Proportionality of adjustments made
6.1 Submissions consider that the costs and adverse impacts in holding refunds are disproportionate to the risks. Stakeholders claim that the ITRIP holds returns for long periods of time for what are considered to be very small sums. Examples brought to the IGT's attention include returns in which the expected refund was $348, and in other cases, taxpayers with low assessable income levels of between $10,000 and $30,000. A further example included a nil return lodged in 2012 being held because it was considered potentially fraudulent or contained an overstated claim.
6.2 Other concerns raised with the IGT in relation to proportionality of action under the ITRIP relate to large refunds being withheld by the ATO where the only concern related to a minor amount. In one example, the taxpayer originally claimed a refund of about $55,000. The ATO retained the entire sum pending further verification despite its concern being limited to $3,900 of that $55,000. Similarly, in another submission the entire refund of $10,000 was withheld pending a $100 adjustment.
6.3 In response to direct query from the IGT, the ATO has advised that:198
Each risk model includes defined parameters designed to address the spectrum of risks across the program. These parameters are established to ensure that the focus is aligned to the higher risk transactions enabling low risk matters to be addressed through alternative treatment options. For example, income tax returns identified as being potential identity takeover would be held given the level of risk. However, other transactions identified as possible over-claiming at a particular label but with a low level of refund would not be held and the matter considered as part of other treatment options.
The performance of each of the expert business rules is monitored on a regular basis and is formally reviewed and evaluated with an annual revision undertaken to ensure continuous performance improvement.
6.4 The ATO has provided a stratified data set illustrating the amounts of original refunds claimed in 2010-11, 2011-12 and 2012-13 year to date (as at 11 February 2013). It has provided a similar data set to illustrate the amounts of adjustments made to tax returns held in those particular years. It notes that during the 2010-11 year, the ITRIP was moved to the Siebel system and as such, the data extracted for that year only represents about 75 per cent of the actual number of returns stopped and adjusted. This data is outlined in Tables 17 and 18, below.
|Original refund claimed amount||Financial year in which returns were stopped|
|Amount payable (DR assessment)||129||0.48||78||0.07||54||0.11|
|$1 — $1,000||1,232||4.59||1,878||1.77||1,297||2.73|
|$1,001 — $2,000||3,937||14.67||12,888||12.15||6,996||14.71|
|$2,001 — $3,000||5,835||21.74||27,271||25.71||10,927||22.98|
|$3,001 — $4,000||5,640||21.01||23,051||21.73||8,415||17.70|
|$4,001 — $5,000||3,681||13.71||14,457||13.63||6,430||13.52|
|$5,001 — $10,000||5,552||20.69||22,518||21.23||11,076||23.29|
|$10,001 — $15,000||553||2.06||2,474||2.33||1,548||3.26|
|$15,001 — $20,000||116||0.43||594||0.56||396||0.83|
Source: ATO data extracted as at 11/2/2013.
6.5 The materiality of returns stopped by ITRIP is illustrated in Table 17, above. It is useful in considering concerns raised by taxpayers that the ITRIP is unnecessarily stopping returns with no tax refund due or with very small tax refunds. Based on the data in Table 17, across all years provided, the numbers of returns stopped with $1,000 or less in refunds claimed, no tax payable or refundable, or tax payable positions are relatively small. They were 5.29 per cent in 2010-11, 1.85 per cent in 2011-12 and 2.87 per cent in 2012-13 (year to date). The data also illustrates that across all years, about three quarters of returns stopped claimed refunds of $5,000 or less.
|Adjusted refund amount||Financial year in which returns were stopped|
|$1 — $1,000||5,397||27.38||14,255||22.67||5,807||22.58|
|$1,001 — $2,000||3,406||17.28||11,740||18.67||4,917||19.12|
|$2,001 — $3,000||3,035||15.39||14,591||23.20||3,179||12.36|
|$3,001 — $4,000||1,796||9.11||6,079||9.67||2,222||8.64|
|$4,001 — $5,000||1,061||5.38||3,273||5.20||2,045||7.95|
|$5,001 — $10,000||1,750||8.88||5,687||9.04||4,113||15.99|
|$10,001 — $15,000||379||1.92||1,006||1.60||637||2.48|
|$15,001 — $20,000||124||0.63||344||0.55||181||0.70|
Source: ATO data extracted as at 11/2/2013
6.6 When examining the materiality of adjustments made to ITRIP returns, the data in Table 18 shows that across all three years about one third of returns were adjusted by a value of $1,000 or less (38.4 per cent in 2010-11, 31.3 per cent in 2011-12 and 32.1 per cent in 2012-13). Expanding this to include adjustments of up to $5,000 shows that these account for the vast majority of adjustments made, being 85.6 per cent in 2010-11, 88 per cent in 2011-12 and 80 per cent in the 2012-13 year to date.
