5.1 The manner in which compliance activities are carried out can affect the substantive issues under examination as well as future compliance postures adopted by taxpayers and their advisers.

5.2 The ATO has a number of processes and procedures to help guide its officers in dealing with taxpayers and their advisers in the course of compliance activities. Notwithstanding these processes and procedures, submissions to the review raised a number of concerns with the conduct of compliance activities and the effectiveness of existing escalation processes. Generally, a desire was expressed for increased transparency and awareness of internal ATO processes in this respect.

5.3 In this respect, the ATO's current version of the Wealthy and wise booklet sets out the expectations the ATO has of its officers in the conduct of HWI compliance activities. It sets out a range of material useful to HWIs and their advisers, including the issues and characteristics that attract the ATO's attention and how the ATO generally conducts its compliance activities in relation to HWIs.

5.4 During the review the ATO agreed to extend the scope of the booklet to the entire SME market segment. This, in the IGT's view, is a welcome initiative.

5.5 However, notwithstanding the beneficial nature of this document, there are a number of specific areas in which the content of the document could be improved to better set expectations on SME officer conduct. These areas are discussed below and include: escalation processes; opening meetings for compliance activities; allowing tax advisers to be more effective; communicating the commencement and finalisation of compliance activities; having discussions with taxpayers before adverse ATO views are documented in writing; changing the basis for amendments; and changing auditors during compliance activities.

Expectations and escalation processes

5.6 In the large business market, the ATO's publication, Large business and tax compliance (the 'blue book') sets out the relationship that external parties can expect during ATO compliance activities and related processes, such as escalation processes. Among other things, this set of expectations allows taxpayers to hold ATO officers to account where they do not meet the expectations set out in the ATO's publication.

5.7 In the HWI market, the current version of the ATO's Wealthy and wise booklet67 seeks to provide a similar kind of assistance, but only in a much more generalised fashion.

5.8 A number of submissions to the IGT review claimed that they experienced a level of intimidation and perceived a lack of accountability for ATO officer behaviours in SME and HWI active compliance activities. They did not consider that there was a clear escalation pathway for the compliance activity conduct that caused them concern. They considered that existing escalation processes for the SME market (such as escalating to the team leader and then to ATO complaints) are sometimes ineffective, especially when they concern an auditor's conduct, and that discussing matters with personal contacts within the ATO is generally more effective.

5.9 During the review, the ATO agreed to extend the approach taken in the ATO's blue book to the SME market segment so as to improve the public awareness of the procedural and behavioural conduct that could be expected in the ATO's interaction with HWI and WAs as well as all SME taxpayers. Specifically, the ATO advised:

The current version of the 'Wealthy and Wise' booklet (published in March 2008) will be replaced by a new booklet to reflect an updated and broader view of our approach to managing compliance from a private wealth/private group approach and more broadly across the S&ME market.

The new booklet will provide guidance on our risk assessment and compliance approach to the private group/wealth market along with the broader S&ME segment. It will also provide guidance on our relationships and interactions with taxpayers and advisers, the behaviours we would expect to see from our people, and the procedures we would follow when conducting risk assessment, review and audit activity in the segment.

Like the 'Large business and tax compliance' booklet our expectations of taxpayers and advisors in terms of their tax compliance and their interaction with us during our activities will also be covered.

We see the development of the new booklet as a collaborative and co design process with both taxpayers and advisers in this segment. We will be engaging with a range of external and internal stakeholders in the process of developing the new booklet. We are targeting a publication date of July 2012.

This work provides an opportunity for the ATO to engage with the tax profession and relevant taxpayers to ensure that shared expectations between the ATO and these market segments are fostered in relation to the conduct of compliance activities. It is also an opportunity to develop improved stakeholder perceptions of ATO accountability.68

5.10 In the IGT's view, this ATO advice is welcomed as it improves shared expectations on what the SME business line will and will not do during compliance activities, the manner in which those activities are conducted and how taxpayers and advisers can hold SME officers to account (such as how matters can be escalated to senior ATO officials for rectification) where they do not meet those expectations. Setting such expectations would go some way to allaying concerns of some in the private sector that, at present, there are no effective means of holding SME officers to account.

