff, to provide a gateway for the maintenance of current and accurate procedures around case plans and to utilise internal communication networks to reinforce the requirement to complete case plans (while this is not a root cause of the issues around case plans, it has been identified as a solution to improve staff awareness for the procedures of case plans).

4.39 In the IGT's view, the SME business line could do more to ensure SME officers proactively manage cases, including the continual monitoring, re-communication with taxpayers and complying with the requirement to complete case plans before commencing activities.

Recommendation 4.5

The ATO should improve management oversight and assurance measures to ensure SME officers proactively manage cases, including continually monitoring cases, re-communicating with taxpayers and complying with the requirement to complete case plans before commencing compliance activities.

ATO response: Agree

We will implement the Compliance Active Case Management project outcomes which are being rolled out across the compliance sub plan during 2011/12.

We will also reinforce the need for case officers to prepare a case plan and discuss this with the taxpayer at the outset of the case.

We have implemented a 'checkpoint reporting' process to assist managers to monitor the progress of cases.

Systems support

4.40 Internal ATO research identified that an SME system, called 'BMT', was not linking related taxpayer entities together properly, thereby increasing SME officers' time taken in manually establishing links and increasing the risk of less experienced officers missing links with other entities.

4.41 The potential impact of this on taxpayers is the potential duplication of risk reviews for the same economic group, creating unnecessary increased taxpayer compliance costs.

4.42 The SME business line identified the ability to link entities as a key risk in its 2010 HOTSA:

What are the key risks to our internal capability?

... Data collection / systems — Within S&ME we are focusing on closely held private wealth groups that link entities to the economic group / controlling mind. This focus was derived from the systems and processes developed within the HWI taskforce. Increasingly for S&ME, we are developing new views on our information and data to support this changing approach. Through this work we have been experiencing issues with data warehouse speed and accessibility. We are working with [other areas of the ATO] to ensure performance and support for the business demands is maintained for our critical business needs.60

4.43 In the IGT's view, improving the identification of links between related entities within the same economic group will help to reduce compliance costs on taxpayers in responding to unnecessary information requests.

Recommendation 4.6

To reduce the risk of duplicating risk reviews for the same economic group, the ATO should improve its automated systems' ability to identify links between related entities within the same economic group.

ATO response: Agree

We have been investing significant resources into our processes for collecting data and linking entities to economic groups and to individuals to assess their net wealth. This work continues to produce improved outcomes for linking entities.

Interpretative Assistance (IA) area's resourcing

4.44 In addition to concerns with the delivery of outcomes, specific concerns were raised in relation to the resourcing of the SME business line's IA function.

4.45 During the review, the ATO commissioned an internal review to examine what changes may be needed given the expected shift in compliance work type and workloads. Among other things, that report considered a specific area where resourcing was said to be insufficient:

There were claims made that IA was not sufficiently resourced to carry out its work, particularly in relation to HWI objection work. All sites indicated they were working at near full capacity and any sudden increase in work would be difficult to manage... clearly there are resource pressures in IA that need to be managed. It appears that S&ME management have long recognised the need to resource this area but for various reasons it has not been able to make it happen.

Recommendation 6

Urgent action is taken to fill positions in IA to deal with increasing workloads.61

4.46 In examining the underlying reasons, the report considered the basis upon which workloads were calculated:

[The then Deputy Commissioner of the SME business line] mentioned at a Governance session that he would like to see IA officers moved towards completing six cases a month. This was calculated at 60 per cent of 20 working days a month (12 days per month), and estimating that case officers should be able to do one case every two days — for a total of six cases per month. There was an expectation that S&ME would increase productivity (that is, case holdings per officer) in order to achieve this aspiration.

However, since then the compliance program has significantly changed ... and the IA area is starting to face pressure in handling objections to more complex issues. Consideration needs to be given to whether case work needs to be categorised. The aspiration of 6 objections per FTE per month is probably achievable for routine cases but is clearly not feasible for complex objections.62

Restructuring of objections function

4.47 In considering this issue it is also important to understand the background to the SME business line's IA function and the restructuring of its objections function.

4.48 In 2009, HWI objections were dealt with by different ATO teams to those that dealt with SME objections. At the 24 November 2009 SME Executive meeting, it was decided to centralise the HWI IA functions and transfer that function to the SME IA area by 1 July 2010. At the time, HWI IA work was done by 9 FTE staff in the HWI AC teams and Technical Excellence Practice (now subsumed into the Senior Technical Leadership).

