4.1 When, as in Australia, tax administration is based on self assessment, compliance activity is inevitably based on risk management approaches. The Tax Office is not resourced by government to do everything that might be done to achieve absolute compliance. Rather, it is resourced to ensure that budgeted revenue is collected and that confidence in the system is maintained. Unless government specifically provides resources for exclusive use to address a defined compliance risk, the Tax Office must make its own judgements on relative compliance risks, the strategies and actions that will best address them, and how it needs to distribute its resources to achieve planned compliance outcomes.
4.2 This framework places great importance on the following elements of risk management in respect of non-lodgement (or any other) compliance risk:
- risk assessment processes;
- strategies and actions to address priority risks;
- investment of resources; and
- monitoring performance and effectiveness (achievement of planned outcomes).
4.3 This chapter considers the Tax Office approaches to these elements of its risk management of non-lodgement of individual income tax returns and the Inspector-General's observations on them.
Risk assessment processes
4.4 The Tax Office publicly identifies the importance of lodgement in the tax system ...
Taxpayer returns (including activity statements and other reports) are the foundation for verifying compliance which is why we put so much emphasis on the need for taxpayers to lodge returns in full and on time.26
... and it is also upfront about the impact of the risk management framework in which it works:
However we are unable to monitor and follow up all instances of late or non-lodgement of income tax returns, and consequently cases for further pursuit are selected based on an assessment of their relevant risk.27
4.5 The fact that the non-lodgement of tax returns poses a risk to the integrity of the tax system and potentially the revenue is clear. However, the Tax Office is unable to follow-up all cases of non-lodgement mainly because of constantly changing taxpayer demographics such as:
- leaving and re-entering the workforce;
- extended absence from Australia due to overseas travel; and
- changes in location and relationship status.
4.6 The Tax Office, in answer to a 'question on notice' to the Senate Economics Legislation Committee regarding these challenges, concluded that:
It is not possible to compile data showing how many individuals have 'dropped out of the tax system.28
4.7 In January 2005, following some embarrassment at the identification of a high-profile, high-wealth person who had not lodged a return for many years, the Tax Office created a new Lodgement Compliance business line to identify high-risk taxpayers as well as taxpayers who deliberately or persistently failed to meet their lodgement obligations. In July 2006, recognising the importance of tax practitioners in the tax system, especially their strong lodgement role, Lodgement Compliance was expanded to also incorporate responsibility for the relationship with tax practitioners, with the newly formed line called Tax Practitioner And Lodgement Strategy (TPALS).
4.8 The creation of TPALS was an important step as it created a strategic lodgement compliance leadership responsibility for the whole of the Tax Office for the first time since the Tax Office organised itself around client market segments. This move provided the Tax Office with a business line resourced to:
- manage lodgement risk and policy (including penalties relating to lodgement obligations);
- broaden strategies beyond the 'tax level' approach to focus on those taxpayers that either persistently or deliberately fail to meet, or only partially meet their lodgement obligations; and
- focus on ensuring lodgement compliance among taxpayers whose high profile or profession would encourage and maintain 'voluntary' compliance among other taxpayers.
4.9 Responsibility for the operational functions that support lodgement, such as the 'front-end' lodgement enforcement activities (for example, the issuing of bulk RMS reminder letters29 and demand letters to taxpayers identified by TPALS through their risk assessment processes) was assigned to the Debt business line within the Operations sub-plan.
4.10 The above mentioned three areas continue to be a focus for TPALS as outlined in its business line Delivery Plan for 2007-08 which states that 'business priorities' include:
- contributing to and co-managing the strategic compliance risks, as well as our specific leadership in ensuring improvements in lodgement behaviour; and
- refining risk identification and assessment processes to improve case selection through the ongoing use of analytics' 30
4.11 Since the inception of the Lodgement Compliance business line in 2005, the Tax Office has continually modified and developed its lodgement risk framework into a multi-dimensional model that selects cases based on an assessment of one or more of the following risks:
- The risk to revenue which is based on an estimate of a taxpayer's potential liability for an outstanding lodgement obligation (the 'tax level' approach).
- The risk to community confidence which is based on groups of taxpayers or entities that the community expect the Tax Office to ensure meet their lodgement obligations (for example, clients with child support responsibilities, high-wealth individuals), or to support other compliance programs (for example, Project Wickenby31).
- The risk to the integrity of the tax system which is based on those groups of taxpayers or entities that could potentially damage the reputation of the Tax Office as a taxation administrator if they were not pursued.
4.12 With the introduction of TPALS, the Tax Office also established a Risk and Intelligence Unit to oversee the development and operation of effective intelligence and risk processes.
4.13 Compliance risk assessment relies on combining multiple pieces of disparate information and interpreting them to form intelligence.32 Data matching is a key strategy used by the Tax Office to achieve this through identifying those individuals and businesses that have generated income at levels during a particular financial year that would warrant lodgement of a tax return, but who have failed to do so. Underlying this approach is the matching of data held on Tax Office systems33 to externally sourced data:
- acquired from external parties in accordance with a legislative requirement such as payment summary statement data annually supplied by employers under section 16-153 of Schedule 1 to the TAA 1953 (during 2007-08, the Tax Office received around 78 million records via a legislative requirement);34
- acquired from government agencies under memoranda of understanding (such as data regarding significant or suspect cash transactions provided by the Australian Transaction Reports and Analysis Centre (AUSTRAC));
- purchased by the Tax Office (that is, commercially available data such as property information acquired through CITEC and RP Data Pty Ltd); and
- requisitioned by the Tax Office under legislative authority on a non-routine basis (for example, data from State and Territory authorities relative to the registration of luxury vehicles and marine vessels).