Recommendation 5.1

In consultation with taxpayers, tax practitioners and their representative bodies, the ATO should replace its 'Wealthy and wise' booklet (published in March 2008) with a new booklet to apply across the SME market segment that more clearly communicates what specific conduct taxpayers and their advisers can expect during compliance activities. This booklet should set clear expectations, including:

  1. what the ATO will and will not do during compliance activities in the SME market segment (including HWIs and Wealthy Australians);
  2. the manner in which those activities will be conducted; and
  3. more effective escalation processes where the ATO's SME officers do not meet those expectations.

ATO response: Agree

We are currently working on the development of a comprehensive booklet which will focus on the private wealth segment (net wealth over $5 million) as well as the broader S&ME market (entities with turnover between $2 million and $250 million).

The booklet will detail our approach to assessing risk and managing compliance in these market segments. It will also outline the behaviours we would expect to see from taxpayers and advisers in these segments along with the behaviours expected from tax officers when they are dealing with taxpayers and advisers in these segments

In general we support the views in the range of recommendations in this report which are related to the publication of a new booklet.

We have formed a working group of key tax professionals to assist us in the development of the booklet.

The views of this group will be taken into account in finalising the content of the booklet and will be considered in terms of the implementation of the recommendations in this report which relate to the publication of the booklet.

5.11 As indicated above there are a number of issues concerning the setting of expectations of SME officer conduct. The replacement of the Wealthy and wise booklet provides an appropriate vehicle to communicate these expectations. As such there are a number of recommendations that are directed to the content of this booklet. These issues and the recommendations are discussed below.

Opening meetings for compliance activities

5.12 The current version of the Wealthy and wise booklet states that at the beginning of an audit the ATO:

Will generally:

… discuss with you or your adviser the risk/issue and the information we propose to seek, including the reasons we are seeking it. The aim of the discussion is to refine our information needs to ensure adequate information is obtained in the shortest possible time. We will seek your views on any concerns, ambiguities or issues of relevance and your assistance to identify other information that would assist in the timely completion of the audit

… discuss with you our information-gathering protocols and expectations, including our timeliness for the provision of information and appropriate resource levels

… take into account your particular circumstances to minimise the inconvenience and cost of our enquiries

… Hold preliminary audit interview

At the interview we will:

  • provide you with a copy of the audit plan;
  • discuss the audit scope, the periods under audit and the expected completion date;
  • discuss the information gathering process;
  • discuss any Tax Office guidelines relevant to the issues and years to be audited, including procedures in relation to voluntary disclosures;
  • Outline facilities and assistance we may require; and
  • give you contact details for a senior officer in case you wish to raise any concerns during the audit.69

5.13 In the IGT's view, the above should be expanded in a number of respects, including covering risk reviews and audits of S4 taxpayers and WAs.

Recommendation 5.2

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that at the outset of any compliance activity ATO officers will meet with the taxpayer and/or their representatives. The purpose of this meeting will include the following:

  1. identify the areas to be reviewed or audited;
  2. identify the information that the ATO is seeking and whether there are alternative forms of the information that would fulfil ATO purposes and be of reduced compliance burden to the taxpayer;
  3. agree on the timeframes for the compliance activity and deadlines for key milestones in that activity; and
  4. commit to the aim of 'no surprises' and the means to achieve that aim, such as periodic ongoing communication, preferred communication channels and escalation processes for any concerns arising during the audit.

ATO response:

Agree

Allowing tax advisers to be more effective

5.14 Under the SME business line's current compliance activity procedures, there is no requirement for SME officers to allow tax advisers time to internally review their clients' affairs before reviews or audits commence.

