The Inspector-General of Taxation’s (IGT) review into improving aspects of the income tax self assessment system arose from stakeholder concerns that recent administrative practices have swung the pendulum from a pure self assessment system back towards a quasi-full assessment system, without any of the previous benefits available from the former regime and with increased taxpayer costs. The areas in need of most attention were highlighted by a wide range of taxpayers, tax practitioners and their representative bodies. These areas included:
- the advice framework;
- the ATO’s compliance approach regarding recent administrative requirements;
- the penalty and interest regimes; and
- tax law complexity and the ability to administer the law in a pragmatic manner.
Advice framework — Notwithstanding the outcome of previous reviews of the ATO’s advice framework, taxpayers and their advisers claimed that they continued to experience examples of unnecessary delays, costs, perceived lack of sufficient objectivity and continuing uncertainty. The ATO faces considerable challenges in providing taxpayers with practical certainty on a timely basis. There is also a question as to whether the amount of binding advice produced is sufficient or provided in the areas of most need.
To address the above concerns, the IGT has made a range of recommendations including that the ATO be required to synchronise its advice with the enactment of substantial new laws and monitor that advice more closely following those laws’ enactment. A number of other recommendations in this area are aimed at improving the provision of public binding advice, such as tailoring the scope of ATO public rulings to improve timeliness, improving issue identification for the public rulings program and providing a certain level of protection to taxpayers where there is no ATO advice or ATO guidance. A particular recommendation is directed at expanding the scope of protection afforded to e-tax and a reinstated TaxPack.
ATO compliance approaches — The IGT observed that the recent ATO risk based approach to compliance is aligned with broader international trends, particularly those aimed at shifting compliance activities upstream to address risks earlier. Such approaches raised the issue of whether ATO practices may be improved in order to reduce compliance costs and rebalance taxpayer protections without significantly affecting Government revenue.
In this respect, the IGT has made a number of recommendations aimed at addressing the impacts of its risk differentiation compliance approach including the reduction of costs arising from ATO information requests. The IGT has also recommended that taxpayer certainty can be improved by adjusting certain statutory periods of review such as:
- shortening the periods of review for micro and small businesses with relatively low annual turnovers; and
- reducing the periods of review for transfer pricing claims and losses.
A number of other areas for improvement in this area relate to specific ATO compliance activities, such as improving the delivery of Annual Compliance Arrangements and the transparency of pre-lodgement compliance reviews.
Penalties and interest regimes—These regimes were intended for a pure self-assessment model and require reconsideration in the light of recent changes to ATO compliance approaches. In this respect, the IGT has made a number of recommendations to Government for it to consider a number of matters, including that:
- the reasonably arguable position (RAP) penalty threshold be raised to $100,000 to relieve smaller taxpayers from incurring disproportionate compliance costs;
- the onus of proof for RAP penalties be placed on the ATO to impose a greater level of accountability for ATO penalty decisions; and
- interest be capped for ATO delays in the compliance assurance processes.
The IGT has also observed that significant numbers of unsustainable penalty decisions may have arisen because of a lack of ATO compliance officer discipline in dealing with evidentiary matters for the rate of penalty sought to be imposed. Recommendations for improvement have been made in other reviews in this regard and the ATO’s administration of penalties more generally may be the subject of a future IGT review.
Tax law complexity and administering the law in a practical manner —Taxpayers face complexity arising from tax legislation, as well as the way that legislation is interpreted and administered by the ATO. As such, the ATO has a crucial role in developing the legislation that gives effect to policy and administering it in a practical manner that reduces costs and risks borne by taxpayers without significantly increasing the risk to the revenue.
In this respect, the IGT has recommended the augmentation of existing public consultation processes with tripartite tax law design teams, comprising ATO and Treasury senior officials as well as paid external tax experts, who are engaged to provide advice on the proposed law, relevant explanatory memoranda and the nature and timing of ATO advice.
The IGT is also of the view that there is merit in considering whether the Commissioner of Taxation’s administrative discretion should be improved to facilitate relief to taxpayers facing unintended, anomalous, inequitable or impractical outcomes. Accordingly, The IGT has recommended that the Government consider providing the Commissioner with the power to not take compliance action in such circumstances for a period of three years whilst the Government takes any corrective action.
Overall, the report makes 33 recommendations directed at improving taxpayer certainty, reducing compliance costs and rebalancing taxpayer protections. Almost half of these recommendations are directed towards Government whilst the remainder are aimed at the ATO. The ATO has agreed, either in full, in part or in principle, with almost all the recommendations directed to it. The main disagreement relates to e-tax and a reinstated TaxPack having the status of a public ruling.