6.7 A direct comparison between the two sets of data contained in Tables 17 and 18 suggests that while the ITRIP may have selected returns with relatively high refund claims, the amounts by which these refunds have been adjusted are small. This suggests that following review of these returns and contact with taxpayers, the claims have either been substantiated in full or in part leading only to partial adjustments. The implications may be that the ATO should consider releasing refunds in more instances and conducting compliance action after the assessment is issued if necessary.
6.8 While the taxpayer's experience may be that the ITRIP is unnecessarily stopping returns which bear minimal risk to the revenue, the data provided in the above tables suggest that returns with low level refunds are a relatively small proportion of overall returns stopped by the ITRIP. However, the IGT also notes that the perception of what is and is not proportional is often reflective of the taxpayer's specific circumstances. The ATO needs to strike an appropriate balance between the need to protect the revenue and to minimise any adverse impacts on taxpayers.
Objection and litigation
6.9 Decisions arising out of the ITRIP are subject to the usual rights of objection and appeal under Part IVC of the Taxation Administration Act 1953. Data provided by the ATO, and outlined in Table 19, suggests that the level of objections lodged by taxpayers is relatively low with 6.5 per cent and 9.5 per cent of returns adjusted as a result of the ITRIP, in 2010-11 and 2011-12 respectively. The 2012-13 year to date data shows a decrease in objection rates.
|Total number of audits/reviews conducted||34,600||79,944||35,101|
|Total returns adjusted following audits/reviews||26,287200||62,888||25,717|
|Total objections lodged against audits/reviews above||1,718||6,028||721|
|Percentage of audits/reviews objected against||5%||8%||2%|
|Percentage of adjusted returns objected against||6.5%||9.5%||2.8%|
6.10 While the objection rates of ITRIP adjusted returns are relatively low, the IGT notes that they exceed the enterprise level objection rates (being the rate of objection across all compliance activities resulting in adjustments), in 2010-11 and 2011-12 which were 4 per cent201 and 4.7 per cent,202 respectively.
6.11 In analysing the high level outcomes from objections lodged by taxpayers, the IGT observes that the vast majority of cases result in an objection being allowed in full203 or in part. The proportion of objections allowed in full or in part was 62 per cent in 2010-11, 78 per cent in 2011-12 and 67 per cent in 2012-13 (year to date). A summary is contained in Table 20, below.
|Recorded outcome||Financial year|
|Allowed in full||708||41||3,496||58||347||48|
|Allowed in part||359||21||1,068||18||134||19|
|No outcome recorded||114||7||289||5||22||3|
6.12 The high rates of objections being allowed suggest a need for the ATO to better refine the ITRIP to select cases bearing higher risk. It is also indicative of the need to enhance and improve the engagement and communication between the ATO and taxpayers at the audit stage to ensure that correct information is requested and provided in a timely manner. The IGT considers that the earlier recommendations in this report aimed at improving ITRIP information gathering and auditor communication would help to minimise this issue.
6.13 Where a taxpayer is dissatisfied with the ATO's objection decision, they may seek to appeal that decision to the Administrative Appeals Tribunal (AAT) or the Federal Court of Australia. Statistics provided by the ATO, in Table 21, in relation to such appeals demonstrate that very few matters progress down this route.
|Litigation venue||Outcome||Financial year||Total|
|Administrative Appeals Tribunal||Settled||3||3||0||6|
|Small Taxation Claims Tribunal||Settled||2||7||9|
|Litigation matters as a percentage of objections allowed in part or disallowed||2.33%||2.23%||0.66%|
|Litigation matters as a percentage of total compliance activities||0.05%||0.05%||0.01%|
6.14 Of those cases which have progressed to the AAT (including the Small Taxation Claims Tribunal), the majority have been finalised by way of settlement, withdrawal or concession by the taxpayer or the ATO. Similar to the experience in objections, this is likely a result of further information being provided by the taxpayer.
