Proportionality of data matching

4.1 Stakeholders have expressed a view in submissions that the ATO's data matching activities and the corresponding cost to taxpayers and tax agents in managing these cases are disproportionate to the level of revenue protected.

4.2 The ATO has noted the high success rates of its data matching activities. In 2012, the ATO reported, as part of its Health of the System Assessment, that data matching activities had raised $915m - a return of some $5.9m per full time equivalent staff member. It noted further that this result is more than double those of the prior two years.164 While this is helpful in providing an overall picture of the outcomes of data matching, it does not assist in determining the proportionality of action taken by the ATO and the corresponding cost to taxpayers.

4.3 An examination of the outcomes and level of revenue raised in relation to particular data matching projects provides greater insight on the proportionality and effectiveness of specific projects. Tables 13, 14 and 15, below, outline a sample of different legislative and non-legislative data matching projects, the numbers of adjustments and total and average amounts of adjustments.

4.4 As illustrated in Table 13, the ATO's legislative data matching projects results in a high quantity of adjustments with generally lower revenue values. For example, the ATO's 'Investment Income' data matching project resulted in 158,381 adjustments averaging $532.07 in 2011-12. Similarly, those projects targeting 'Allowances' (34,834 adjustments averaging $624.38) and 'Australian Government Allowances and Payments' (33,612 adjustments averaging $565.82) also reported high quantities of adjustments with low level quantum in 2011-12.

4.5 There are two exceptions to the high quantity low quantum adjustment nature of legislative data matching projects. These are the 'lump sum payments' project which in 201112 made adjustments in 1,253 cases averaging $3,131.64 and the 'employee share schemes' project which made 8,193 adjustments averaging $5,646.32.

4.6 In addition to illustrating the generally low quantum of adjustments in relation to legislative data matching, the information contained in Table 13 also shows that a general declining trend in the quantum of adjustments made over the three years between 2009-10 and 2011-12. With the exception of the 'Australian Government Allowances and Payments' and 'Lump Sum Payments' projects, all other projects within the sample demonstrated a reduction in the quantum of adjustments. No comparative data is available for 'Employee Share Schemes' which only commenced in the 2011-12 financial year.

Table 13: Legislative data matching - Adjustments
Subject of data matching Case actioning years Number of adjustments Amount of adjustments (Total liabilities raised) Average amount of adjustments (total liabilities/number of adjustments)
Legislative Data Matching        

Salary and wage

PAYG data is matched to the salary and wage income label on the individual income tax return to check that the taxpayer has returned all of their employment income and claimed the correct tax withheld amounts.

2012 21,347 $22,563,985 $1,057.00
2011 14,871 $18,149,706 $1,220.47
2010 10,519 $19,645,255 $1,867.59

Lump sum payments

PAYG data is matched to the lump sum payments label on the individual income tax return to check that the taxpayer has returned all of their lump sum payment income and claimed the correct tax withheld amounts.

2012 1,253 $3,923,954 $3,131.64
2011 1,329 $1,478,905 $1,112.79
2010 1,829 $2,723,227 $1,488.91

Allowances

PAYG data is matched to the allowance income label on the individual income tax return to check that the taxpayer has returned all of their allowance income and claimed the correct tax withheld amounts.

2012 34,834 $21,749,965 $624.38
2011 39,636 $31,232,137 $787.97
2010 22,678 $23,211,383 $1,023.51

Australian Government Allowances and payments

Welfare data is matched to taxpayer returns to check that the taxpayer has returned all of their Australian Government Allowances and payments income.

2012 33,612 $19,018,478 $565.82
2011 28,631 $15,878,900 $554.60
2010 32,696 $17,396,618 $532.07

Australian Government pension and allowances

Welfare data is matched to taxpayer returns to check that the taxpayer has returned all of their Australian Government pension and allowances income.

2012 7,534 $2,771,117 $367.81
2011 965 $1,660,507 $1,720.73
2010 6,809 $3,392,068 $498.17

Australian annuities and superannuation income streams

PAYG data is matched to the Australian annuities and superannuation income streams label on the individual income tax return to check that the taxpayer has returned all of their annuities and superannuation income and claimed the correct tax withheld amounts.

