6.1 The ATO generally seeks to take a staged approach to information gathering. In the ATO compliance environment, the approach is usually to commence information gathering to assess whether there are tax risks arising from a taxpayer's self-assessment of their tax obligations (a risk review). It is expected that risk reviews involve a lower intensity of information gathering compared to that of an audit. In relation to HWI and S4 cases, the ATO seeks to impose a lower level of burden of information gathering initially by scoping risks in a Preliminary Risk Review (PRR) before undertaking a Comprehensive Risk Review (CRR) or audit. The ATO also has a general policy of asking for information informally, rather than using formal powers at first instance, such as those under section 264 of the Income Tax Assessment Act 1936.

6.2 The SME business line also uses expanded returns for those HWIs that it considers exhibit a higher risk rating. The ATO may also use expanded returns for a number of years following adverse compliance action to assure itself that the HWI is correctly complying with the tax laws.

6.3 The IGT has observed that some of the stakeholders' experiences have been very mixed in relation to information gathering in compliance activities of S4, HWI and WAs. Stakeholders have conveyed a need for greater ATO communication and engagement on the overall information gathering process along with better targeting of requests and minimising the time taken for ATO responses and related follow up.

6.4 During the IGT's review the ATO advised:

S&ME will implement a new centralised case preparation and selection process which is designed to utilise more of our new automated data collection and collation processes.

The new process will provide our active compliance staff with a much richer picture of the taxpayer and the risks associated with that taxpayer along with all the relevant information the ATO holds on that taxpayer prior to us having any contact with the taxpayer or their advisor.

This process will minimise the need to contact taxpayers or advisers for the basic information we might need prior to commencing a review or audit.

… While further information requests will remain part of the review and audit process S&ME will review its procedures related to seeking and managing further information requests to ensure that they support full engagement with the taxpayer or advisers in relation to the nature, extent and timing of such requests.73

6.5 In the IGT's view, better management of the ATO's contact with taxpayers and their advisers to obtain basic information should go some way to minimising compliance costs imposed by these types of information requests. The ATO's commitment to engaging taxpayers and their advisers in relation to further information requests also provides an opportunity to manage relationships and improve compliance outcomes and taxpayers' experiences. Further areas for improvement in relation to information gathering activities are identified below.

Setting expectations in information gathering

6.6 The ATO's confidence that its SME business line has correctly assessed risks is directly related to the amount of source information obtained and the depth of risk assessment activities.

6.7 The ATO is in the final stages of risk reviewing all S4 entities, approximately 1400 in number. This market segment predominately comprises private groups and entities, having a lower level of publicly available information than that of larger businesses. This is the first time that the ATO has reviewed this market segment in this manner. It is likely that many of these entities have not previously been the subject of ATO compliance activities and a greater level of information is likely to be required than would otherwise be the case.

6.8 There were are also indications that initially there may have been an inconsistent approach to gathering information from S4 taxpayers, particularly in relation to the stage at which financial statements are requested by the ATO and which entities within an S4 group should be targeted.

6.9 Some submissions to the IGT review also observed unfocussed information gathering requests in both reviews and audits. They have cited some examples of requests for information already provided to the ATO. They also observe that the ATO has sometimes made information requests of third parties without informing the taxpayer first, thereby adversely affecting the commercial relationships between taxpayers and third parties.

6.10 As discussed in chapter three, the ATO uses a Facts and Evidence Worksheet to focus compliance officers' attention on technical decision making. However, at present, there is no SME business line requirement to use the Facts and Evidence Worksheet to focus technical thinking and determine the information that should be gathered to test risks. The only requirement is to use the worksheet as the means for recording the facts and evidence of the case.

6.11 During the review the ATO advised that:

We will reissue the instructions and reinforce the requirements to use the Facts and Evidence worksheet in a range of S&ME case work.74

6.12 In the IGT's view, the ATO could do more to closely set private sector expectations on what information will be obtained during risk review stages. Additionally, after the risk hypotheses are developed by SME auditors, proper use of the Facts and Evidence Worksheet would minimise the incidence of unfocussed information gathering occurring during audits.

Recommendation 6.1

The SME business line should require its compliance officers to use the Facts and Evidence Worksheet to determine what information will be asked of a taxpayer in any particular compliance activity.

ATO response: Agree

The facts and evidence worksheet is required to be used in audit cases. This has been the case since April 2010. We will reinforce this business rule with our staff to ensure its use in all cases.

The worksheet remains a key part of the process for determining and seeking further information during our audit activity.

