2.1 In this review the Inspector-General has examined the Tax Office's management of the non-lodgement of income tax returns, with a particular focus on non-lodgement of individual or personal returns. Overall, the Inspector-General has found that the Tax Office is managing the non-lodgement of individual returns well and with sophistication within the current legislative framework.
2.2 The review has also found that significant numbers of individuals who are required to lodge returns fail to do so, and that a large number of outstanding returns have accumulated as a result. The Inspector-General considers that this is not the result of Tax Office mismanagement, but is to be expected in a tax system that is based on self-assessment and risk management approaches, that requires almost every individual with income to lodge a return annually, and where the Tax Office is not resourced to do everything.
2.3 Based on the profile of the non-lodging taxpayers and the Tax Office strategies to identify high-risk non-lodgers, the Inspector-General agrees with the Tax Office view that these non-lodged individual returns do not represent a high risk to revenue or the integrity of the tax system. Information on the broader picture indicates that the risks to the tax system of non-lodgement by Small to Medium Enterprises (SMEs) and Micro businesses are greater than those posed by individual non-lodgement.
2.4 Notwithstanding the generally low risk of individual non-lodgers, the review notes that the Commissioner's specific power to exempt individuals from having to lodge is limited. Low risk non-lodgements therefore accumulate in large numbers over time and they generate costs for the ATO, for taxpayers and tax practitioners.
2.5 The review asked the Commissioner to consider whether, in the interests of good management of the system, it would be appropriate for him to use his general power of administration either to make further exemptions in respect of low-risk individuals, or to inform them that they would be at low risk of being pursued by the ATO. The Commissioner advised that it would not be appropriate to use his general powers in this way, mainly because s. 161 of the ITAA was very specific about the circumstances where he could (and therefore could not) exempt taxpayers from lodgement.
2.6 The Inspector-General therefore has recommended that the Government refer the review's findings and the results of the community survey to the Henry review for consideration in that broader context, noting that the Henry review has specifically sought input in this area:
How might the process of personal income tax returns be simplified, including by removing the requirement for some taxpayers to lodge returns?2
2.7 As large numbers of low risk non-lodgements accumulate they can also create an incorrect impression that a risk exists that needs to be addressed. The review therefore recommends that the ATO should flag low-risk non-lodged returns in its systems and should identify them as a separate category in its management reports to enable a clearer focus on higher risk non-lodged returns. Of course, individual returns considered low risk at one point in time can be elevated for attention if information, risk definitions and resources subsequently change.
2.8 The review also recommends that the Tax Office supplement its current public reporting on lodgement compliance by a periodic report on the broader outcomes and impacts being achieved on the level of non-lodgement.
2.9 The review highlighted that the effectiveness of Tax Office lodgement (and other) compliance activity relies heavily on information about taxpayers sourced from third parties such as banks. The Tax Office has identified sources of information that would enhance its compliance work that it currently cannot access, and sources that it can use, but where the data is not as useful as it could be. The review recommends that the Government take opportunities to increase support to the Tax Office in making key improvements to the access and usefulness of third party data, through its consultations with the state and territory governments and legislatively if necessary.
2.10 An independent community survey undertaken as part of the review indicates that the community expects the Tax Office to maintain individual non-lodgement at a slightly better level than the Tax Office is presently achieving. The survey also suggests that the level of individual non-lodgement has been static over recent years or at best may be improving slightly. The survey also indicated that some confusion about lodgement obligations still underlies individual non-lodgement, despite the ATO providing useful online assistance.
2.11 Notwithstanding that it is not quite achieving community expectations, the review does not suggest that the Tax Office should increase the resources it commits to tackling individual non-lodgement. This is consistent with the relative risk to the system.
2.12 The more detailed findings from the review are as follows.
How the Tax Office manages the risk
Risk management and assessment processes
- Tax returns are the foundation for verifying tax and Child Support compliance and for verifying entitlements to a range of tax and other benefits and concessions.
- Under self-assessment, the Tax Office is not resourced to do everything that might be done to achieve absolute compliance. The Tax Office must make its own judgements on relative compliance risk, the strategies and actions to address them and the allocation of its resources to achieve planned outcomes.
- The Inspector-General considers that the ATO's risk assessment based approach to non-lodgement is entirely appropriate in a self-assessment system and in the context of the shifting demographics that affect taxpayers.