2012 20 $33,864 $1,693.20
2011 317 $1,177,551 $3,714.67
2010 616 $1,330,785 $2,160.36

Investment income

Interest and dividend data is matched to the gross interest and dividend income labels on the individual income tax return to check that the taxpayer has returned all of their investment income.

2012 158,381 $84,270,941 $532.07
2011 181,158 $106,634,003 $587.13
2010 110,609 $83,920,708 $758.71

Employee share schemes Div83A

Employee share scheme data is matched to the employee share scheme income labels on the individual income tax return to check that the taxpayer has returned all of their employee share scheme income and claimed the correct tax withheld amounts.

2012 8,193 $46,260,302 $5,646.32
2011 N/A N/A N/A
2010 N/A N/A N/A

Source: ATO

4.7 In contrast to the outcomes of legislative data matching, the results of the CGT and FSI non-legislative data matching projects, as outlined in Tables 14 and 15, are markedly different. There are fewer adjustment cases but a higher quantum of revenue adjustments.

4.8 As illustrated in Table 14, all but one of the ATO's sampled CGT data matching projects resulted in adjustments exceeding $10,000. The only exception to this was the data matching project concerning the CGT from the disposal of shares. The highest average adjustment ($48,873.48) was reported in relation to taxpayers who had not lodged tax returns despite having disposed of real property in the financial year.

4.9 As many of the CGT data matching projects only commenced in 2011-12, a trend analysis of the quantum of adjustments is not possible, save in relation to the first-listed project concerning CGT arising out of real property disposals. For this project, the ATO's data illustrates a significant increase in the both the quantity and quantum of adjustments from 2009-10.

Table 14: Non-legislative data matching, CGT - Adjustments
Subject of data matching Case actioning years Number of adjustments Amount of adjustments (Total liabilities raised) Average amount of adjustments (total liabilities/number of adjustments)
Non-Legislative Data Matching, CGT        

Capital gains tax - from the sale of property

Property disposal data from state and territory revenue offices is matched to taxpayers to identify where a taxpayer has disposed of a property which does not appear to be their main residence and has not returned the capital gains.

2012 1,475 $27,792,303 $18,842.23
2011 288 $6,361,990 $22,090.24
2010 143 $196,746 $1,375.84

Capital gains tax - from the sale of property -non lodger

Property disposal data from state and territory revenue offices is matched to taxpayers to identify where a taxpayer has disposed of a property which does not appear to be their main residence and has not lodged a tax return where it appears that they have an obligation to do so.

2012 508 $24,827,729 $48,873.48

Capital gains tax - from the sale of property Micro taxpayers

Property disposal data from state and territory revenue offices is matched to taxpayers in the micro market to identify where a taxpayer has disposed of a property which and has not returned the capital gains.

2012 1,159 $37,940,059 $32,735.16

Capital gains tax - from the sale of property Micro taxpayers - non lodgers

Property disposal data from state and territory revenue offices is matched to taxpayers in the micro market to identify where a taxpayer has disposed of a property and has not lodged a tax return where it appears that they have an obligation to do so.

2012 105 $1,863,180 $17,744.57

Capital gains tax - from the sale of shares

Share transaction data provided by share registries is augmented with data from the Australian Security Exchange to identify potential capital gain events from the disposal of shares. This income is then matched to the capital gains tax labels to check that the taxpayer has returned all of their capital gains income from the disposal of shares.

2012 368 $706,681 $1,920.32

Source: ATO

4.10 The statistics in relation to the quantity and quantum of adjustments for the ATO's FSI data matching bear similar characteristics to those in relation to CGT, although the quantum involved is not as consistently high. As outlined in Table 15, the ATO's project to identify non-lodgers and its OVDI generated significant levels of adjustments of $208,970.26 and $75,693.32, respectively.

4.11 The FSI data matching based on AUSTRAC information yielded $22,160.79 in average adjustments in 2011-12 while data matching to identify mislabelling or those based on double tax agreement data were generally lower ($3,353.09 and 1,014.26, respectively).