5.15 In the IGT's view, affording tax advisers an opportunity to internally review clients' affairs and make voluntary disclosures before the ATO commences information gathering could substantially reduce direct SME officer time on reviews and audits and reduce taxpayers' costs.

5.16 Separately, under the SME business line's population strategy, the SME business line is exploring pre-activity relationship development with HWIs' tax advisers so that case plans are discussed with the tax adviser prior to any audit activity being started. This initiative is similar to the LBI business line's relationship management process.

5.17 In the IGT's view, discussing and developing compliance activity case plans with the representatives of the taxpayer before any activity commences would improve taxpayer engagement and access to the relevant information needed. If there were to be circumstances in which this opportunity was not to be afforded (such as appropriately commenced covert audits involving organised criminal activity), this should be explicitly stated in the relevant publication.

Recommendation 5.3

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that ATO officers will discuss and develop compliance activity case plans with the taxpayer's representatives before any activity commences. If there are circumstances in which this opportunity was not to be afforded, these circumstances will be explicitly stated also.

ATO reponse:

Agree

Discussion with taxpayers before views are documented in writing

5.18 A number of submissions to the IGT review commented that SME officers appear committed to a course of action once the ATO position is in writing, even if in draft form, such as draft position papers. The submissions comment that they perceive entrenched views were only objectively re-assessed when signals that the ATO view may not be correct were raised with more senior ATO officials. This occurred after considerable delay and associated costs being incurred.

5.19 Some submissions observed quick and streamlined resolution of issues when the Facts and Evidence Worksheet (a compliance officer's internal working document) was disclosed by the officer and the practitioner was afforded an opportunity to comment on it in discussion with relevant technical officers. The IGT has also observed in other areas that this practice of disclosing similar types of worksheets were effective in quickly and effectively resolving some of the ATO's most complex compliance cases.

5.20 According to the current version of the Wealthy and wise booklet, there is no requirement for an officer to discuss the issues with the tax adviser before a position paper is communicated — for example, under a HWI compliance activity, discussions are guaranteed only after issue of the draft finalisation letter (for review) and position paper (for audit).

5.21 There are indications that some SME officers may consider such discussion with taxpayers unnecessary and would provide opportunities for delay in completing compliance activities.

5.22 In the IGT's view, requiring officers to discuss potential views with taxpayers and their advisers before drafting a position paper provides a means to efficiently and effectively narrow the issues in dispute, so long as that discussion is focussed. Sharing properly prepared Facts and Evidence Worksheets with taxpayers and their advisers provides the means for focusing those discussions. There may be a view that this action may provide additional opportunities for some taxpayers to delay the compliance processes. However, this view should be balanced against the downstream impacts for not doing so, such as increased timeframes and intensity of disputes during the objections and litigation stages.

Recommendation 5.4

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that ATO officers, based on the relevant facts and evidence worksheet which they have prepared, will discuss potential views with taxpayers and their advisers before drafting a position paper that may have adverse impact on them.

ATO response: Partially agree

We will include in the new booklet commentary on the nature of our engagement with taxpayers in the course of us preparing position papers and throughout the course of the audit.

We will continue to use the facts and evidence worksheet in the course of developing our view.

It remains a key component in the process of developing a position paper.

We will discuss key issues with taxpayers in the course of developing our position paper.

Changing the basis for amendments

5.23 In some cases, the ATO reasons for amending a taxpayer's liability may change after the assessments are amended (such as in objection decisions or litigation). There is no requirement for SME officers to notify taxpayers for the reasons of this change — for example, why the views ultimately relied upon were not raised during audit.

5.24 Some submissions received from certain ATO staff indicate that they are aware of a number of cases where the ATO has raised an assessment in circumstances where the period for review was close to running out and an ATO position was still not fully formulated. In those cases, the SME business line issued amendments and subsequently worked to develop the position in the ATO's response to the objection and litigation.

