Purpose of this document
The Inspector-General of Taxation (IGT) is seeking your submissions on his review into improving the self assessment system. This review was originally listed on our 4 April 2011 work program announcement as our Review of the Australian Taxation Office’s (ATO’s) implementation of the Report on Aspects of Income Tax Self Assessment (ROSA) recommendations. This document explains how you can make a submission to this review. It also sets out the scope of the area for inquiry and discusses some of the issues for focus in the review.
Since 1986-87, Australia’s income tax system has been administered on a self assessment basis. Under this system, taxpayers shoulder the primary responsibility of correctly applying the tax laws to their circumstances. Previously, under the full assessment system, taxpayers were only responsible for disclosing all the relevant facts to the ATO. The ATO was responsible for correctly applying the law to those facts. The main objective of moving to a self assessment system was to improve efficiency in the use of ATO resources to collect revenue342.
In this way, the introduction of self assessment changed the balance of costs and risk between the ATO and the taxpayer343. This shift raised the question of what the appropriate balance should be, that is, the extent to which taxpayers should bear an additional burden under a self assessment system.
In 2003, the Treasury’s review into aspects of income tax self assessment (the ROSA review) examined whether Australia’s self assessment system had struck the right balance between ‘protecting the rights of individual taxpayers and protecting the revenue for the benefit of the whole Australian community’344.
The report of the ROSA review (the ROSA report) was published in August 2004. It favoured a self assessment system over a system of full administrative assessment since such a system meant that ATO resources could be used more efficiently, allowing more revenue to be collected for the same administrative cost. At the same time, the report also recognised that it would be appropriate to reduce the costs and risks to taxpayers in certain circumstances, although it stated that such a shift would result in additional costs to the ATO and to the revenue345.
The ROSA report therefore made a number of recommendations which were intended to refine the operation of the income tax self assessment system in order to ‘improve certainty and reduce compliance costs for taxpayers without significantly affecting the capacity of the [ATO] to collect legitimate income tax liabilities’346. This included recommendations aimed at:
- providing a better framework for the provision of ATO advice by making advice more accessible, timely and binding in a wider range of cases;
- reducing the periods in which the ATO could amend certain taxpayer assessments;
- providing for future improvements to tax policy, law and administration; and
- mitigating the extent to which taxpayers were subject to interest and penalty consequences arising from uncertainties in the self assessment system.
The recommendations arising from the ROSA review (the ROSA recommendations) required legislative action in some instances and ATO administrative changes in others. Accordingly, two tranches of legislation were enacted in 2005 and the Commissioner of Taxation (the Commissioner) undertook to implement all of the recommended administrative changes as soon as practicable.
During recent consultation on the IGT’s work program, many submissions observed that taxpayers now operate in an environment of ever increasing tax complexity and risks. They suggested that although the self assessment system itself had its benefits, there were issues with the current systems and their operation that imposed increased costs and uncertainty.
Submissions generally agreed with the overall aims of the ROSA recommendations and observed that certain recommendations were successful in addressing some issues with the self assessment system. However, they indicated that there was room for further improvement and questioned whether a number of the recommendations were implemented as intended. In particular, a number of questions were raised in relation to:
- the ATO’s recent administration of the existing advice framework, such as whether the amount of binding advice produced was sufficient or provided in the areas of most need, whether ATO responses to adverse tribunal and judicial decisions provided sufficient clarity and whether taxpayers faced significant obstacles that hindered them in obtaining certainty about their tax risks in a timely and cost effective manner;
- the ATO’s approach regarding recent administrative requirements, such as expanded returns with additional disclosure requirements, and whether some of the ATO approaches were moving towards a quasi-full assessment system or a hybrid self assessment/full assessment system entailing increased taxpayer costs without an apparent commensurate reduction in risk; and
- the ATO’s ability to administer the law in a practical manner that reduces costs and risks borne by taxpayers without significantly increasing the risk to the revenue.
On the basis of these submissions and in the context of the move from full assessment to self assessment, the IGT will also seek to establish whether aspects of the implemented ROSA recommendations have been successful in achieving their original aims and whether there are any further improvements that can be made.
The IGT has set out his terms of reference below with submission guidelines thereafter to assist you in forming your submission.
Terms of reference
In accordance with subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act 2003), the Inspector-General conducts the following review on his own initiative.