- As part of its risk assessment processes, the Tax Office has developed reliable approaches to predicting the assessable income of potential non-lodgers and predicting their likely tax debit or credit position.
- The Tax Office has taken important steps over recent years to strengthen its strategic focus and operational effectiveness on lodgement compliance.
- The Tax Office is gaining a better understanding of the environment taxpayers are operating in which in turn has lead to more sophisticated identification of risk. Risk assessment and compliance levels are close to the level that the community expects.3
- The third party data accessed by the Tax Office is not as useful as it could be. The inclusion of unique identifiers (such as a TFN or ABN) in third party data would significantly enhance the Tax Office's risk interpretation and analysis and improve the identification of non-lodgers and support other compliance strategies.4 There are legislative provisions that currently limit extension of the Tax Office's current practices in this area.5 There is a need for either a new legislative requirement or through agreement between the states and the territories for the inclusion of unique identifiers in selected sources of third party data provided to the Tax Office.
Lodgement Compliance Strategies and Actions
- The Tax Office's Child Support Agency (CSA) Project, aimed at ensuring lodgement by those having support obligations, has exceeded estimated achievements.
Failure to Lodge Penalties
- Failing to lodge (FTL) penalties are very low with the maximum possible being $2,750 per document for a non-compliant taxpayer who earns $20 million or more assessable income (for the income year in which the return is required).
- Tax Office application of FTL penalties has been increasing but so have subsequent remissions and cancellations. Overall, the number of FTL penalties actually applied has increased with some 98,700 applied in 2007/08, but it is still small relative to over 1 million lodgement compliance actions and the estimated level of non-lodgement.
- The structure of FTL penalty provisions generally means that they are applied after lodgement has finally been made. Some overseas jurisdictions apply flat, non-remittable penalties as soon as lodgements are overdue.
- The Inspector-General considers that the FTL penalty regime should be strengthened and penalties increased for high-risk taxpayers.
- The Tax Office can issue default assessments to taxpayers who do not lodge as a means of obtaining compliance, but only does so sparingly. The Inspector-General believes that the ATO should, with due process, progressively increase the use of default assessments to support lodgement compliance.
- Tax Office prosecutions for non-lodgements are increasing. The 2007-08 totals were 1999, and for 2008-09 the Tax Office plan is for 2,200 prosecutions. While small in number relative to the 1 - 1.5 million individual non-lodgers, this seems in line with Commonwealth and Tax Office policy to pursue prosecution only in appropriate circumstances and with observations about the effectiveness of prosecutions.
- Section 8ZE of the Taxation Administration Act 1953 (TAA 1953) requires that FTL penalties are waived immediately upon institution of prosecution against a taxpayer for failing to lodge. Where a taxpayer lodges in response to the summons, section 8ZE operates to preclude any monetary administrative penalty for failing to lodge other than by continuing with prosecution. The effect of section 8ZE has been raised within the tax community and in particular the obligatory waiving of FTL penalty once a summons has issued. The Inspector-General may consider the matter further if the application of section 8ZE is leading to unintended or unfair consequences for taxpayers.
Allocation of resources and results achieved
- Resource allocation and work planning within the Tax Office is a complex annual cycle and is kept under constant review and monitoring. This cycle is synchronised with a wide-ranging risk assessment process called the Health of the System Assessment (HOTSA).
- A result of this approach is that, at this time, the Tax Office does not have a good picture of the resources allocated to lodgement compliance activities.
- Given the fundamental importance of lodgement in the tax system and the substantial volume of work undertaken, the Inspector-General considers that a clearer picture of the level of resourcing should be available for management and accountability purposes.
Results and reporting
- As large numbers of low risk non-lodgements accumulate they can also create an incorrect impression that a risk exists that needs to be addressed. The review therefore recommends that the ATO should flag low-risk non-lodged returns in its systems and should identify them as a separate category in its management reports to enable a clearer focus on higher risk non-lodged returns.
- Results may be double counted across theOperations and Tax Practitioner and Lodgement Strategy (TPALS) areas of the Tax Office. The Tax Office has agreed that it is possible that an outstanding return will be finalised where both Operations and TPALS have made contact and the results will be claimed by both areas. The extent to which this happens could be large, and could flow through into the Tax Offices key performance reports. However, the Tax Office has assured the Inspector-General that any issues that may exist at lower levels of reporting do not flow through to the Annual Report.6
- This issue could be overcome if the Tax Office regularly performed the analysis it undertook for the IGT during the review, which provided a clearer picture of the work done, and the results achieved by the Operations and TPALS areas.