4.14 As indicated in the following diagram, the Tax Office accesses information on individuals' activities from a wide range of sources. During 2007-08, the Tax Office received around 78 million records containing income details solely from those organisations and government agencies required to do so by law.35
Information flow into the Tax office for the purposes of administering the lodgement of income tax returns
4.15 On receiving the third-party data, the Tax Office compares it with other Tax Office information to confirm the identity of the relevant person or entity. Data which does not contain a TFN or ABN is separated so that the relevant number can be attached by the Tax Office identity matching facility. Where this facility fails to establish with a sufficient level of confidence the identity of the person or entity, Tax Office staff may investigate the relevant transaction or record in order to establish a reliable link.
Usefulness of third-party data
4.16 The Tax Office's ability to use externally sourced data is enhanced when the data includes a unique identifier that is recognisable by Tax Office systems such as a TFN or ABN. This is because the identifier improves the ability of the Tax Office to 'locate' non-lodging taxpayers during the data matching process. The difficulty for the Tax Office is that only certain providers of data are authorised by law to request quotation of a TFN, including:
- financial institutions;
- some Australian Government agencies;
- trustees for superannuation funds;
- payers under the pay-as-you-go system; and
- higher education institutions.
4.17 There are a number of other issues that affect the Tax Office's ability to use third-party data, including:
- delays experienced by the Tax Office in receiving third-party data due to the number of non-electronic formats still used by owners of the information;
- variation in formatting of third-party data obtained from different providers (particularly when dealing with agencies from different states and territories in Australia);
- delays in the referral of data by providers, both with and without a legislative requirement to report; and
- data failing to indicate a requirement to lodge or the presence of an undeclared taxable transaction, often because the provider of the data originally collected the data for its own purposes. An example is data provided by State land titles offices regarding property transfers which largely reflect taxpayers selling their own homes rather than investment properties (this particular issue also has wider application with capital gains from the disposal of property being listed as a focus in the Tax Office's Compliance Program 2008-09 publication36).
What other data could the Tax Office use?
4.18 During the review, the Inspector-General asked the Tax Office whether there was any other data that would improve the outcomes of its lodgement models. The Tax Office responded as follows37:
The following suggestions for additional data sources for use in lodgement models are provided:
- Yellow Pages Business advertisement details — This data would be most beneficial if it was accompanied by an ABN as it would be an indicator of intent to earn income.
- Road Transport Authority business vehicle purchase and registration data. This data would be used in a similar manner to the existing Luxury Motor Vehicle data project and would be an indicator of business activity.
- Business insurance data — This could be cars, real property or business assets. Again this would be most valuable if associated with an ABN.
- Personal asset insurance policy data. This would cover high value assets that are not registered (for example, artworks, wine collections). It would also provide valuations for assets that some registering bodies do not collect for example, marine craft. This data would be more an indicator of wealth rather than income, and may require further analysis/investigation to be useful in identification of a potential lodgement obligation.
- Income protection insurance data. This data may provide an indication as to the potential level of business income, and also indicate potentially inaccurate income disclosure in lodged income tax returns.
- Memberships of exclusive clubs could be an indication of wealth and possibly level of income.
- Use of real property data. A pilot program reviewing property data from State Revenue and Land Titles Offices is being undertaken by the Micro Enterprises and Individuals business line. This is a compliance program designed to ensure that taxpayers correctly return income (capital gains) on the disposal of real estate. The results of this program and the suitability of the data reported will be monitored and analysed as a further indicator of income and hence the existence of a lodgement obligation.
Predictive risk modelling
4.19 With the establishment of TPALS, the Tax Office realised that to target non-lodgers more effectively and to consequently apply its limited resources more efficiently, it needed a predictive model that:
- considered risk attributes not only in respect of non-lodgement (such as age and the tax level of the taxpayer), but also the taxpayer's compliance behaviour, including their lodgement and collection history and current status, profile in terms of the taxpayer including their financial status and other special circumstances;
- was more intuitive by incorporating expert business rules38 and relational formulas;39 and
- automated the decision making process.
4.20 Predictive risk modelling techniques are increasingly being adopted as a best practice to better differentiate taxpayers based on their individual circumstances, behaviours and risk profiles and to determine the most appropriate treatment strategies.40
4.21 The Tax Office has developed analytic models41 that 'select' non-lodgers with high compliance-risk. The Lodgement Risk to Revenue Model, predicts the amount of revenue that would have been posted to a taxpayer's account had they lodged the outstanding income tax return. This model, which was delivered in January 2006, involves a two-stage process that draws on Tax Office and external data to:
- establish the probability of a credit, debit or nil assessment; and
- estimate the magnitude of the assessment.
4.22 The Tax Office uses the model in two different ways for lodgement compliance purposes, either as:
- the primary selector of cases for lodgement compliance action; or
- the means of prioritising potential cases selected via other methods such as data matching.
4.23 For completeness, the Inspector-General notes that the predictive model is not the only case selector that supports Tax Office lodgement compliance strategies:
- Lodgement obligations identified for the large market segment — due to community expectations, as well as the potential revenue implications associated with these entities, their lodgement obligations are closely monitored and follow-up action is taken in all cases where appropriate returns are not received.