The IGT will review aspects of the current self assessment system and consider whether improvements may be made, with a particular focus on:
The self assessment framework
- given the program of improvements to self assessment that was recommended in the 2004 ROSA report and other changes to the system which have taken place since then, whether the current self assessment system strikes the right balance of responsibilities between taxpayers and the ATO and whether further improvements could be made;
- whether the current self assessment mechanisms minimise the costs and burdens of these responsibilities for stakeholders, including:
- in the context of the commercial, legal and administrative complexities that taxpayers experience, what difficulties taxpayers face in fulfilling their self assessment responsibilities;
- whether the administrative requirements for increased pre-assessment compliance action (such as expanded returns and real-time assessments) are proportionate to the risks they are intended to minimise;
- whether there is sufficient certainty in what constitutes a reasonably arguable position and reasonable care such that taxpayers are effectively able to manage their compliance risks in a complex environment;
The ATO advice framework
- the extent to which the current ATO advice framework and its administration supports self assessing taxpayers to manage their risks and compliance costs without significantly diminishing the ATO’s ability to collect appropriate revenue, including:
- the extent to which the ATO provides binding and non-binding advice and the issues on which stakeholders consider it should be provided;
- whether ATO responses to adverse tribunal and judicial decisions are working effectively for stakeholders;
The role of the tax administrator
- the nature and role of the tax administrator, including:
- the extent to which the ATO makes judgements or take actions which give effect to the object and purpose of the legislation and the degree to which those judgments and actions are made in a transparent manner;
- the extent to which the ATO takes practical actions or makes practical decisions in situations of legal or administrative uncertainty to support taxpayers to self assess their tax liabilities in a cost-effective manner without significantly increasing the risk to the revenue (for example, through the exercise of various discretions or the powers of general administration);
- whether the ATO’s effectiveness to take such actions or make such decisions could be improved through alternative models or approaches and, if so, the potential implications of adopting those alternatives;
- any other concerns or potential improvements in relation to the self assessment system, including those matters considered by the ROSA review, such as periods for amendment.
The IGT welcomes your engagement in the consultation process. To facilitate this action, the IGT will:
- publish a copy of the terms of reference for this review on his website and call for submissions through other channels, such as print media;
- take submissions on this review from members of the public, or from particular associations, industry bodies or organisations; and
- request the Commissioner to provide information and/or documents relevant to this review.
The IGT invites you to provide written submissions to assist with this review. The IGT has provided submission guidelines in the section below that you may find of assistance in making your submissions. Submissions should address the terms of reference set out above and the issues and questions outlined in the submission guidelines. It is not expected that each submission will necessarily address all of the issues and questions raised.
The closing date for submissions is 21 July 2011. Submissions can be sent by:
Inspector-General of Taxation
GPO Box 551
SYDNEY NSW 2001
fax to: 02 8239 2100
email to: email@example.com
Submissions provided to the IGT are dealt with in strict confidence (unless you specify otherwise). This means that the identity of the taxpayer, the identity of the adviser and any identifying information contained in such submissions will not be made available to any other person, including the ATO. Sections 23, 26 and 37 of the IGT Act 2003 safeguard the confidentiality and secrecy of such information provided to the IGT — for example, generally the IGT cannot disclose the information as a result of an FOI request, or as a result of a court order. Furthermore, if such information is the subject of client legal privilege (or legal professional privilege), disclosure of that information to the IGT is protected and will not result in a waiver of that privilege.
In connection with the above terms of reference, we are seeking submissions to this review. We envisage that, broadly, your submission will be divided into two parts: firstly, a detailed account of your experience with the self assessment system, particularly in managing your tax risks; and secondly, your thoughts on any opportunities to improve the system and its performance.
Your experience with the self assessment system
In the first part of your submission, you should provide detailed accounts of experiences in complying with the tax laws under the self assessment system (including any ATO requirements), and the costs you bore in dealing with your tax risks, particularly in relation to:
- the factors that gave rise to the tax risks or uncertainty you experienced;
- the steps you took to minimise those risks or uncertainty (such as whether you obtained and used advice from the ATO and/or external service providers to help you manage tax risks), and the costs and impacts of these steps;
- the steps you took to minimise the adverse effects of the ATO disagreeing with your tax position (such as steps you took to establish that reasonable care was taken and that you have a reasonably arguable position);
- if the Commissioner exercised, or could have exercised, his general power of administration or other discretions in relation to your circumstances, whether you considered the exercise or otherwise to be appropriate and any impacts of that exercise or otherwise;
- the impact of, and costs involved in, fulfilling your responsibilities under the tax laws and related administrative requirements;
- the degree to which these costs and impacts were minimised by the tax laws and existing ATO advice and ATO action; and
- any other experience that you consider relevant.
