Conduct of the review
1.1 This is the report on the review undertaken by the Inspector-General of Taxation (Inspector-General) into the Australian Tax Office's (Tax Office) approach to administering the non-lodgement of individual income tax returns. The review was conducted on the initiative of the Inspector-General under subsection 8(1) of the Inspector-General of Taxation Act 2003 (IGT Act).
1.2 The review was announced on 12 October 2007. Its terms of reference and details of how the review was conducted are provided in Appendix 1.
1.3 The decision to undertake the review was prompted by concerns raised by tax practitioners and scoping research undertaken by the Inspector-General.
1.4 A number of key recommendations are listed in Chapter 2. During the course of the Inspector-General's review, the Tax Office made or proposed a number of changes to its systems involved with the administration of non-lodged income tax returns. Some of those changes directly addressed concerns raised by the Inspector-General. All changes made or proposed by the Tax Office are noted in this report wherever relevant.
1.5 The Tax Office's detailed response to the review is in Appendix 2.
Focus of the review
1.6 Information supplied before the commencement of the review by the Tax Office indicated to the Inspector-General that many millions of non-lodged income tax returns had accumulated which potentially involve large amounts of revenue. The focus of this review has therefore been to identify and recommend changes that will assist the Tax Office to improve how they manage the non-lodgement of individual income tax returns.
1.7 A key part of this has involved the Inspector-General working with the Tax Office to establish the level of non-lodgement of income tax returns. The initial intention was to do this for all categories of income tax returns. However, the scope of required data collection and analysis was such that it was decided to focus the review mainly on the individual taxpayer segment which represents the majority of non-lodged returns. Some of the review's findings are nevertheless relevant to other categories of non-lodging taxpayers.
1.8 The review also focused on whether the legal and administrative policy settings surrounding the lodgement of income tax returns are efficient, effective and fair, and provide the best motivation to support compliance in a contemporary self assessment environment.
1.9 The requirement for individuals to lodge income tax returns has been the subject of considerable debate within the community and, most recently, has been raised in light of the announcement of the Government's review of Australia's future tax system (the Henry Review1). This debate quickly raises a number of sensitive issues such as the deductibility of work related expenses for employees. Consideration of policy issues is not within the scope of the work of the Inspector-General and therefore is not the focus of this review. The review has concentrated on systemic tax administration issues surrounding the Tax Office's approach to managing the non-lodgement of income tax returns by individuals.
1.10 The assistance and cooperation provided by the Commissioner of Taxation and his officers to the Inspector-General and his team during the course of the review are gratefully acknowledged. The Inspector-General acknowledges with thanks the staff of the Australian National Audit Office.
1 Announced on 13 May 2008, the review will look at the current tax system and make recommendations to position Australia to deal with the demographic, social, economic and environmental challenges of the future.