- Similarly, the lodgement obligations for entities in the 'top end' of the Small to Medium Enterprises (SME) market (that is, with an annual turnover of between $100 million and $250 million) are also closely monitored and actioned where appropriate returns are not received.
- Micro enterprises (that is, businesses with turnover of less than $2 million) identified as being in high-profile professions that influence the wider community (for example, the legal profession and tax practitioners).
- Individuals expected to have high-level tax liabilities (for example, 'tax level 6' taxpayers with tax payable in excess of $20,000) or in high-profile professions that influence the wider community (for example, the legal profession and sports people).
- Individuals with 'conspicuous wealth', identified through matching information obtained from relevant external databases regarding asset acquisitions (for example, luxury cars, aircraft and marine vessels).
- Individuals with child support obligations.
- Referrals of high-risk lodgement cases from other business lines, including the cash economy and serious non-compliance projects.
4.24 The Tax Office is developing two other models to assist with lodgement compliance activities which are not yet in production:
- the Propensity To Lodge Model, which aims to predict how late a return is likely to be lodged, based on a taxpayer's history, and how late returns from taxpayers with similar attributes were lodged;42
- the Income Tax Return Not Required Model, which aims to predict the likelihood that a taxpayer is not required to lodge an income tax return, at a point in time. This model is currently being tested.
IGT observations on the risk assessment process
4.25 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. The organisational and system changes made since 2005 in particular demonstrate that the Tax Office has taken steps in recent years to strengthen its focus on managing lodgement compliance and the identification of risk. The creation of the TPALS business line to manage lodgement risk and policy and the establishment of the Risk and Intelligence Unit to oversee the development and operation of effective intelligence and risk processes are particularly important.
4.26 These changes have provided the focus which has enabled the Tax Office to broaden its approach with the addition of new methodologies, including predictive risk modelling. The Tax Office's Change Program provides an opportunity to build on that progress and to further explore and test ways to combine internal and external data to help identify lodgement obligations.
4.27 The Tax Office is gaining a better understanding of the environment taxpayers are operating in, which in turn has led to more sophisticated identification of risk. Risk assessment and compliance levels are close to the level that the community expects.43
4.28 The Tax Office highlighted to the Inspector-General the problem of the currency of some of the data it holds and the useability of the third-party data it accesses. Addressing these matters would improve the identification of non-lodgers and support other compliance strategies. 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.44 The Inspector-General notes that there is no compulsion for a taxpayer to provide a TFN or ABN in any of their dealings with the Tax Office and that there are legislative provisions which potentially affect any extension of the Tax Office's current practices in this area.45 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.
Strategies and actions to address priority risks
4.29 The Tax Office's Business Model, as outlined in its Strategic Statement 2006-10 sets out how it will conduct its business. Consistent with this Business Model, the Tax Office's corporate lodgement strategies use a balance of educational and compliance activities to improve taxpayers' understanding of lodgement obligations, and to manage taxpayers who do not meet their obligations. The Tax Office divides the work as follows:
4.30 While TPALS takes the lead on strategy and risk assessment, lodgement compliance action is undertaken across various business lines in the Tax Office. Client Account Services are responsible for the registration and processing of income tax returns. The Debt business line is responsible for 'front-end' lodgement compliance activities, including the automated bulk issue of reminder to lodge letters and the resulting inbound calls and correspondence. The Client Contact business line is responsible for follow-up phone calls. The compliance business lines (for example, Large Business and International) are responsible for field intervention activities, identification of high-risk taxpayers through joint projects and undertaking high level activities for fraud cases.
Direct contact by letter or phone
4.31 The administration of campaigns to directly contact taxpayers is a significant investment on behalf of the Tax Office and includes the participation of not only Operations (mainly the Debt business line) but also TPALS. Table 4.3 provides a break-up of the numbers of letters and notices sent to all taxpayers during the 2006-07 financial year as well as the respective numbers of returns finalised and liabilities raised. 46 A further break-up concentrating on the individual taxpayer segment is also provided in the table.
4.32 The Tax Office continues to seek ways to improve its communication with taxpayers in respect of lodgement obligations. For example, it uses SMS text messaging to remind self-preparers of key lodgement due dates.47
4.33 If a taxpayer does not respond positively to the initial contact, the Commissioner may issue a final notice to lodge. Included in the final notice are details about the possibility of penalties or prosecution action.
4.34 The review has not established how many of these letters are sent to taxpayers directly and how many are sent through tax agents. It is clear that tax agents are impacted by this strategy in terms of workloads and therefore it is important that the Tax Office monitors the situation. The Tax Office has developed technology to support electronic lodgement by tax agents and to support their practice management by providing a portal to Tax Office systems. The portal has been a particularly welcomed development. However, tax agents continue to be frustrated with the system's inability to effectively remove old clients from tax agent lodgement lists. The Inspector-General continues to receive representations from tax agents on this issue. These include concerns that, despite having accessed the portal to remove the names of former clients, agents continue to receive letters from the Tax Office regarding these former clients (including requests for the lodgement of outstanding returns). In this regard, ATO systems do not appear to be consistently recording this data nationally.