Specific examples arising from your experiences would greatly assist us to both identify and examine potential systemic issues more efficiently and effectively. These accounts of your experiences should take into consideration the terms of reference above.
For these examples, it would be useful to provide a time line of events outlining your key interactions with the ATO including information requests, key meetings, the issuing of ATO documents and ATO amended assessments (if relevant).
It is important to provide details of specific factors, including the ATO practices and behaviours that, in your view, impact upon taxpayer certainty and the risks and costs that taxpayers must bear in a self assessment environment.
Any adverse or detrimental impacts of particular aspects of the self assessment system, including the ATO’s practices and behaviours, should be set out and, if possible, the costs quantified. These might include unanticipated tax liabilities raised in amended assessments (including tax, penalties and interest) for prior years, increased compliance costs in dealing with the ATO directly, increased ongoing income tax risk and compliance costs thereafter, potential restructuring of significant commercial arrangements and opportunity costs.
The IGT also seeks examples of positive factors that contribute to taxpayer certainty and reduce costs.
Opportunities for improvement
In the second part of your submission, we invite you to identify opportunities to improve the self assessment system and its performance. Your submission may outline alternative frameworks, actions, practices or behaviours which, in your view, could minimise any adverse or detrimental impacts arising from the current system and its operation. This may include experiences you have had in other foreign tax jurisdictions.
The following is provided to give some background to the issues raised in the terms of reference and assist you in developing this part of your submission.
Responsibilities under the self assessment system and their implications
As stated in the background above, under the self assessment system, taxpayers shoulder the primary responsibility of correctly applying the tax laws to their circumstances. Although Parliament has given this responsibility to taxpayers, it has entrusted the Commissioner to ensure compliance with those laws. Any disputes involving the liability to pay taxes may, ultimately, be resolved by the judiciary, who are entrusted to interpret the laws raising those taxes.
The application of the tax laws to particular circumstances may involve a degree of complexity, such as that arising from the interaction of the tax laws with other laws or their application to complex facts. In these circumstances, there is an increased risk that within the available time period a taxpayer may not correctly assess their liability.
Previously, under the full assessment system, taxpayers were only responsible for disclosing all the relevant facts to the ATO. The ATO was responsible for correctly applying the law to those facts.
The ROSA report indicated that while the move from a full assessment system to a self assessment system led to the more efficient use of ATO resources to collect revenue, it also led to a shift of the burden of costs and risks of income tax compliance from the ATO to the taxpayer. The ROSA report’s recommendations were not intended to remove these costs and risks altogether, but to minimise them to the extent possible while still allowing the ATO to collect legitimate income tax liabilities347.
In your submission, you should reflect upon whether the current balance operates effectively to protect the rights of, and minimise the costs incurred by, taxpayers while still assuring the protection of revenue collections for the benefit of the Australian community as a whole. On the one hand, if the administrator was obliged to collect all liabilities without regard to taxpayers’ costs and rights, it may create economic distortions and deter commercial innovation. On the other hand, if the administrator was obliged to minimise taxpayers’ costs in proportion with the amount of revenue in question, it may make tax a negotiable debt and reduce funding for public policies.
In considering this issue, you may wish to consider the extent to which mechanisms that are designed to ease the cost and risk burden are effective in doing so. For example, do pre-assessment agreements achieve their stated purpose of giving taxpayers certainty regarding the ATO’s satisfaction with an assessment for a particular year?
You may also wish to discuss the implications of the penalty mitigation and remission structure, particularly where there is disagreement over whether a taxpayer has taken reasonable care, or adopted a reasonably arguable position.
In considering any improvements to the current framework, you should specifically discuss what the aims of improvements to the self assessment framework could be in this context. That is, whether there are other outcomes that the balance of responsibilities between taxpayers and the administrator might seek to achieve. You should provide reasons for your views.
Having considered the existing self assessment framework, you should also consider the following specific areas.
ATO advice framework
The current ATO advice framework, subsequent to the recommendations made in the ROSA report, was designed to support self assessing taxpayers in managing their risks in a complex commercial and legal environment by making advice more timely, accessible, accurate and binding in a wider array of circumstances.
The ROSA review’s discussion paper stated that it is possible to reduce taxpayer uncertainty by assuring taxpayers that they are assessing their income tax liabilities in accordance with the ATO’s interpretation of the law, as communicated through rulings and other ATO advice348. Moreover, the ROSA report suggested that where taxpayers have acted in good faith, they should not suffer adverse consequences as a result of having relied on incorrect ATO advice. The cost of this protection, according to the report, should instead be borne by the community as a whole349.