4.49 Based on a predicted increase in HWI audit activity it was estimated that approximately 26-35 FTE staff would be needed to manage expected HWI IA work. However, the SME Executive would consider their agreement to that expected FTE staff increase in May/June 2010 when it could be determined what resources would get freed up as a result of this integration and the outcome of other productivity initiatives. A staged approach to implementation of the restructuring was ultimately decided upon, with savings expected to arise from the integration. However, as later events show, the integration did not reduce the workloads for IA staff.

Staff concerns with resourcing and management's response

4.50 By mid-2010, senior SME officers were made aware of more junior officers' concerns with the IA area's resourcing. In March/April 2010, the SME business line conducted feedback sessions with its officers with 85-90 per cent attendance. Amongst other comments that SME business line officers 'consistently raised across various sites and sessions', they commented that:

Technical area merger

  • Comments centred around this move being beneficial, and in line with a private wealth approach. Most sites with an IA presence commented that they are pleased to see this, as they felt the current technical support in IA is not adequate.

...Interpretative Assistance

  • Some IA staff are feeling heavily criticised at the moment (for example, criticisms of their productivity and inaction on Siebel issues that cause them to fail cycle times)
  • Technical support for IA was raised several times. The new technical area will assist in addressing some of this issue — but it is something we may need to consider moving forward.63

4.51 It also appears that there were significant work pressures in at least one IA site, requiring Human Resource practitioner involvement and active involvement of Assistant Commissioners.

4.52 The SME Executive had agreed to find 10 more FTE staff to transfer from the HWI area to the IA area as soon as possible. However, as at 1 June 2011, this action item was not complete. A recently completed ATO internal report also recommended urgent action be taken (see above).

Gap in resources at main IA site

4.53 A recently completed ATO internal review of the IA area identified a gap in IA resources in one of the main sites:

... it is understood that the Box Hill site that is principally responsible for HWI objections, has had a number of staff relocate out of S&ME, and this has left a significant gap in resources within Box Hill IA. It would not be wise to simply replace these staff with new recruits and expect them to continue to carry out HWI objections. Indeed, the fact that this site is remotely managed by a director in Adelaide and the SES in Perth is further reason to consider the nature of the work this team should be doing. There should be no reason why HWI objections could not be handled in other sites within Melbourne. The work should go to more established teams (who have the capability and experience to handle the work) or alternatively Box Hill should be resourced by experienced staff (who understand the S&ME business and have the capability to handle complex work).

Consideration needs to be given to whether the Box Hill IA site needs to be relocated or whether its workload should be reassessed.

Recommendation 5

Box Hill site needs to be resourced with experienced SME staff who can handle complex HWI work or, alternatively, consideration be given to the feasibility of keeping an IA/objection site in Box Hill where there is limited site leadership to handle these complex cases.64

Sharing information to help predict the IA area's workloads

4.54 The ATO's internal report also observed that there may be information needed to predict downstream workloads (such as objections) which may not always be shared within the business line:

It is understood that IA areas have access to AC's [the Active Compliance area] data on 'work in progress' and 'expected completion' . which assist in planning for projected workloads. Also, the IA area has recently completed work for an IGOT review on finalisation outcomes for audit objections. Reports such as these provide valuable information in relation to expected workloads, complexity of issues and capability of workforce — which is necessary for positioning and planning for IA functions.

In the course of meeting with various directors it became apparent that there are some reports prepared by AC that the IA area was not privy to. It is unclear what reports are routinely available to IA to assist them with the projections and planning for IA work.

Recommendation 7

AC management reports and IA management reports should be routinely shared with each other. Consideration should also be given to joint reports that are prepared for the purpose of BMC committees.65

4.55 Relevantly, the ATO advised the IGT during the review that:

We will design and build a 'complexity measure and indicator' into our case selection process to enable us to better understand the nature of case work we plan to undertake. The indicator will also provide us with a better basis for planning our resource needs and allocation of the correct resources to match the case work. We plan to have this in place for the 2012/13 year.66

4.56 In the IGT's view, the ATO's compliance focus on more sophisticated taxpayers is likely to lead to more complex cases being considered and increased potential for disputation. On this basis, the ATO should undertake to reassess, and carefully monitor, its resourcing allocation for the pipeline of compliance work (including dispute resolution functions, such as objections and litigation). The ATO should ensure that the SME business line's IA areas are sufficiently resourced to appropriately handle the number and complexity of objections being lodged. In line with recommendations 5-7 of its internal report, the ATO should act to fill gaps in resourcing (such as that identified above) as well as ensure that relevant information is shared within the business line. The IGT also considers that the SME business line should also more broadly carefully reconsider its current staffing, capabilities and management of its IA areas in relation to the comparative complexity of cases.