- The review's analysis of current Tax Office reporting on lodgement compliance indicates a focus on the number of actions and finalised returns. The Inspector-General considers that this reporting should be supplemented by a periodic report on broader outcomes and impacts being achieved on the level of non-lodgement in the community. This would be in line with the Tax Office's announcement in August 20087 of methodology designed to measure the success of the ATO's compliance interventions - with a focus on outcomes rather than activities. A periodic survey similar to that undertaken as part of the review would, for example, achieve that end.
Individual taxpayers - lodgement compliance
The level of non-lodgement in Australia
- Constantly shifting taxpayer demographics (employment, marital status, domicile, travel, etc) mean that it is not possible for the Tax Office, in a self-assessment system, to know precisely which taxpayers should lodge returns each year. Under self-assessment there is no requirement for taxpayers to inform the Tax Office if they have assessed that they have no requirement to lodge.
- The Australian community expects the Tax Office to maintain the level of non-lodgement of individual tax returns to no more than 8%.
- The Tax Office is currently maintaining non-lodgement at 9-10%.
- The level of non-lodgement is statistically static, but may have improved slightly over recent years.
- The number of non-lodged individual tax returns in any year can be conservatively estimated at 1.2 million to 1.5 million returns.
- The number of accumulated potentially non-lodged individual returns is estimated to be 6.5 million.
- The profile of individuals who don't lodge returns when they should (required individuals) suggests that the risk to revenue and to the tax system of non-lodged individual returns is low. This view is supported by Tax Office analysis and compliance results.
- Overall, the Inspector-General has found that the Tax Office is managing the non-lodgement of individual returns well and with sophistication within the current legislative framework.
- What is important is not so much the overall number of outstanding individual tax returns, but the associated level of risk to revenue or the integrity of the tax system. The Inspector-General's overall conclusion concurs with the Tax Office view, that the level of risk is low.
Key Recommendation 1
The Government should refer the review's findings and the results of the community survey to the Henry review of Australia's future tax system for consideration in that broader context, noting that the Henry review has specifically sought input in this area.
Key Recommendation 2
The Inspector-General recommends that the Tax Office supplement its current reporting on lodgement compliance by a periodic report on the broader outcomes and impacts being achieved on the level of non-lodgement in the community.
Key Recommendation 3
The Government should increase support to the Tax Office in making key improvements to the availability and usefulness of third party data used to identify non-lodgers and for other lodgement compliance activities. This could include new legislative requirements, new arrangements with Commonwealth agencies, and agreements by the states and the territories for third party data to:
- include unique identifiers such as a TFN or ABN
- where possible be an electronic transmission
- be promptly provided to ensure the currency of the information
- determine whether a taxpayer was in or out of Australia.
Key Recommendation 4
The Tax Office should flag low-risk non-lodged returns in its systems and should identify them as a separate category in its management reports to enable a clearer focus on higher risk non-lodged returns.
Key Recommendation 5
The Government should consider strengthening the failure-to-lodge penalty regime and, in particular, increasing penalties for high-risk taxpayers.
Key Recommendation 6
The Tax Office should progressively increase, where appropriate, the use of default assessments to further support lodgement compliance.
2 Australia's Future Tax System - Consultation Paper (released 10 December 2008, consultative question 8.2 at page 169).
3 See chapter 5 for an outline of the results arising from the independent community survey conducted by Colmar Brunton.
4 The Tax Office advised the Inspector-General that in the absence of a unique identifier they require at a minimum the full name, address and date of birth of an individual in order to provide a reasonable opportunity to establish identity - ATO Minute "Information Flows into the Tax Office" (dated 3 June 2008 at page 3).
5 The Tax File Number guidelines 1992 (which were issued under section 17 of the Privacy Act 1988) are intended to protect the privacy of individuals by restricting the collection, use and disclosure of tax file number information.
6 Conference with Deputy Commissioner, Lodgment (Australian Taxation Office) 13 February 2009.
7 Measuring Compliance Effectiveness - Our Methodology: Foreword - Commissioner of Taxation (August 2008).