6.15 While the IGT acknowledges the generally very low levels of litigation in relation to ITRIP cases, it is also important to acknowledge that the low numbers of cases proceeding to litigation do not necessarily reflect the actual level of disputation that individual taxpayers may have with ATO decisions. As noted in recent academic research, personal costs of disputation represent a considerable barrier to accessing tax justice in cases involving low dollar values.206
6.16 The costs associated with litigation were also recognised by the IGT in the ADR review and recommendations were made for ongoing engagement to resolve disputes early to avoid the need for more formal processes.207 Relevantly, the IGT also recommended that the ATO undertake a pilot to utilise in-house trained ATO facilitators to assist in resolving less complex disputes.208 The IGT considers that in appropriate circumstances, disputes arising under the ITRIP would be suitable for such a pilot.
The IGT recommends that the ATO make use of the in-house facilitators pilot program or other informal dispute resolution process to address and resolve disputes arising out of the ITRIP.
6.17 The ATO recognises that in some instances, ATO audit officers make decisions to adjust taxpayers' returns based on limited information. The ATO acknowledges that this is attributable to a number of factors not affecting the legality of the taxpayer's claim, including:209
- the taxpayer has not been able to reply to ATO requests for information or has not sought an extension of time to provide information requested;
- the information requested is not readily available to the taxpayer and they are unable to substantiate their claims; or
- the taxpayer chooses not to respond to ATO requests for information.
6.18 During the course of the IGT's review, between April and June 2013, the ATO undertook a program of work to pilot and implement the use of the Commissioner's power to effect 'administrative reversals' to resolve disputes against ITRIP decisions. An 'administrative reversal' is a mechanism through which the taxpayer or their agent can request the ATO to informally review the initial adjustments processed based upon further information provided to substantiate the taxpayer's original claims.
6.19 The ATO's pilot was aimed at cases in which adjustments were made after the ATO did not receive a response to its enquiries from taxpayers or their agents.
6.20 Where information provided by the taxpayer or their agent sufficiently addresses the ATO's concerns, the original claims are reinstated and an amended notice of assessment is issued as a consequence of the ATO auditor's adjustments being reversed.
6.21 Through this 'administrative reversals' pilot, the ATO aimed to improve the efficiency of the ITRIP and to provide a simplified process through which the taxpayer may seek to dispute any adjustments made to their return while minimising the time and cost impacts for all parties. This is achieved as a result of the reversals process being less formal and therefore less costly and time consuming than the more formal objections process discussed earlier.
6.22 Following an evaluation of the pilot in July 2013, the ATO has advised that the piloted process will be extended and expanded to include all cases in which adjustments have been made after no response was received from taxpayers or their agents. The ATO aims to implement a permanent, ongoing administrative reversals process to address ITRIP cases by October 2013.
6.23 Importantly, while the administrative reversals approach is intended to simplify the process and deliver more efficient outcomes for taxpayers and the ATO alike, it does not supplant a taxpayer's rights under Part IVC of the Taxation Administration Act 1953 to object to the ATO's decision and to litigate where appropriate. This is why the ATO intends to apply administrative reversals only to those cases in which adjustments were made after no response was received from the taxpayer or their agent. The ATO considers that where the taxpayer has previously responded and has not been able to substantiate their claim, the taxpayer should exercise their rights under objection to challenge any adjustments which have been made.
6.24 The IGT sees considerable merit in the ATO making greater use of administrative reversals to minimise the impact on taxpayers of disputing ATO decisions. It may also assist to minimise the instances of taxpayers not seeking to formally dispute ATO adjustments by reason of such disputes being too time consuming or costly.
6.25 The IGT also appreciates the ATO's efforts to ensure that the administrative reversals process does not unduly impact upon, or protract, the period for objections. However, the IGT notes that there may be some circumstances in which a matter could be resolved more efficiently when considered as an administrative reversal as opposed to an objection. Whether an administrative reversal may be appropriate depends on a number of different factors such as when the taxpayer contacts the ATO, the issues which the taxpayer is seeking to dispute and the evidence which the taxpayer proposes to provide in support of their claim.