Table 15: Non-legislative data matching, FSI - Adjustments
Subject of data matching Case actioning years Number of adjustments Amount of adjustments (Total liabilities raised) Average amount of adjustments (total liabilities/number of adjustments)
Non-Legislative Data Matching, FSI  

Foreign source income - from Double Tax Agreement data

Automated exchange data received from treaty parties is matched to the foreign source income label on the individual income tax return to check that the taxpayer has returned all of their foreign source income and claimed the correct tax offset.

2012 3,171 $3,216,238 $1,014.26
2011 4,862 $11,470,324 $2,359.18

Foreign source income - AUSTRAC

Incoming amounts listed in AUSTRAC are matched against foreign source income label on the individual income tax return to check that the taxpayer has returned all of their foreign source income.

2012 1,274 $28,232,847 $22,160.79
2011 3,333 $44,982,977 $13,496.24

Foreign source income - Mislabelling

Individual income tax returns are identified where a taxpayer has returned an amount of foreign source income at a non-assessable label on and no amount at the assessable label. These returns are checked to ensure that the taxpayer has returned all of their foreign source income

2012 4,125 $13,831,498 $3,353.09

Foreign source income - Offshore Voluntary Disclosure Initiative (OVDI)

Follow up work in relation to non-responses to the Offshore Disclosure project. The Offshore Disclosure project identified that these received incoming amounts via AUSTRAC. Where no response was received to the initial voluntary disclosure letter a data matching letter was issued.

2012 4,267 $322,983,397 $75,693.32

Foreign source income - non lodgers

Automated exchange data received from treaty parties and incoming amounts listed in AUSTRAC are used to identify resident taxpayers that appear have a requirement to lodge a return due to the amount of foreign source income they have received.

2012 15 $3,134,554 $208,970.26

Source: ATO

IGT observations

4.12 At a macro level, it is clear that the ATO's data matching activities have captured high levels of omitted income. From the data contained in Tables 13, 14 and 15, it appears to be most effective where it seeks to target taxpayers who have not lodged a return but have earned assessable income during the relevant financial year.

4.13 In examining whether the ATO's data matching activities are proportionate to the risks posed, it is important to appreciate that taxpayers' perceptions are based on their particular circumstances. For example, a $500 adjustment may not be significant from a particular taxpayer's perspective but, as seen in Table 13 in the case of legislative data, the ATO may argue that in aggregate, that is, a total of similar adjustments for a large number of taxpayers, it can represent significant government revenue.

4.14 However, Table 11 also shows that there is a downward trend in the amount of the adjustments. The ATO, therefore, needs to monitor the situation and ensure that the cost of its data matching activities both for itself and the taxpayer is commensurate to the additional revenue collected.

4.15 In contrast to legislative data, Tables 14 and 15 illustrate that for CGT and FSI there are far less adjustments but the quantum of the adjustment are comparatively higher. At present there is a lack of data to establish any emerging trends but a focus on non-lodgers seems to produce the best results.

Administrative reversals - adjustments without objection

4.16 The ATO has advised that the primary means of correcting an adjustment arising out of data matching is through what is referred to as an 'administrative reversal'. An administrative reversal does not require a formal objection to be lodged with the ATO. Rather, it is a process through which the ATO reverses the adjustment or reduces it to the extent that the taxpayer provides evidence showing that the adjustment is excessive or otherwise incorrect. Therefore, this constitutes a further amendment to the amendment made earlier by the ATO as a result of the data matching.

Initiating the reversals process

4.17 The administrative reversals process represents an opportunity for the ATO and the taxpayer to address disputes arising out of data matching decisions in a timely and cost-effective manner, avoiding the costs associated with and the formality of the objections process.

4.18 Submissions to the IGT have indicated that on some occasions, taxpayers have had difficulty initiating the reversals process where ATO officers have appeared unwilling or unable to appropriately escalate such matters.

4.19 In a case study brought to the IGT's attention, the taxpayers were the subject of FSI data matching. The ATO issued information requests to the taxpayers' agents who sought extensions of time owing to the age and complexity of the information. Notwithstanding the grant of extensions for the provision of information, adjustments were made and notices of amended assessments were issued to the taxpayer before expiry of the extension. When the taxpayers' agents sought to address the issue with the ATO officer, they were advised that there was nothing the officer could do. Other examples raised with the IGT include minor CGT adjustments which could have been escalated for reversal consideration but where the taxpayer was instead advised by the ATO officer to lodge an objection.

