Conduct of review

1.1 This report, the Inspector-General of Taxation’s (IGT) review into improving the self assessment system, is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (the IGT Act 2003). In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation was provided with an opportunity to give submissions on any implied or actual criticisms contained in this report.

1.2 The review arose following concerns raised with the IGT by taxpayers, tax practitioners and their representatives. Generally these concerns focussed on taxpayers’ ability to operate in an environment of ever-increasing tax complexity and risks. Whilst the benefits of the self assessment system were recognised, issues were raised with increasing costs of compliance with no abatement in the level of uncertainty.

1.3 The IGT started this review pursuant to subsection 8(1) of the IGT Act 2003 and announced terms of reference on 16 June 2011 (a copy is reproduced in Appendix 1). The IGT received a significant number of written submissions and also met with taxpayers, tax practitioners and their representative bodies to better understand the issues covered by this review.

1.4 Particular areas of focus were reviewed in more detail and discussed with key Australian Taxation Office (ATO) and Treasury staff.

1.5 It should be noted that Treasury undertook a detailed examination of the self assessment regime in 2004 (ROSA review)1 and made significant recommendations to the Government and the ATO for improvements to the system. Overall, representations to this review expressed broad agreement with the overall aims of the ROSA review. However, many 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 issues were raised in relation to:

  • the ATO’s recent administration of the 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 shifting the pendulum towards a quasi-full assessment system entailing increased taxpayer costs without any 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.

1.6 During the review, the IGT established a working group comprising key tax practitioners and representatives. The participants were: Mark Bradford (Qantas), Michael Johnston (Consolidated Press Holdings Limited and the Group of 100), Alf Capito (Ernst & Young), Teresa Dyson (Law Council of Australia), Matthew Hayes (KPMG), Andrew Mills (Greenwood & Freehills), Professor Richard Vann (University of Sydney), Frank Brass (H&R Block), Darren Day (Woolworths), Chris Millett (Commonwealth Bank), Peter Poulous (Maddocks), Carlo Moretti (PKF Chartered Accountants and Business Advisers), Paul Suppree (BHP Billiton), as well as the ATO team led by Bruce Quigley, Second Commissioner—Compliance.

1.7 We greatly appreciate the generosity of the members of this working group in freely giving their time and expertise. Their involvement has greatly enhanced the outcomes of this review.

1.8 The working group met several times to identify and develop potential solutions to the systemic issues falling within the scope of this review. It should be noted, however, that the views and recommendations expressed in this report are not necessarily those of individual members of the working group. The views and recommendations were finalised by the IGT after much deliberation and based on input received from all stakeholders, including the ATO and Treasury.

1.9 In this report, the IGT has not discussed every aspect of the self assessment system. The focus has been on areas of most concern raised by stakeholders and those solutions most likely to provide the most benefit.

Structure of report

1.10 The report is divided into five main chapters.

1.11 Chapter 2 discusses the advice framework with particular focus on the ATO’s role within Australia’s system of self assessment and explores improvements which can be made.

1.12 Chapter 3 considers a number of specific aspects of the ATO’s compliance assurance function. In particular, the chapter considers the impact of the ATO’s recent trend of obtaining more information before or at the time of lodgement.

1.13 Compliance assurance can result in adjustments to tax liabilities, with the potential for added penalties and interest. Chapter 4 discusses the various issues raised by submissions, particularly those in relation to the no reasonably arguable position and lack of reasonable care penalties.

1.14 Underlying the advice framework and the ATO’s compliance assurance role is the complexity of the tax system itself. Factors which can affect this complexity include: the processes used in designing the law, measures aimed at the care and maintenance of that law, as well as the Commissioner’s discretions. These issues are discussed in chapter 5.

1.15 Finally, the report outlines the recommendations arising from Treasury’s ROSA review. It sets out the ATO’s governance framework for their implementation and the ATO’s progress towards that goal. The chapter also briefly refers to the IGT’s submission to the Government’s Tax Forum in relation to a proposed ATO appeals and review function.

1 See The Treasury (Cth), Report on Aspects of Income Tax Self Assessment (2004).