6.13 As discussed in the previous chapter, the Facts and Evidence Worksheet can also be shared with the taxpayer to focus discussion on technical issues.

Asymmetries in timeframes

6.14 Depending on the type of information requested, the ATO may require taxpayers to provide information within a set time period (generally 28 days) or otherwise as negotiated. However, there is no such similar requirement on the ATO to respond to the taxpayers' requests or responses within set timeframes.

6.15 Some submissions commented that extended delays in the ATO responding to information provided (such as further follow up or discussion of issues arising from the information provided) result in increased costs to advisers and taxpayers by reason of the time taken to re-familiarise themselves with matters and issues. They observed this occurred in various types of compliance activities in relation to various types of taxpayers.

6.16 In the IGT's view, the ATO should better manage and meet private sector expectations around the time periods in which the ATO should review and respond to information provided. Team leaders should also ensure that cases are progressing in a manner that provides taxpayers with adequate time to respond to ATO information requests and minimises the time taken by SME officers to progress and finalise cases.

Recommendation 6.2

In the new booklet (which will replace the 'Wealthy and wise' booklet, as set out in recommendation 5.1), it should be stated that in relation to ATO information requests, the SME business line will:

  1. clearly state to taxpayers and their advisers the time periods within which the ATO will review and respond to information provided by them; and
  2. ensure that team leaders are progressing cases in a manner that provides taxpayers with adequate time to respond and minimises the time taken by SME officers to finalise cases.

ATO response:


Private group structure questionnaires

6.17 During the initial phase of the IGT's review, a significant number of tax advisers made representations on the SME business line's use of its Private group structure questionnaires. They claimed that the questionnaires were unclear in terms of the information requested and time period to which they related. Also the questionnaires asked for information concerning family members and associates, while similar questionnaires were sent to those family members and associates as well, thereby duplicating the information required. They also claimed that after providing the information, long periods of time elapsed before the ATO responded, which in many cases was a further request for information or questions on the information provided.

6.18 The SME business line acknowledges that it did not properly consider staging the issuing of these information requests, particularly in relation to ensuring it had enough resources available to deal with the responses and follow up requests. It now understands that this market segment may not have been exposed to such information requests previously and could have better engaged with these taxpayers before sending out the questionnaires. The SME business line has also undertaken to review the content of the questionnaires with their SME advisory group (an ATO consultative forum comprising private sector SME representatives and senior ATO staff).

6.19 The SME business line has, in more recent times, established a program of structured scrutiny of S4 and WA taxpayers through its S4 risk review, HWI expansion and WA initiatives. The ATO required a greater level of information from these taxpayers (and other related or connected taxpayers) as it did not have detailed knowledge of the broader economic group to which they were related. In many situations this will be the first time that many of these entities have dealt with the ATO on this basis.

6.20 The IGT considers that there is significant scope for improvement in better preparing taxpayers for new information gathering questionnaires and generally better managing the entire process.

Recommendation 6.3

The ATO should review, with their SME advisory group, the structure and content of any proposed new (or substantial alterations to existing) information gathering questionnaires.

ATO response: Agree

We work with the S&ME ATPF group to ensure our questionnaires and outbound letters are effective, appropriate and minimum cost to taxpayers.

Information gathering initiatives

6.21 The ATO project, KPMG Risk Assessment Information Sharing (RAIS) Phase 1, is aimed at improving information gathering in the S4 market segment, amongst other things. It grew out of KPMG expressing an interest in better understanding the SME business line's risk management process and the risk classification assigned to their clients in the S4 market segment. The ATO considered that an improved understanding would lead to a more accurate assessment of the ATO's risk profiling of the taxpayers and minimise the chance of inappropriate taxpayer risk selection. The SME Executive approved the project outline in September 2009.

6.22 The ATO is also conducting an Annual Compliance Arrangement Lite Project which is based on the large business annual compliance agreements but with a reduced amount of information gathering.

6.23 Other tax advisers have commented favourably about the objectives of these initiatives.

6.24 In the IGT's view there is potential to use the findings from the RAIS project to develop a strategy for improving information gathering and risk assessment through communicating to each taxpayer the risks that the SME business line has identified in relation to that taxpayer.

Recommendation 6.4

The ATO should use the findings from the Risk Assessment Information Sharing project to develop improved information gathering and risk assessment and by communicating to each taxpayer the risks that the SME business line has identified in relation to that taxpayer.

ATO reponse: Agree

We plan to make use of the data and knowledge we gain from the current Risk Assessment Information Sharing (RAIS) pilot to expand this activity to other practitioners and taxpayers in our market where appropriate.

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

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