5.25 An internal ATO report also commented that SME objection officers observed some audits reaching objections in a 'poor state' due to, amongst other reasons:

Lack of properly considered position — protective assessments due to time constraints and assessment issued while audit still underway.70

5.26 Some private sector submissions claim that these occurrences are not uncommon and that they burden the taxpayer with unnecessary costs and shift the identification and testing of risk hypotheses into the formal and more costly Part IVC (of the Taxation Administration Act 1953) dispute resolution process.

5.27 The IGT understands that there may be circumstances in compliance activities where there is a need to take protective action and there is not enough time to formulate a concluded ATO position, such as where the taxpayer has deliberately avoided contact with the ATO over a period of years despite repeated and numerous attempts by the ATO to establish contact. These circumstances, however, should be rare. Where these circumstances arise, the ATO should take fair and reasonable action to minimise the costs imposed on that taxpayer by reason of changing the ATO position during the dispute resolution process. This action should include, at the least, communicating the reasons why the view was not formulated earlier, GIC remission and a concessional approach to penalty remission.

Recommendation 5.5

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that where the ATO's reasons for amending a taxpayer's liability change after assessments change (such as during the consideration of objections or litigation), the ATO will take fair and reasonable action to minimise the costs imposed on that taxpayer by reason of that change, including:

  1. communicating the reasons why the new ATO position was not formulated earlier;
  2. GIC remission; and
  3. a concessional approach to penalty remission.

ATO response:

Agree

Changing auditors during compliance activities

5.28 Submissions to the IGT indicate that concerns with the change of SME officers during compliance activities. They cite increased costs in bringing new SME officers up-to-date where those officers are not aware of the information already provided or have not sought to understand that information before engaging with the taxpayer or their adviser.

5.29 In the IGT's view, the ATO should take steps to minimise taxpayers' costs arising from changing staff during SME compliance activities.

Recommendation 5.6

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that the ATO will minimise taxpayers' costs arising from the change of SME officers during compliance activities. This will include, before engaging with the taxpayer or tax adviser the new compliance officer will:

  1. familiarise themselves with the issues, facts and status of the compliance case; and
  2. understand the information that has already been provided by the taxpayer and how that relates to the issues in question.

ATO response:

Agree

Communicating commencement and finalisation of compliance activities

5.30 The current version of the Wealthy and wise booklet states that, among other key events in active compliance activities, officers are to:

  • provide a finalisation letter to taxpayers where they decide that no further action is to be taken as a result of a risk review;
  • provide a draft finalisation letter for any risks that are intended to be audited; and
  • 'generally' notify taxpayers of an intention to audit.

5.31 In 2010, an SME business line's workshop with externals71 identified 1 of 4 cases where transition from CRR to Specific Audit was not communicated to taxpayers. The later workshop with externals72 also identified in some of the 8 cases where the transition from review to audit was not communicated to taxpayers.

5.32 In the IGT's view, more could be done to ensure SME officer compliance with existing notification procedures, such as the commencement and finalisation of compliance activities. Further, the ATO could more clearly set expectations about such notification by clearly stating when officers are to provide such notification.

Recommendation 5.7

In relation to existing notification procedures concerning the commencement and finalisation of compliance activities, the SME business line should:

  1. in addition to existing quality assurance measures, ensure that its officers comply with these procedures; and
  2. more clearly set expectations about such notification by clearly and publicly stating when officers are to provide such notification.

ATO response: Agree

We will issue clear instructions to staff around advising taxpayers of the commencement and finalisation of compliance activities.


67 Australian Taxation Office, Wealthy and wise: a tax guide for Australia's wealthiest people, Canberra, March 2008.

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

69 Australian Taxation Office, Wealthy and wise: a tax guide for Australia's wealthiest people, Canberra, March 2008, pp. 32, 42.

70 '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. 23.

71 The SME Community Involvement workshop (a process through which the ATO identifies areas for improvement), March 2010.

72 The SME Community Involvement workshop, August 2010.