4.35 The Tax Office is attempting to address this by conducting a project whereby letters containing a list of current clients are sent to agents for their review. In the letter, the Tax Office requests that the agent advises the name of any taxpayer that is not a client and for approval that such taxpayers be removed from the agent's client list. The Tax Office having sent over 10,000 letters in June 2008 to agents during phase 3 of this project, has advised that the project will be ongoing.48 The Inspector-General intends to continue monitoring the extent to which tax agent concerns in this area are addressed.
TPALS projects to secure lodgement
4.36 A series of projects are also undertaken to address certain strategic high risk taxpayers. Project-based work is a favoured approach of the Tax Office. Currently, there are 24 projects working towards improving lodgement compliance.
High profile profession project
4.37 The Tax Office reviews and follows up the lodgement compliance of members of the legal profession, politicians, tax agents, professional sports people and a sampling of others with recognised media or business profiles.
The Child Support Agency project
4.38 The Child Support Agency (CSA) has entered into a memorandum of understanding with the Tax Office to exchange information as part of specific compliance action aimed at ensuring that taxpayers satisfy their obligations (including the lodgement of income tax returns). Each year around 125,000 taxpayers are referred by CSA for manual follow-up action.49
4.39 The Tax Office has advised IGT that in 2007-08 the Tax Office has finalised50 126,267 outstanding income tax returns from 68,816 taxpayers (55 per cent). These returns identified $62.5 million in refunds, from which $19.7 million has been transferred to the Child Support Agency. In addition, there have been 518 convictions of taxpayers failing to comply with their requirement to lodge.51
4.40 The Tax Office continues to receive and use information about taxpayers and their lodgement behaviour as part of Project Wickenby — a joint taskforce of Australian Government agencies investigating revenue fraud.
1. Imposition of failure to lodge penalty
4.41 Failure to lodge (FTL) penalty is an administrative penalty which applies if a taxpayer is required to lodge a return with the Tax Office by a particular day but fails to do so. Liability to FTL penalty is provided by subsection 286-75(1) in Division 286 of Schedule 1 to the TAA 1953. There are a number of reasons behind the establishment of the FTL penalty regime including:
- that a taxpayer who does not provide information to the Commissioner on time may gain a significant benefit or advantage over taxpayers who comply with their obligations;
- that non-lodgement of returns affects the efficient operation of the tax system; and
- that a loss of community confidence in the tax system may result from an unsupported argument being promoted as a reason for not lodging a document or documents.
4.42 Application of FTL penalty is based solely upon the period of time that the document is outstanding. It is not dependent upon a related unpaid amount or upon the Tax Office receiving the return. The penalty applies whether or not the document is ultimately lodged.
4.43 The amount of FTL penalty is calculated in accordance with section 286-80 of Schedule 1 to the TAA 1953.
4.44 The first step in the calculation of FTL penalty is to determine the base penalty amount (BPA) which consists of one penalty unit52 for each 28 days (or part thereof) that the return is overdue. The maximum amount of the base penalty is five penalty units which may therefore be applied if the return is not lodged within 113 days of the lodgement due date.
4.45 This BPA may then be multiplied by two or five depending on the size of the entity:
- It is multiplied by two where the taxpayer:
- earns more than $1 million but less than $20 million assessable income (for the income year in which the return is required);
- is a 'medium withholder;'53 or
- has a current GST turnover of more than $1 million but less than $20 million (worked out at the time in the month in which the return was required to be given).
- It is multiplied by five where the taxpayer:
- earns $20 million or more assessable income (for the income year in which the return is required);
- is a 'large withholder'54; or
- has a current GST turnover of $20 million or more (worked out at the time in the month in which the return was required to be given).
4.46 The maximum possible FTL penalty for a taxpayer with assessable income of $20 million or more is therefore $2,750 per document.
FTL penalty imposition and remission statistics — income tax
4.47 The following table55 provides details of FTL penalty impositions for the 2004-05 to 2007-08 financial years.
|Income tax returns||2004 — 05||2005 — 06||2006 — 07||2007 — 08|
|Not lodged — Manual FTL imposed||5,678||3,510,650||5,232||3,332,670||7,210||4,681,710||10,120||6,304,650|
|Not lodged — Bulk FTL imposed1||0||0||0||0||263||235,290||52,002||26,926,680|
|Late lodgement — Auto FTL imposed||53,471||23,198,230||55,106||25,013,120||57,588||26,591,070||59,316||28,551,820|
|FTL warnings issued||241,079||N/A||258,275||N/A||271,802||N/A||306,177||N/A|
Source - ATO Minutes dated 4 June 2008 and 4 December 2008 [includes all classes of taxpayers].
FTL penalty waived where prosecution is commenced
4.48 Section 8ZE of the 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. We note that the background to the introduction of section 8ZE was to ensure that taxpayers were not exposed to both an administrative penalty and a prosecution for the same act or omission.
4.49 The effect of section 8ZE has been raised within the tax community and in particular the obligatory waiving of failure to lodge penalty once a summons has issued. For example, Mr Robert Williams in his paper Prosecuting non-lodgers: to persuade or punish?56 said:
In the current situation, taxpayers who receive a summons and then lodge are still prosecuted because they will otherwise escape any financial penalty. Taxpayers who lodge their returns should be de-escalated down the [compliance model] pyramid rather than up to prosecution. Prosecuting when a taxpayer is cooperating is contrary to the responsive philosophy of the compliance model.