6.26 Diverting objections cases to administrative reversals, in appropriate circumstances, may be achieved by the ATO encouraging taxpayers to engage with it to discuss any potential disputes which may escalate through the objections process.210 In doing so, the taxpayer and the ATO officer may identify and arrive at a common understanding of the issues in dispute and choose the most appropriate channel to facilitate the resolution of the matter.
6.27 In so doing, there is a need to maintain an appropriate balance between encouraging taxpayers and tax agents to respond to audit requests in the first instance and utilise an informal review process as the most cost-effective and efficient means of revisiting adjustments where information is provided outside of set timeframes.
6.28 Moreover, when implementing a new initiative it is important to ensure that taxpayers and tax agents are aware of these different options. A robust communications strategy will increase awareness of the ATO's use of administrative reversals, how it differs from the objections process and reduces the risk of taxpayers lodging objections with the ATO where a reversal may be more timely and cost-effective.
The IGT recommends that the ATO:
- update its finalisation letters to invite taxpayers to contact the ATO before disputing any adjustments to enable ATO officers to understand the dispute and provide advice as to the most appropriate channel for resolving the dispute; and
- implement a communications strategy to ensure that taxpayers and tax agents are aware of administrative reversal as a cost effective dispute resolution mechanism and how taxpayers and tax agents may seek such reversals in appropriate cases.
ATO use of default assessments
6.29 In December 2011, the ATO undertook a pilot program in relation to the use of default assessments pursuant to section 167 of the ITAA 1936 as a means of processing and releasing ITRIP returns in a more timely manner.
6.30 Section 167 empowers the Commissioner to issue an assessment based on his judgement of the amount of tax due or payable. This may occur as a result of the taxpayer having not lodged a return,211 where the Commissioner considers the return lodged to be unsatisfactory212 or where the Commissioner has reason to believe the taxpayer has derived assessable income and has not lodged a tax return.213
6.31 The ATO's pilot applied both to self-preparers as well as tax agent-lodged returns with a particular focus on cases where the ATO suspected that the person preparing the tax return was an unregistered tax agent and the ATO has been unable to contact the taxpayer to verify the accuracy of the information lodged in the tax return.
6.32 In its briefing to the IGT in March 2012, the ATO noted the success of the pilot. It noted that 133 default assessments were issued together with letters explaining the nature of the assessments, the review process available to taxpayers and the possibility of reinstatement of disallowed claims following the receipt of further evidence by the ATO.214
6.33 In January 2012, the ATO's use of default assessment was implemented more generally and applied against those cases which were held as a result of risks identified in the pattern detection model of ITRIP. Data supplied by the ATO indicates that in 2011-12 it completed 7,669 audits under this program and made adjustments to the sum of $22.1 million.215
6.34 The ATO notes from its experience that taxpayer response to letters advising taxpayers of default assessments and inviting further engagement to substantiated claims has been very limited.216 Indeed, during 2011-12, the ATO only recorded 867 (or 11 per cent) cases in which taxpayers requested a review of the adjustments. Of these, 251 (or 29 per cent) resulted in adjustments in full in favour of the taxpayers, 529 (or 61 per cent) resulted in partial adjustments in favour of the taxpayer and 87 cases (or 10 per cent) in which the original ATO adjustments were upheld.217
6.35 The ATO has noted informal feedback from tax agents that the use of default assessments has caused difficult working relationships between them and their clients. Taking on board this feedback, the ATO has indicated to the IGT that it would no longer apply the use of default assessments to tax agent-lodged ITRIP cases. However, it would continue to pursue this course of action in relation to self-prepared lodgements in appropriate instances.
6.36 While the use of default assessments may provide some finality and certainty in the conduct of ITRIP cases, it also imposes a burden on the taxpayer who is then required to formally challenge such an assessment. In continuing to make use of default assessments, the ATO should be mindful to strike an appropriate balance between the efficiency and effectiveness of this strategy and the impost that default assessments can have on taxpayers who may not be represented by tax agents. These taxpayers may feel they cannot, or are ill-equipped, to dispute ATO default assessments even though they consider them to be incorrect or inaccurate.