4.20 These case studies appear to be at odds with the intended operation of administrative reversals. Where an otherwise straightforward process is difficult to access, this has the potential to increase taxpayer and tax agent time and costs. It can also lead to increased frustration, stress and diminished confidence in the process more generally.

4.21 One way to ensure that the administrative reversals process is used in appropriate circumstances is to raise awareness of its availability including how this process can be initiated. There is little publicly available information which outlines the ATO's use of the reversals process.165 The lack of information and community awareness of the ATO's administrative reversals process may potentially create a situation where taxpayers unnecessarily incur time and costs to lodge objections against ATO decisions where a reversal could have otherwise been effected in a more timely and cost-efficient manner.

4.22 During this review, as part of its user-testing of correspondence in data matching cases, the ATO has now included an additional paragraph in its initial discrepancy letter to outline the taxpayer's right to seek review of amendments in addition to their objection rights. The paragraph states:166

Your right to request a review of our decision

If you receive an amended assessment and you believe the information used is incorrect, you can request a review of the amended assessment. In reviewing our decision, we will consider any additional information not available to us at the time of our amendment.

Your objection rights would not be affected by any such review. To request a review, please

contact us as detailed below.

4.23 In addition to raising awareness of these processes, it is imperative that all ATO officers who interact with taxpayers and tax agents are fully aware of escalation processes where a reversal is sought or where it is otherwise appropriate.

4.24 The ATO acknowledges this and has advised that since 1 July 2012, all calls made to the ATO general call centre in relation to data matching cases are required to be transferred to officers within the DMCS. This, however, depends in part on taxpayers correctly identifying that their cases relate to data matching which may not always occur. The IGT considers that improved call centre scripting to prompt ATO officers to identify data matching cases and to escalate these effectively would better streamline the process.

4.25 The ATO has also advised the IGT that it has processes in place to ensure that objections which relate to questions of fact in data matching (and therefore more appropriately considered as a reversal) are referred back to the data matching teams for consideration along these lines.167 While this process is important to ensure that disputes in relation to data matching adjustments are not unnecessarily formalised, it may create some confusion for taxpayers and lead to taxpayers incurring costs in engaging tax advisers to assist in preparing formal objections which are ultimately resolved by way of a reversal. Moreover, it also appears to create unnecessary reverse workflows within the ATO itself.

Recommendation 4.1

The IGT recommends that the ATO:

  1. actively raise awareness of the administrative reversals process in data matching cases, including how taxpayers can initiate this process, for example through tax agent seminars and communiques;
  2. improve ATO call centre scripting to prompt ATO officers to identify cases of data matching and to escalate these to the DMCS team appropriately; and
  3. periodically reinforce guidance and instruction to staff in relation to escalating cases for reversal consideration when requested by taxpayers, or where the ATO officer otherwise identifies that it would be appropriate to do so.

ATO response

Agree

The ATO will update public documents, such as the website, to provide information on the administrative reversals process for data matching cases.

The ATO will also update its internal instructions and guidance to staff involved in data matching activities, including call centre staff.

Outcomes of internal and external review of data matching decisions

4.26 ATO decisions under data matching may be challenged through internal review, such as the administrative reversals process or objections,168 or through external review such as the appeals processes in the Administrative Appeals Tribunal or the Federal Court of Australia.169

4.27 Examining the outcomes of these internal and external reviews, provides some insight into the sustainability of adjustment decisions made by the ATO. However, it is important to note that as data matching is a largely automated process, adjustments may be triggered by non-response on the part of the taxpayer rather than manual review and decisions by ATO officers. As such, the rate of reversals should not be taken to be wholly reflective of ATO manual decision-making.

Administrative reversals

4.28 The ATO has provided the IGT with global reversal figures of $16,570,803 in 2009-10, $13,503,000 in 2010-11 and $22,993,056 in 2011-12 in relation to its legislative data matching activities. It notes that until 2012-13, all reversals were only reported globally and as such it is not attributable to any particular data matching project.170 When compared with the global adjustment figures, the IGT notes that the reversals are a relatively small fraction. This is outlined in Table 16 below.