4.50 The report then went on to suggest that this needed attention by legislative amendment. The Inspector-General notes this discussion and may consider the matter further if the application of section 8ZE is leading to unintended or unfair consequences for taxpayers.
2. Default assessments
4.51 If there is default in furnishing a return or the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income, the Commissioner may make a 'default assessment' under section 167 of the ITAA 1936 of the amount upon which in his judgement income tax ought to be levied.
4.52 The Commissioner may make a default assessment upon any basis that is reasonable, taking into account the particular circumstances. This includes referring to information accessed from external sources or from an extrapolation of figures included in previous years' returns.57
4.53 A taxpayer is entitled to object to a default assessment and in turn appeal a decision regarding the objection. However, the onus in both circumstances is with the taxpayer to show that the assessment is excessive.
4.54 Overall, default assessments have been used sparingly in the past, and their effectiveness as a treatment strategy for non-lodgers is currently being tested by the Tax Office via a pilot project. 58 However, there are situations where a default assessment is considered appropriate, such as where there is a risk that the taxpayer in question may remove themselves or their assets from Australia.
3. Prosecution action
4.55 A person commits a criminal offence under paragraph 8C(1)(a) of the TAA 1953 if they fail to lodge an outstanding return as required by the Commissioner. To secure lodgement, the Commissioner has the option to take prosecution action which can ultimately lead to the courts, upon conviction, making an order pursuant to section 8G of the TAA 1953 that the taxpayer lodge the relevant return(s) with the Tax Office by a particular date. The penalty for an individual that fails to comply with such an order is a fine not exceeding $5,500 and/ or imprisonment for a period not exceeding 12 months.59
4.56 Prosecution is the severest sanction in the end-to-end process of securing lodgement of outstanding income tax returns. Where a taxpayer has failed to voluntarily comply, the Tax Office's lodgement teams apply one or a number of treatments to encourage compliance. However, a matter will not proceed to prosecution where an administrative penalty itself, or some other form of administrative response, will result in the taxpayer lodging the outstanding return.60
4.57 If a taxpayer fails to comply with a final notice, a pre-prosecution call is usually made by the referring area of the Tax Office.61 If the taxpayer cannot be contacted by telephone, the Tax Office sends a pre-prosecution letter to either the taxpayer or their representative. However, pre-prosecution contact is not always instituted following a failure to comply with a final notice.
4.58 In accordance with the ATO Prosecution Policy, where lodgement has occurred before prosecution action is instituted, generally prosecution action will not commence. If lodgement occurs after the summons has been issued, the matter is considered to be in the hands of the court and the prosecution process continues.
4.59 Under the Director of Public Prosecutions Act 1983, the Commonwealth Director of Public Prosecutions (CDPP) has control of all Commonwealth prosecutions. However, due to the high number and nature of non-lodgement of income tax return matters, the CDPP has agreed that the Tax Office's In House Prosecution unit (IHP) can initiate and conduct prosecutions,62 subject to certain restrictions, including that certain types of cases are sent to the CDPP for the conduct of the prosecution (including defended matters and matters involving high-profile defendants and 'restricted access' taxpayers).
4.60 The following table represents the number of individual taxpayers prosecuted for failing to lodge an income tax return.
|2004 — 05||659|
|2005 — 06||1824|
|2006 — 07||1961|
|2007 — 08||1999|
Sources: Conference between IGT and the Director of Government Assurance and Liaison for TPALS on 11 December 2008; ATO Minute 'Lodgement Prosecutions - Income Tax Returns' - 12 March 2008. [includes all classes of taxpayers except those referred to the CDPP].
The effectiveness of prosecution
4.61 The effectiveness of prosecution as an approach for obtaining lodgement of a tax return was also considered in the above mentioned paper by Mr Robert Williams:
... prosecutions were only moderately successful in obtaining lodgement and that lodgement rates (for prosecuted taxpayers) reduced significantly in subsequent years. Nevertheless, these lodgement rates were still three to four times greater than those of taxpayers who were selected for prosecution but did not receive the summons issued to them.
4.62 The study also went on to note that '...there is not a 'universal belief that failing to lodge a tax return is a serious offence' and that one ATO officer interviewed said that they 'had to work hard to convince taxpayers that the offence they had committed was serious'. The researcher put forward the option of more communication to the public about the seriousness of non-lodgement. Such an increase in the level of communication may go hand in hand with the need for more communication generally about lodgement obligations, as indicated by the results of the independent survey outlined in Chapter 5.
IGT observations on 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
- Failure 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 of assessable income.
- 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 lodgers.
- 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 1.2 to 1.5 million individual non-lodgers, this seems in line with Government and Tax Office policy to pursue prosecution only in appropriate circumstances and with observations about the effectiveness of prosecutions.
- Section 8ZE of the 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 failure to lodge 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 the results achieved
4.63 A key part of this review was to determine the resources allocated to lodgement compliance by the Tax Office and what results were being achieved with them.
4.64 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). At the micro level, resources are split across the Tax Office's five major sub-plans of Operations, Compliance, Law, People and Place and Information Technology. Another perspective on resourcing is also required at government level by major outputs specified in the Portfolio Budget Statements to Parliament.
4.65 The process of resourcing lodgement compliance work within the Tax Office is further complicated because it falls across both the Compliance and Operations sub-plans (and potentially others), and risk assessment is an input from all relevant compliance business issues.