6.37 The IGT considers that default assessments should only be used as a last resort, that is, where the taxpayer has not responded to the ATO and all alternative channels of communication have been exhausted. Even then, the ATO must be cautious to ensure that the lack of taxpayer communication is not due to incorrect taxpayer contact details for example.
6.38 The ATO has advised the IGT that it already only uses default assessments as a last resort. The ATO only uses default assessment in relation to taxpayers who have been identified as being unlikely to respond and unable to substantiate their claims. It notes that about 89 per cent of taxpayers issued with default assessments do not challenge the adjustment. The ATO considers this to be indicative of awareness by these taxpayers of a lack of entitlement to these claims.
6.39 As previously stated taxpayers may not challenge default assessment for reasons such as feeling ill-equipped to take on the ATO. The IGT believes that further analysis of the patterns and features in the 11 per cent of cases constituting genuine claims, including any reasons for non-response to the ATO's initial enquiry, may assist the ATO to better reduce instances of unnecessary use of default assessments.
6.40 The ATO also notes that for the 11 per cent of taxpayers who have made claims which they can substantiate, it currently offers informal administrative reversals as a means of reversing any adjustments which have been made by the default assessment. It advises that details of how to request a reversal are outlined in its default assessment finalisation letter which issues to taxpayers independently of the default notice of assessment.
6.41 In its default assessment finalisation letter, the ATO states:218
Your right to request a review of our decision
If you believe we have made an error or mistake in respect of the adjustments we have made to your return, you can write to us and request a review of our decision. You will need to:
We will consider the information you provide to support your claims and if appropriate we will make further adjustments to your return. In this instance, we will issue you with an amended notice of assessment.
6.42 The IGT notes that while the ATO's letter attempts to convey details of its informal reversals approach, the absence of words denoting the informality and the lack of distinction between this process and the objections process may lead taxpayers to conclude they are one and the same. Moreover, as the standard form notice of assessments only refers to the formal objections process, they may further contribute to taxpayers believing that they must lodge an objection to challenge the default assessment.
6.43 Accordingly, while the IGT acknowledges the ATO's intention to provide a cost-effective and efficient means for reversing default assessment decisions, the IGT considers that it must communicate this option in an effective manner. In doing so, the ATO should emphasise the less formal nature of reversals and clearly distinguish between reversals and the taxpayer's statutory rights to object and litigate.
6.44 The ATO also acknowledges that there may be scope for it to further refine the general tone of the finalisation letter so as not to discourage taxpayers making genuine claims from engaging with the ATO.
The IGT recommends that the ATO:
- undertake an analysis of the patterns and features of cases where default assessments have had to be reversed and accordingly use the findings to limit the instances of default assessment being issued; and
- refine default assessment finalisation letters to encourage taxpayers with genuine claims to engage with the ATO by, for example, clearly communicating the availability of administrative reversal process and to distinguish this process from the statutory rights to object.
198 Above n 98.
199 ATO, communication with the IGT, 12 March 2013; Above n 70.
200 Based on the ATO's advice that the original figure 19,715 is only representative of about 75 per cent of the population, the IGT uplifted the figure (19,715/0.75) for comparative purposes. This figure is indicative only and should not be taken to be determinative of actual figures.
201 ATO, Your Case Matters, First edition, p. 4.
202 ATO, Your Case Matters, Second edition, p. 2.
203 An objection allowed in full is not necessarily indicative of full reversals of ATO decisions. It only indicates that all aspects of the taxpayer's objection were allowed by the ATO.
204 Above n 199.
205 Above n 199.
206 Binh Tran-Nam and Michael Walpole, 'Access to tax justice: How costs influence dispute resolution choices,' (2012) 22 JJA 3, p. 3.
207 Above n 181, p. 42.
208 Above n 181, p. 44.
209 Above n 199.
211 Section 167(a) of the Income Tax Assessment Act 1936.
212 Section 167(b) of the Income Tax Assessment Act 1936.
213 Section 167(c) of the Income Tax Assessment Act 1936.
214 Above n 15, p. 3.
215 Above n 98, p. 5.
216 Above n 15, p. 3.
217 Above n 98, p. 5.
218 Above n. 76.