Table 16: Legislative data - global adjustments and reversals
  2009-10 2010-11 2011-12
Global adjustments $225,765,642 $242,335,182 $299,657,139
Global reversals $16,570,803 $13,503,000 $22,993,056
Rate of reversals 7.3% 5.6% 7.7%

Source: ATO

4.29 Across all years provided, the rate of reversals as against adjustments has remained largely consistent with 7.3 per cent in 2009-10, 5.6 per cent in 2010-11 and 7.7 per cent in 2011-12. This consistency is indicative of the ongoing and business as usual nature of the ATO's legislative data matching activities. Moreover, it is also indicative of the consistency of quality of the data sets which are used by the ATO in these activities.

4.30 In respect of the non-legislative CGT and FSI projects, as outlined in Table 17 and Table 18, the ATO's statistics in 2011-12 are more specific, detailing the quantity and quantum of reversals in specific years. This illustrates some of the improvements made by the ATO to its record-keeping and reporting on reversal rates. However, these statistics are still limited, as illustrated by the ATO's inability to report on reversals in certain years or in respect of certain projects.

4.31 The statistics in Table 17 outline high levels of reversals being requested in relation to CGT on real property disposals for individual and micro enterprise taxpayers. In respect of CGT on real property disposals for individual taxpayers, the ATO reported that 19.6 per cent of affected taxpayers requested a reversal, with 33.39 per cent of total adjustments being reversed. The statistics also indicate that 40 per cent of affected micro taxpayers sought reversals with 52.87 per cent of adjustments reversed. The rates of reversals in relation to the sale of shares were considerably lower, with 2.17 per cent of affected taxpayers seeking reversals and only 0.03 per cent of adjustments being reversed.

Table 17: Non-legislative data matching, CGT - reversals
Subject of data matching Case actioning years Number of adjustments Amount of adjustments(Total liabilities raised) Number of adjustments reversed Amount of Reversals Proportion of adjustments reversed (Proportion of taxpayers seeking reversals in parentheses)
Non-Legislative Data Matching, CGT            

Capital gains tax - from the sale of property

Property disposal data from state and territory revenue offices is matched to taxpayers to identify where a taxpayer has disposed of a property which does not appear to be their main residence and has not returned the capital gains.

2012 1,475 $27,792,303 289 -$9,253,564 33.39% (19.6%)
2011 288 $6,361,990 N/A N/A N/A
2010 143 $196,746 N/A N/A N/A

Capital gains tax - from the sale of property -non lodger

Property disposal data from state and territory revenue offices is matched to taxpayers to identify where a taxpayer has disposed of a property which does not appear to be their main residence and has not lodged a tax return where it appears that they have an obligation to do so.

2012 508 $24,827,729 N/A N/A N/A

Capital gains tax - from the sale of property Micro taxpayers

Property disposal data from state and territory revenue offices is matched to taxpayers in the micro market to identify where a taxpayer has disposed of a property which and has not returned the capital gains.

2012 1,159 $37,940,059 464 -$20,057,729 52.87% (40.0%)

Capital gains tax - from the sale of property Micro taxpayers - non lodgers

Property disposal data from state and territory revenue offices is matched to taxpayers in the micro market to identify where a taxpayer has disposed of a property and has not lodged a tax return where it appears that they have an obligation to do so.

2012 105 $1,863,180 N/A N/A N/A

Capital gains tax - from the sale of shares

Share transaction data provided by share registries is augmented with data from the Australian Security Exchange to identify potential capital gain events from the disposal of shares. This income is then matched to the capital gains tax labels to check that the taxpayer has returned all of their capital gains income from the disposal of shares.

2012 368 $706,681 8 -$227 0.03% (2.17%)

Source: ATO

4.32 In respect of FSI data matching projects, outlined in Table 18, the highest proportion of affected taxpayer seeking reversals occurred in relation to the OVDI (20.9 per cent) with the remaining projects showing only low levels of reversal requests (4.98 per cent for doubt tax agreement, 3.85 per cent for AUSTRAC and 5.99 per cent for mislabelling).