4.66 Separating out the resources allocated to individual lodgement compliance activity is even more problematic. A Lodgement Steering Committee is charged with ensuring that there is a coordinated approach to managing compliance with lodgement obligations across products and markets. This committee meets quarterly, but does not seem to have resourcing responsibility or the benefit of a resource plan.
4.67 In response to the Inspector-General's request for an estimate of the percentage of overall Tax Office budget invested in the administrating the lodgement system, the Tax Office stated:
ATO Finance has since advised that the Tax Office costing framework does not provide the detailed data that is required to answer this request. 63
Accordingly, we are not in a position to provide an estimate of the overall costs (at the Tax Office budget level) as requested. 64
4.68 The current position is that neither the Inspector-General nor the Tax Office has been able to determine the level of resourcing allocated to lodgement compliance across the whole ATO. The IGT notes that this is the result of the approach taken to resourcing by the Tax Office and the complexity of the Tax Office's process and not the result of any reluctance by the ATO to provide information. Nevertheless, 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
4.69 The Tax Office maintains a constant watch on lodgement compliance. Its dominant focus is on timely lodgement. As part of this approach, it also monitors and reports internally to executive levels on the work output aimed at non-lodgers (letters and notices) and the potential results of that work in terms of net liabilities raised (debit assessments minus refund assessments).
4.70 This review has identified some issues for the Tax Office to focus on in its approaches to reporting and monitoring lodgement compliance and the results of its work.
Reporting low-risk non-lodgers as a separate category
4.71 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, returns considered low risk at one point in time can be elevated for attention if risks and resources subsequently change.
The risk that results are double counted across Operations and TPALS
4.72 Throughout a year the Operations sub-plan, mainly through the Debt business line, issues a large number of standard letters to potential non-lodgers. At the same time, TPALS undertakes more targeted contact with selected high-risk taxpayers by using unique or tailored letters and contact. TPALS may also initiate the sending of standard letters to groups of taxpayers using the same standard letter system (the Receivables Management System — RMS) as used by Operations.
4.73 Both TPALS and Operations record and report their results in terms of returns 'finalised' (meaning either lodged or identified as not required) for the taxpayers they contact. Operations report results for all contacts made through their RMS systems. TPALS report results similarly.
4.74 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 Office's key compliance Heartbeat report to its Compliance Executive Group. 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.65
4.75 This issue can be overcome. In response to an IGT request for the review, the Tax Office's Risk and Intelligence Group and the Debt Reporting Team ran a data query that provides a clearer picture of the distinct work done and potential results achieved by the Operations and TPALS areas. These results are discussed below and shown at Table 4.3. The IGT-initiated Table 4.3 can also be compared to the Operations Lodgement Actions Report of its RMS actions (Table 4.4). This comparison may indicate the potential double counting of results. It shows that Operations, excluding TPALS (in Table 4.3), claims net liabilities of some $206 million, whereas the report of results of RMS actions (in Table 4.4) indicates results of almost $300 million in net liabilities.
Tables 4.3, 4.4 and 4.5 below show the results of Operations and TPALS lodgement compliance activities. These results are discussed after the Tables.
|Business line||Operations lodgement compliance 2006-07 results (a)||TPALS lodgement compliance 2006-07 results (b)||Tax Office lodgement compliance 2006-07 results (a+b)|
|Number of taxpayers||Number of income tax returns finalised||Reportable net liabilities raised||Number of taxpayers||Number of income tax returns finalised||Reportable net liabilities raised||Number of taxpayers||Volume of letters issued||Number of income tax returns finalised||Reportable net liabilities raised|
|Small to medium enterprise||10,375||11,187||$80,551,444||3,635||5,253||$88,915,826||14,010||43,389||16,440||$169,467,270|
|Not For Profit||54||70||-$232,261||80||265||-$31||134||89||35||-$232,292|
Provided by the Tax Office to IGT on 5 June 2008. 'Net liabilities' are the net result of refund and debit assessments and do not include FTL penalty or GIC
|RMS actions||Number of income tax returns||$ Net liabilities|
|Automatic system generated letter/s as last action prior to finalisation:||277,113||291,927,711|
|Last action — 1st of any system category letter issued prior to finalisation||119,698||186,384,080|
|Last action — 2 of any 2 system category letters issued prior to finalisation||103,802||55,099,917|
|Last action — 3rd of any 3 system category lettendrs issued prior to finalisation||53,613||50,443,713|
|Lodgement arrangement, deferral or suspension||47,165||28,446,213|
|Bars to action||23,207||43,057,563|
|Demand phone call or manual letter issued||14,989||64,923,983|
|Lodgement NFA — Potential Siebel case||1,570,465||153,471,925|
|Action taken/system letter issued — Finalised||68,296||135,982,329|
|No action taken/no system letter issued — Finalised||9,819||17,489,596|
|Action taken/system letter issued — Not Finalised||1,170,562||0|
|No action taken/no system letter issued — Not Finalised||321,788||0|
4.76 As part of running the special query to collate the results in Table 4.4 for IGT, the Tax Office provided the breakdown of net liabilities into total refunds and total debt amounts for TPALS and for Operations (refer below to Table 4.5).