Recommendation 4.7

To ensure that the ATO appropriately resources its compliance activities in relation to HWIs, S4 and Wealthy Australian taxpayers, the ATO should:

  1. identify and fill gaps in resourcing (such as that identified in its internal report, 'Review of interpretative advice as part of the SM&E pipeline');
  2. ensure that relevant information on workflows and resourcing is shared within the SME business line;
  3. based on the increased complexity of this work, reassess the expected workloads of its SME Active Compliance, SME Interpretative Assistance (IA) officers and other ATO officers involved in dispute resolution (such as TCN and litigation);
  4. assess the impacts of this compliance action on other SME business line commitments; and
  5. sufficiently resource the SME's IA function to appropriately handle the number and complexity of objections being, and expected to be, lodged.

ATO response: Agree

We will implement the recommendations of the S&ME commissioned report ('Review of Interpretative Advice as part of the S&ME pipeline) which was prepared for the S&ME Executive in June 2011.

Active Compliance provides a report to Interpretative Advice on the expected workloads and timing of case work which may flow into the Interpretative Advice area.

This report allows Interpretative Advice to better align their resourcing and work priorities with current and expected workloads.

4.57 During the review, the IGT received submissions from ATO staff concerned with aspects of the SME business line, including how the business line handled concerns raised with senior officials. The IGT has considered the issues insofar as they relate to the ATO in its role as a tax administrator. However, some issues related to the ATO in its role as an employer. In this respect, the IGT considered that there were alternative workplace relations mechanisms designed to resolve such concerns.

Change management

4.58 The SME Executive recently implemented a number of substantial changes to address approaches in relation to integration, private wealth, the S4 market, WA work, and candidate HWIs' identification.

4.59 Generally, 'integration' within the SME business line refers to the merging of the GC, HWI and WAs areas into one. Senior SME staff explained that the aim is to remove the internal silo stacks of these areas and put them together into one area. The SME business line recognises that there will be many streams of work, but does not intend staff to do work that they are not equipped to deal with. It will be up to the team leaders and regional directors to match the existing capability with the work required to be done in line with the ATO's commitments to Government. The ATO advises that integration occurred in mid-October 2011.

4.60 Submissions from certain ATO staff indicate that it is unclear the extent to which staff understand how the transitions will impact on their work (that is, what their job is and how they are expected to do it).

4.61 In the IGT's view, the SME business line could improve staff understanding of the integration and its impact on the GC, WA and HWI areas.

Recommendation 4.8

The ATO should improve staff understanding of the integration of the General Compliance, Wealthy Australians and HWIs areas and its impact on staff.

ATO response: Agree

We delivered staff information sessions to all S&ME staff during October and November 2011. These sessions detailed our line priorities, our focus on understanding and managing compliance within our various populations and linking this to the ATO strategic plan. The sessions also covered our use of the RDF, active compliance integration, interpretative assistance and our marketing and education activities.


52 'S&ME Income Tax HOTSA 2010 — Compliance Sub-plan Health of the System Assessment (HOTSA)', p. 28, document attached to the minutes of the 16 September 2010 Risk Management Committee meeting.

53 'S&ME Case Product Reduction and Cycle Time Recommendations, pp. 2-5, document attached to Minutes of the 25 August 2010 SME Executive meeting.

54 Inspector-General of Taxation, Report into the Australian Taxation Office's large business risk review and audit policies, procedures and practices, Sydney, May 2011.

55 55 Australian Taxation Office, presentation to IGT staff, May 2010.

56 'S&ME Active Compliance — performance report: year to date 24 February 2011', pp. 5-6, prepared for the SME Executive.

57 The SME business line's Community Involvement Workshop, 27 August 2010.

58 'Small and Medium Enterprises (SME) Active Compliance (AC) Integrated Quality Framework (IQF) Community Involvement Workshop (CIW)', a document prepared by the community representative on the SME business line's Community Involvement Workshop, 27 August 2010.

59 The SME Active Compliance Continuous Improvement Workshop, 17 September 2009.

60 'S&ME Income Tax HOTSA 2010 - Compliance Sub-plan Health of the System Assessment (HOTSA)', p. 30, document attached to the minutes of the 16 September 2010 Risk Management Committee meeting.

61 'Review of interpretative advice as part of the SM&E pipeline', a report commissioned by and prepared for the ATO's SME Executive, June 2011, p. 21.

62 Ibid, pp. 26-27.

63 'Feedback from SME Information Sessions March/ April 2010', p. 2, document attached to the agenda for the 12 May 2010 SME Executive meeting.

64 'Review of interpretative advice as part of the SM&E pipeline', a report commissioned by and prepared for the ATO's SME Executive, June 2011, pp. 18-19.

65 Ibid, p. 27.

66 Australian Taxation Office, written communication to the IGT, 23 September 2011.