4.33 However, the quantum of actual adjustments appears to be higher for the FSI data matching. The statistics show that the highest levels of reversals related to projects for identifying mislabelling (42.07 per cent) and the OVDI (25.5 per cent). Of the remainder, the FSI projects based on double tax agreement data and AUSTRAC information reported reversal rates of 16.05 per cent and 9.17 per cent, respectively.

Table 18: Non-legislative data matching, FSI - reversals
Subject of data matching Case actioning years Number of adjustments Amount of adjustments (Total liabilities raised) Number of adjustments reversed Amount of Reversals Proportion of adjustments reversed (Proportion of taxpayers seeking reversals in parentheses)
Non-Legislative Data Matching, FSI            

Foreign source income -from Double Tax Agreement data

Automated exchange data received from treaty parties is matched to the foreign source income label on the individual income tax return to check that the taxpayer has returned all of their foreign source income and claimed the correct tax offset.

2012 3,171 $3,216,238 158 -$516,471 16.05% (4.98%)
2011 4,862 $11,470,324 N/A N/A N/A

Foreign source income -AUSTRAC

Incoming amounts listed in AUSTRAC are matched against foreign source income label on the individual income tax return to check that the taxpayer has returned all of their foreign source income.

2012 1,274 $28,232,847 49 -$2,590,510 9.17% (3.85%)
2011 3,333 $44,982,977 N/A N/A N/A

Foreign source income -Mislabelling

Individual income tax returns are identified where a taxpayer has returned an amount of foreign source income at a non-assessable label on and no amount at the assessable label. These returns are checked to ensure that the taxpayer has returned all of their foreign source income

2012 4,125 $13,831,498 247 -$5,819,165 42.07% (5.99%)

Foreign source income -offshore Voluntary Disclosure initiative (OVDI)

Follow up work in relation to non-responses to the Offshore Disclosure project. The Offshore Disclosure project identified that these received incoming amounts via AUSTRAC. Where no response was received to the initial voluntary disclosure letter a data matching letter was issued.

2012 4,267 $322,983,397 892 -$75,988,108 25.5 % (20.9%)

Foreign source income -non lodgers

Automated exchange data received from treaty parties and incoming amounts listed in AUSTRAC are used to identify resident taxpayers that appear have a requirement to lodge a return due to the amount of foreign source income they have received.

2012 15 $3,134,554 N/A N/A N/A

Source: ATO

IGT observations

4.34 The ATO's reporting on reversals is limited and does not lend itself to in-depth analysis of trends and reasons for taxpayers challenging ATO decisions and why decisions are ultimately reversed.

4.35 However, a comparison between the global reversal rates for legislative data matching and those for non-legislative data matching illustrates a clear difference with legislative data matching leading to lower levels of reversals.

4.36 The marked variance in reversal rates between legislative and non-legislative data matching projects, as well as different non-legislative data matching projects targeting similar tax risks, suggests that these rates are based on a number of different factors. These factors include the quality of the data relied upon by the ATO as well as the willingness of taxpayers to challenge ATO adjustments.

4.37 The ATO recognises the need to better understand the areas which generate the high levels of disputation and the underlying reasons for this. During the course of this review, the IGT was advised that the ATO had commenced a program of work to enhance its recording and reporting on the rate of reversals in data matching. In particular, the ATO's program of work seeks to:171

  • identify and report on reversal rates on a monthly basis rather than an annual basis; and
  • record reversals against the specific data matching project to which it relates.

4.38 The IGT is also of the view that enhanced identification and reporting would provide the ATO with greater understanding of the underlying drivers of reversals. It would provide valuable input for improving specific data matching projects and processes as well as reducing the level of disputation.

4.39 Moreover, the IGT notes the difference between the proportion of affected taxpayers seeking reversals and the proportion of quantum actually reversed. This suggests that while fewer taxpayers are challenging ATO decisions through the reversals process, the decisions challenged have resulted in high value adjustments. It is important to recognise this as submissions to the IGT, and recent academic literature, suggests that on some occasions, taxpayers with small value disputes may choose not to challenge the ATO because they perceive it to be too costly or difficult. This issue is discussed further below.