|Total finalised returns and liabilities 2007-08|
|Finalised Returns||Reportable Liabilities raised||Finalised Returns||Reportable Liabilities raised||Finalised Returns||Reportable Liabilities raised|
|IT debit lodged||23,843||$284,460,006.93||82,307||$956,778,408||106,150||$1,241,238,414.93|
|IT credit lodged||50,778||-$164,120,007.53||91,659||-$410,532,866||142,437||-$574,652,873.53|
|IT nils lodged||44,106||10,431||54,537|
|IT total lodged||117,003||$120,339,999.40||184,397||$546,245,542||301,400||$666,585,541.40|
|IT not necessary||1,816||266,109||267,925|
|IT total finalised||118,818||450,506||569,324|
|IT debit lodged||25||$15,849,238.26||162||$99,151,419.00||187||$115,000,657.26|
|IT credit lodged||33||-$22,827,837.07||73||-$73,599,665.00||106||-$96,427,502.07|
|IT nils lodged||115||247||362|
|IT total lodged||173||-$6,978,598.81||482||$25,551,754.00||655||$18,573,155.19|
|IT not necessary||0||1,184||1,184|
|IT total finalised||173||1,666||1,839|
|IT debit lodged||1,477||$125,498,363.90||1,477||$135,565,812.00||2,954||$261,064,175.90|
|IT credit lodged||1,412||-$49,645,089.73||1,412||-$37,833,662.00||2,824||-$87,478,751.73|
|IT nils lodged||4,339||4,339||8,678|
|IT total lodged||7,228||$75,853,274.17||7,228||$97,732,150.00||14,456||$173,585,424.17|
|IT not necessary||91||91||182|
|IT total finalised||7,319||7,319||14,638|
|IT debit lodged||8,217||$77,590,875.09||8,217||$521,388,792||16,434||$598,979,667.09|
|IT credit lodged||11,113||-$33,188,015.68||11,113||-$208,650,573||22,226||-$241,838,588.68|
|IT nils lodged||20,783||20,783||41,566|
|IT total lodged||38,677||$44,402,859.41||38,677||$312,738,219||77,354||$357,141,078.41|
|IT not necessary||1,436||1,436||2,872|
|IT total finalised||40,113||40,113||80,226|
|Government & Not For Profit|
|IT debit lodged||0||$0||23||$48,911||23||$48,911.00|
|IT credit lodged||2||-$42,109.20||12||-$6,325||14||-$48,434.20|
|IT nils lodged||25||11||36|
|IT total lodged||27||-$42,109.20||46||$42,586||73||$476.80|
|IT not necessary||1||85||86|
|IT total finalised||27||131||158|
|IT debit lodged||14,124||$65,521,529.68||18,622||$200,623,474||32,746||$266,145,003.68|
|IT credit lodged||38,218||-$58,416,955.85||30,381||-$90,442,641||68,599||-$148,859,596.85|
|IT nils lodged||18,844||1,160||20,004|
|IT total lodged||70,898||$7,104,573.83||50,163||$110,180,833||121,061||$117,285,406.83|
|IT not necessary||288||48,164||48,452|
|IT total finalised||71,186||98,327||169,513|
4.77 As indicated in the tables above, the Tax Office internal reports focus mainly on the number of 'finalised returns' achieved by lodgement compliance activities such as reminder letters and final notices and prosecutions. The term 'finalised returns' embraces a number of important sub-categories of finalisation such as lodgement resulting in a refund, debit or nil assessment and lodgement not necessary. 'Net liabilities raised' is the net result of refund and debit assessments.
4.78 The sub-categories of finalised returns and the tables overall show that:
- Across all taxpayer types, about 17 per cent of Operations compliance activities result in a 'finalised' return.
- Looking at the results from lodgement compliance activities across all taxpayer types, Table 4.3 indicates that:
- The bulk of net liabilities raised comes from actions to achieve lodgements of outstanding returns from small to medium enterprises (SMEs) and micro business.
- Actions focussed on individuals achieve about 11 per cent of total net liabilities.
- For individual non-lodgers:
- The Tax Office takes direct action on about 8 per cent (100,000) of the total estimated 1.2 million non-lodgers.
- This action involves approximately 0.5 million contacts each year.
- For 2006-07, Operations and TPALS actions resulted in 156,000 returns being 'finalised' from 95,000 taxpayers.
- For 2007-08, the majority of finalised returns (56 per cent) resulted in refunds totalling $148 million, and 19 per cent resulted in debits totalling $266 million. Net liabilities raised totalled $117 million.
- The average amount of a debit assessment was $8128, the average refund was $2170 and the average net liability was $969.
IGT observations on results and reporting
- The Inspector-General considers that these results reinforce the judgement that the risks to revenue and to the integrity of the system from individual non-lodgements are low, especially relative to SME and micro enterprises.
- Although the level of individual non-lodgement is marginally higher than the community would prefer, these results and risk appraisal do not suggest that the ATO should invest significantly more resources in actions focussed on individuals.
- Improvements to third-party data sources and quality, which are also relevant to other categories of non-lodger and to broader compliance strategies, should be preferred.
Attributing results to compliance action
4.79 There is an inherent difficulty in reliably attributing finalisation of an outstanding return to a Tax Office compliance action.
4.80 Both Operations and TPALS record results for any return that is finalised at any time after they have taken any compliance 'action'. Both these areas may take action within a short period of a return being outstanding. By the same token, a tardy taxpayer may by coincidence lodge at about the same time as the Tax Office takes action.
4.81 Such returns might be deemed 'self finalising'. The Tax Office could consider incorporating with its results reporting a rule that could reasonably allow for self finalising outstanding returns. For example, where a return becomes finalised within one week of the first compliance action taken by the ATO, it could be excluded from reported results.
