The Australian Taxation Office (ATO) identifies small and medium sized enterprises with annual turnovers between $100 million to $250 million (larger SMEs) as a particular compliance focus. There are approximately 1400 larger SMEs, over half of which are controlled by individuals with more than $30 million in net wealth. Such individuals are referred to as high wealth individuals (HWIs) by the ATO.
The Inspector-General of Taxation (IGT) conducted this review in response to concerns raised by taxpayers, tax practitioners and their representative bodies as a result of an increased ATO compliance focus on larger SMEs and HWIs. These taxpayers believed they were unfairly treated and subject to unnecessary compliance costs. The specific concerns related to the ATO's wide scope of information requests, delays, staff conduct in audit and their lack of commercial and technical knowledge. The overarching theme seemed to be a lack of staff capability.
In this review, the IGT has identified key opportunities for improvement in a number of areas, including: technical capability and support; initial compliance decision making; project management; audit conduct, communication and engagement; and information gathering.
Technical capability and support — Many concerns identified in this review would be resolved by improving staff technical capability. Larger SME and HWI matters are often highly complex and the need for lead times in capability development is appreciated. Importantly, once developed that capability must be maintained. The ATO's senior management has recognised both the SME business line's significant staff capability challenges arising over the next few years and the need to address it. Accordingly, the IGT has made a number of recommendations including:
- better matching the complexity of case work with officers' training and experience;
- clearly defining roles and responsibilities of relevant ATO officers;
- reinforcing the role of the ATO's Senior Technical Leadership;
- improving ATO approaches to recruiting and developing compliance officers;
- facilitating a degree of compliance officer specialisation;
- improving ATO officers' understanding of commercial and business issues; and
- strengthening staff training including the involvement of external experts.
Initial compliance decision making — The ATO has sought to improve initial ATO compliance decisions in the larger SME and HWI areas. However, there is scope for further improvement in a number of areas and the IGT has made a number of recommendations including:
- improving the interpretative assistance area's resourcing and engagement with the active compliance area;
- using the Facts and Evidence Worksheet to develop technical positions; and
- developing better understanding of the rejection of initial compliance decisions.
Project Management — The IGT has identified project management as an area for improvement. The IGT recommendations requiring ATO management action will greatly enhance transparency and accountability in this area.
Audit conduct, communication and engagement — During the review, the ATO agreed to extend the scope of its Wealthy and wise booklet from HWIs to the entire SME market segment. The IGT welcomes this initiative as the booklet provides stakeholders with better understanding of the process and a means of holding ATO officers to account where expectations are not met. The IGT has also identified a number of additional areas to be covered in the booklet including:
- communicating the start and end of compliance actions;
- allowing tax advisers the opportunity to review clients' affairs;
- escalation processes; and
- discussions with taxpayers before adverse ATO views are documented.
Information Gathering — The direct and opportunity costs for taxpayers stemming from ATO information gathering and related compliance action was a very significant area of concern to taxpayers and their advisers. The IGT has concluded that better ATO management of information in their dealings with taxpayers and advisers should assist in minimising delays and compliance costs. It should also assist in reducing perceptions of unfairness. The ATO's commitment to improved engagement with taxpayers and their advisers on information requests should also improve the overall stakeholder relationship and experience.
In conclusion, the ATO has acknowledged the need for improvements in the above areas and, since the commencement of the review, has worked with the IGT to fashion a significant program of work. In this review, the IGT has also made 41 recommendations some of which reinforce the work that the ATO has already begun whilst others are more distinct but complimentary to that work. The ATO has agreed in full with 38 of these recommendations, two in part and disagreed with one.
The appropriate implementation of the recommendations in this review together with the program of work already commenced by the ATO should result in significant improvements in this area of tax administration. However, these improvements may not become apparent immediately as staff capability, for example, may take some time to develop.