Objection and Litigation

4.40 As noted above, decisions made by ATO officers in relation to data matching can be challenged under the formal objection and litigation process pursuant to Part IVC of the TAA 1953. ATO statistics indicate that objections by individual taxpayers account for the highest proportion of all objections received and determined by the ATO. For example, in 2011-12, the ATO reported that of the 33,676 objections it received, 21,015 of these were from individual taxpayers.172 It is important to note that this comprises objections from all compliance activities against individual taxpayers, not just data matching.

4.41 The ATO has advised the IGT that there are current limitations on the ability of its information technology systems to report on the objection and litigation rates specific to data matching. This is due to its general data matching system, ATOMS, not aligning with the enterprise case management system, Siebel, in which objection and litigation matters are recorded.

4.42 The ATO has advised that in order to determine what data matching cases progressed through to objection, it needs to adopt a multi-step process which involves:

  • extracting case lists from both Siebel (objection case list) and ATOMS (data matching case list);
  • applying business rules to compare the above case lists to identify and extract details of taxpayers who had been the subject of data matching and who had lodged objections; and
  • manually review the contents of objections in the extracted cases to determine whether the objections were lodged against data matching decisions.

4.43 The process is resource intensive. Moreover the ATO has also advised that through its use of administrative reversals, as well as current processes for treating objections as reversal cases, the actual numbers of objection decisions are likely to be low. Correspondingly, the number of adverse objection decisions which progress to litigation is also likely to be low.173 As a result of the expected low numbers of such cases and the difficulties in aligning the data, statistics in relation to objection and litigation do not form a part of the ATO's standard business reporting in data matching.

4.44 The IGT was advised during the course of this review that the ATO is currently undertaking work to refine its internal reporting of objections and litigation rates and outcomes in data matching,174 although as at the date of this report, the specific details of what the ATO seeks to do as part of this project remains unclear.

4.45 For the purposes of this review, the IGT sought to understand the extent to which data matching cases generate formal disputes through objections and litigation. At the IGT's request, the ATO undertook work to collate relevant data in this regard.

4.46 The quantity and value of the ATO's data matching objections are outlined in Table 19. The ATO notes that despite its best efforts, the data below may still contain objections which do not strictly relate to data matching adjustment decisions, such as cases in which taxpayers objected because they were out of time to amend their income tax returns.175 The ATO estimates that objections not directly related to data matching account for 20 per cent of the data provided in Table 19.176

Table 19: Quantity and value of objections arising out of data matching
  Year
2010-11 2011-12
Total number of audits finalised 413,989 535,563
Total objections lodged 645 968
Percentage of audits objected against 0.16% 0.18%
Total liabilities raised from data matching compliance activities ($) $407,903,029 $743,185,724
Total value of objection liabilities adjustments ($) $4,088,112 $12,588,603
Value of objections as a percentage of total liabilities raised from compliance activities 1.00% 1.69%

Source: ATO

4.47 The percentage of objections to total audits finalised represents only a small fraction, being 0.16 per cent and 0.18 per cent in 2010-11 and 2011-12, respectively. However, care must be taken when undertaking this comparison as it is unclear what the ATO considers to be an 'audit' in this context and whether they include cases where there was no adjustment or the adjustment was in favour of the taxpayer.

4.48 The outcomes of objections lodged with the ATO are outlined in Table 20.

Table 20: Outcomes of data matching objections
Recorded outcome Year
2010-11 2011-12
  Volume % Volume %
Allowed in full 495 76.74% 764 78.93%
Allowed in part 40 6.20% 67 6.92%
Disallowed 12 1.86% 25 2.58%
Invalid 13 2.02% 15 1.55%
No outcome recorded 56 8.68% 54 5.58%
Other 8 1.24% 11 1.14%
Withdrawn 21 3.26% 32 3.31%
Total 645 100.00% 968 100.00%

Source: ATO

4.49 As outlined in Table 20, 82.94 per cent and 85.85 per cent of objections were allowed in full or in part in 2010-11 and 2011-12 respectively. In each of these years, 1.86 per cent and 2.58 per cent of objections were disallowed and the remainder was handled in other ways.

4.50 Given the proportion of allowed objections, it is reasonable to assume that the numbers of litigated cases concerning data matching adjustments would be relatively low, however, the ATO has been unable to collate relevant statistics in relation to data matching litigation cases.