In your submission, consider the extent to which the ATO provides enough timely, clear and applicable binding advice to taxpayers within the requisite timeframe, such that they are able to assess their liabilities in accordance with the ATO’s interpretation of the law, particularly where there are legal and commercial complexities or where adverse judicial decisions exist.
In considering these aspects of the current framework, you should address the question of whether these aspects support taxpayers in assessing and mitigating their risks in complying with the law. In doing so, you may wish to reflect on whether there are ways in which the ATO advice framework itself may be improved.
An issue raised in consultation was that while taxpayers are not charged directly by the ATO for advice (for example private rulings or other guidance) they may incur significant costs in seeking or obtaining ATO advice in meeting their tax law obligations.
You may wish to consider and detail the direct, indirect and opportunity costs incurred in seeking ATO advice. For taxpayers such costs may include the engagement of external tax advisors or agents. For tax advisers or tax agents it may include costs they experience in dealings with the ATO that are not charged to taxpayer clients for various reasons. To what extent do you believe these costs deter people from seeking ATO advice?
The role of the administrator
The ATO’s approach to the administration of the self assessment system may play a role in supporting taxpayers to self assess in a cost-effective manner without disproportionate risk to the revenue.
In areas of legal and practical uncertainty, one of the ways the ATO is able to impact on taxpayer certainty is through the operation of the Commissioner’s powers of general administration. For instance, section 8 of the Income Tax Assessment Act 1936 (ITAA 1936) gives the Commissioner the ‘general administration of this act’ for the purposes of administering income tax laws. Similar provisions exist in relation to other taxes administered by the ATO. The ATO has interpreted the purpose of this and other general administration provisions as placing the day to day administration of various taxation laws in the hands of a statutory office holder, the Commissioner350. The Commissioner’s view of the scope of this power is set out in his practice statement, PSLA 2009/4.
Your submission should reflect on whether you agree that the role of the administrator is to make judgements or take actions which give effect to the object and purpose of the legislation and the degree to which those judgments and actions should be made in a transparent manner.
You may also wish to reflect on whether taxpayers’ abilities to manage their risks and self assess in a cost effective manner would be assisted if the ATO was able to take practical actions or make practical decisions which may draw more upon the object and purpose of the legislation, but which do not expose the revenue collection to significant risk. Are there areas where the ATO could take such action? Should such action only be taken in areas of low risk, but high levels of impracticality or cost? If such action could be taken, should the ATO engage with the taxpaying community in designing these approaches?
You may also wish to consider whether there are alternative legal models or approaches which may offer improvements. If so, you should also consider the tradeoffs that such alternatives might require.
Having addressed the above, your submission may raise other issues that you wish us to consider in relation to the self assessment system. This may include the key themes arising from the ROSA review: improving taxpayer certainty and reducing compliance costs without significantly impacting on the ATO’s ability to collect legitimate tax liabilities351. For instance, the complexity of the law or the commercial environment may impact on the operation of the self assessment system. You may wish to comment on whether there are other ways to improve certainty and reduce compliance costs for taxpayers in such an environment.
In addition to the advice framework, pre-assessment agreements and the role of the tax administrator, the ROSA review addressed a number of other issues of concern such as the length of amendment periods, law design and policy development, nil assessments and penalties and interest changes. Various recommendations were made and implemented in relation to these concerns. In your submission, you may wish to consider whether any further scope for improvement exists in these areas.
For instance, your submission may wish to consider the extent to which the current lengths of periods of amendment are adequate in allowing both taxpayers and the ATO the opportunity to correct errors. By the same token, you should consider whether there are areas where there may be opportunities to further shorten amendment periods, resulting in greater certainty to taxpayers, without significantly impacting on the ATO’s ability to collect appropriate revenue.
You should note that the IGT listed a ‘Review into ATO use of early and alternative dispute resolution (ADR)’ as a separate review in his work program announcement. The ROSA recommendations that are related to ADR will be considered in the context of that review.
Lastly, your submission may wish to address any other specific points that you consider important in the context of the self assessment system.
342 The Treasury, above n 1, p 4.
343 Ibid p 2.
344 Ibid p 1.
345 Ibid p 4.
348 The Treasury, above n 63, p 8.
349 The Treasury, above n 1, p 9.
350 Quigley, above n 303.
351 The Treasury, above n 1, p 4.