4.82 Reporting of lodgement compliance results would be more meaningful, useful and transparent if current reports were broken down in the following ways:
- separately reporting TPALS and Operations results and work output; and
- separately reporting the major categories of how a return is 'finalised' either by lodgement or identified as not required.
4.83 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 200866 of methodology designed to measure the effectiveness of the ATO's compliance interventions — with a focus on outcomes rather than activities.
4.84 The IGT notes that a periodic survey similar to that undertaken as part of the review which focuses on relevant outcomes, including a sustained improvement in the level of non-lodgement in the community, would achieve that end.
26 Tax Office publication Compliance program 2007-08 (at page 6).
27 ATO Minute 'Non-lodgement of Income Tax Returns November 2007 - Briefing for the Inspector-General of Taxation' (Tax Office report dated 15 November 2007).
28 Answers to questions on notice - Budget Estimates hearing 30 May 2006 (Question BET-144: Tax Returns).
29 RMS is the Receivables Management System which is operated by the Debt business line.
30 Tax Practitioner and Lodgement Strategy 2007-08 Line Delivery Plan - at pages 3 and 4.
31 Project Wickenby is a multi-agency taskforce set up in 2004, to investigate internationally promoted tax arrangements that allegedly involve tax avoidance or evasion, and in some cases large-scale money-laundering.
32 'Compliance Risk Management: Managing and Improving Tax Compliance' - Forum on Tax Administration Compliance Sub-group (OECD) October 2004 - at page 15.
33 Including data captured from previous tax returns, feedback obtained from audit and other programs and historical lodgement compliance data.
34 Tax Office Compliance Program 2008-09 (at page 14).
36 Compliance Program 2008-09 - at page 12.
37 'Additional sources of data for lodgement models' - Briefing for the Inspector-General of Taxation (Tax Office report dated 12 September 2008).
38 Expert business rules define the cases to be sent to each type of treatment strategy. These rules are loaded into the decision management system as a series of tables. As each case is assigned to a treatment, the data warehouse is updated with details of that decision.
39 Relational formulas are based on the relationships between risk scores and expert business rules and predict the likelihood and consequences of applying a particular treatment strategy. Relational formulas cover mathematical and non-mathematical formulas, and help inform whether to apply a particular treatment strategy.
40 The Report on the Survey of Country Practices in Debt Collection and Overdue Returns Enforcement, Forum on Tax Administration, Centre for Tax Policy and Administration, OECD (March 2006).
41 Analytics technologies enable the efficient analysis of large quantities of business data when undertaking client profiling.
42 Ibid at page 5.
43 See chapter 5 for an outline of the results arising from the independent community survey conducted by Colmar Brunton.
44 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).
45 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.
46 The 'front-end' lodgement enforcement activities such as the issuing of bulk reminder letters are handled by the Debt business line.
47 This practice was adopted by the ATO following a pilot conducted in 2006 which saw approximately 79 per cent of the target population of 19,800 improving in compliance behaviour [source -'Non-lodgement of Income Tax Returns November 2007' - Briefing for the Inspector-General of Taxation, 14 November 2007 (at page 9)]. In 2007-8 an SMS lodgement reminder message was sent to 200,788 taxpayers who had lodged by e-tax or paper in 2006 but had not yet lodged by October 2007 [source:Tax Office Annual Report 2007-08 at page 44].
48 Lodgement Working Group minutes (13 June 2008).
49 Ibid (at page 9).
50 Finalised cases include not only lodgement but also cases where no return was necessary.
51 TPALS Focus Area HOTSA Report (September 2008).
52 A 'penalty unit' is $110 under section 4AA of the Crimes Act 1914.
53 The amounts withheld by the entity during a financial year ending before the month in which the return was required are between $25,000 and $1 million.
54 The amounts withheld by the entity during a financial year ending at least two months before the month in which the return was required exceeded $1 million.
55 'Overview of failure to lodge on time penalty - Supplementary request for information dated 27 May 2008' (Tax Office report provided to IGT on 5 June 2008).
56 Published as a working paper for the Centre of Tax System Integrity (CTSI Working Paper No 12, July 2001). The Centre for Tax System Integrity is a specialised research unit set up as a partnership between the Australian National University and the Tax Office.
57 ATO Receivables Policy - ATO Practice Statement PS LA 2006/11 at 57.4.4.
58 'Non-lodgement of Income Tax Returns November 2007' - Briefing for the Inspector-General of Taxation (Tax Office report dated 14 November 2007 - at page 13).
59 Section 8H of the TAA 1953.
60 ATO Receivables Policy.
61 Non-lodgement cases are referred for prosecution by a number of areas in the Tax Office, predominantly Tax Practitioner and Lodgement Strategy (TPALS) but also other business lines such as Serious Non-Compliance (SNC), Goods and Services Tax (GST) and Superannuation.
62 Note that Part 4 of the memorandum of understanding between the CDPP and the ATO outlines the various offences (apart from non-lodgement) which the CDPP has allowed IHP to prosecute.
63 Tax Office minutes of meeting with the Inspector-General on 13 March 2008.
65 Conference with Deputy Commissioner, Lodgement (Australian Taxation Office) 13 February 2009.
66 Measuring Compliance Effectiveness - Our Methodology: Foreword - Commissioner of Taxation (August 2008).