IGT observations

4.51 The relatively low numbers of objections as a proportion of the broad data matching activities and the corresponding expected litigation levels may be due to a number of reasons. These include taxpayers agreeing with the ATO's adjustment decisions or that the ATO's reversals process is effective in diverting matters from objections towards a less formal dispute resolution mechanism.

4.52 In addition to these reasons, it is also important to recognise that some taxpayers may disagree with the ATO's decision but may feel that the time and cost involved in disputing such decisions outweigh the ultimate benefits. This may be especially true in data matching projects which target taxpayers with low disposable income (such as those in receipt of government pensions or allowances) and which result in low quantum adjustments. As noted in recent academic research on point:177

Tax disputes in many cases can be characterised by the asymmetry between the individual taxpayer and the Australian Taxation Office (ATO) in terms of resources and power. Further, resolving tax disputes outside the ATO is a risky and costly process to individual taxpayers. In most cases, the implicit costs (loss of time) and explicit costs (monetary expenses) involved may be of sufficient magnitude to deter taxpayers from seeking independent tax dispute resolution.

4.53 As with the administrative reversals statistics above, the IGT notes the difference between the proportion of affected taxpayers seeking objections and the value of objections allowed. This differential lends some support to the academic research and the view that some taxpayers may be deterred from challenging ATO decisions as perceived costs may outweigh the value of liability challenged.

4.54 The IGT also notes that while objections occur in only a small proportion of all data matching activities, the high rates of objections actually being allowed in full, or in part, suggests that there is scope for improvement in the data used by the ATO or the processes applied by the ATO prior to, or after, data matching is complete and discrepancies are identified.

4.55 Such opportunities for improvement may include strategies to enhance quality data collection, processes to cleanse and validate data and ATO staff engagement with taxpayers and their agents when undertaking compliance activities. The improvement opportunities are necessarily informed by an understanding of those data matching activities which are causing disputes and/or reversals.

4.56 The IGT considers that, in seeking to clearly appreciate the nature of these disputes, the ATO must ensure that it has sufficient and robust reporting to enable it to understand the extent of disputes and the specific projects generating the highest levels of disputes.

4.57 It should be noted that for these reporting purposes, disputes should include all matters which are the subject of internal review (whether treated as formal objections or considered as part of the reversals process) and any litigation matters.

4.58 In addition, the IGT is of the view that the ATO should capture data regarding those taxpayers who are lodging objections against data matching decisions which are ultimately referred and treated as administrative reversals. This would provide a basis for the ATO to assess which classes of taxpayers are opting for objections over reversals, the reasons for this choice and whether more focused and directed communication may assist to encourage greater use of the reversals process as an efficient and cost-effective means of challenging ATO adjustment decisions.

Recommendation 4.2

The IGT recommends that the ATO:

  1. enhance its reporting capability to identify and report on:
    1. data matching projects generating the highest levels of dispute through the administrative reversals process, the reasons for the high rate of disputation and the outcomes of reversal requests;
    2. the numbers of objection cases which are treated as administrative reversals; and
    3. the rate of objections and litigation from data matching decisions and the outcomes of these cases; and
  2. use the above information to augment and refine the ATO's data matching processes with a specific focus on improving its approach in areas or projects generating the highest levels of disputes.

ATO response

Agree

The ATO agrees to enhance its existing internal reporting capability to identify and report on administrative reversals, objections and litigation related to data matching projects.


164 ATO, Individuals Market Segment Health of the System Assessment, 13 September 2012, internal ATO document, p. 5.

165 ATO, Guide to correcting mistakes and disputing decisions, 18 July 2013.

166 See for example: ATO, FSI letter template, 2013.

167 Above n. 16

168 Part IVC of the Taxation Administration Act 1953.

169 Ibid.

170 Above n. 15.

171 Above n. 15.

172 Above n. 13, p. 94.

173 Above n. 16; ATO, communication with the IGT, 1 May 2013.

174 Above n. 173.

175 ATO, communication with the IGT, 27 June 2013.

176 Ibid.

177 Binh Tran-Nam and Michael Walpole, 'Access to tax justice: How costs influence dispute resolution choices,' (2012) 22 JJA 3, p. 4.