Background

3.1 The review examined the Tax Office's ability to identify and deal with major, complex issues within reasonable timeframes in respect to arrangements involving the payment of living-away-from-home allowances to foreign nationals, including working-holiday visitors or 'backpackers'.

3.2 The review sought to assess the following themes in relation to the Tax Office's ability to identify and deal with major, complex issues:

  • The timely identification of issues.
  • The timely resolution of issues including a treatment attitude, approach and processes are objective, fair and transparent.
  • The timely communication of issues to taxpayers.
  • The provision of timely and objective guidance to the community including an appropriate responsiveness to providing certainty on technical and administrative issues at the earliest point in time as possible.

Timely identification of technical and compliance issues

The timeframes to identify the issue

Stakeholder concerns

3.3 The Institute of Chartered Accountants in Australia (ICAA) submitted that the salary sacrificing LAFHAs is not a new issue and has been a relatively standard practice since FBT was first introduced in 1986. In addition, the practice of salary sacrificing LAFHAs in the labour hire industry is also not new and has also been in existence for many years.

3.4 The ICAA submitted that it appeared that the Tax Office initially expressed some interest in this particular topic in late 1998 and that arguably therefore, it may have taken the Tax Office 12 years to 'identify the issue'.

3.5 The ICAA indicated that it was their understanding that the issue has now been clarified, and as it was first identified in 1998, it has taken seven years for the matter to be concluded.

Review Findings and Conclusions

3.6 An examination of the audit case files confirmed that the Tax Office initiated its review activity in August 1999 with the establishment of an audit project team. This was as a result of the risks identified in a project plan prepared by the Small Business line in April 1999. The Inspector-General also notes the earlier concerns expressed by the Tax Office, going back to the proposed 1995 amendments, that tax officers, employers and their professional advisers were facing numerous challenges when interpreting the LAFHA provisions.

3.7 The Inspector-General found no evidence that the Tax Office allowed significant periods of time to elapse before the issue was seen to have accumulated enough potential revenue leakage to initiate compliance action.

3.8 From early on in the project the Tax Office sought to identify the relevant technical and compliance issues. For example, it adopted a project plan which set out the key objectives for the project and the issues for resolution. There was also the early involvement of the Tax Counsel Network and the FBT Specialist Cell with the aim of developing the Tax Office view on the key technical issues. There was an ongoing involvement of various technical areas within the Tax Office throughout the project providing technical input to the project team. The project team, together with the Tax Counsel Network, and consistent with Tax Office procedures, also sought to refer a number of technical issues, including the application of the general anti-avoidance provisions, to the Part IVA Panel and the Public Rulings Panel.

Timely resolution of technical and compliance issues

The timeframes to deal with the issue

The nature and cause of those timeframes, and if they were reasonable in the circumstances

Stakeholder concerns

3.9 The ICAA was of the view that the question of salary sacrificing LAFHA is not a complex one and that seven years is not a reasonable timeframe within which to deal with the matter. It submitted that whilst the Tax Office needs to satisfy itself that the positions that have been taken within the industry are reasonable, the matter could have been concluded in a much shorter time frame. The ICAA comments that the dominant reasons for the delay in concluding the matter revolve around the Tax Office's apparent unwillingness to act quickly where the correct interpretation of the law gives rise to a favourable position for taxpayers.

Review Findings and Conclusions

3.10 In 1998, following media reports of alleged misuse of LAFHAs by a labour hire organisation, the Tax Office commenced investigations into these arrangements. Of particular concern to the Tax Office was the taxation treatment of LAFHAs paid to foreign nationals working in Australia. In the course of the investigations a number of technical issues, including the application of Part IVA, were considered by the Tax Office and a number of proposed taxation determinations and a taxation ruling were considered by the Rulings Panel which led to the release of Draft Taxation Determination TD 2000/D5. The Tax Office also publicly released Taxpayer Alert TA 2002/7. The Tax Office only issued two amended assessments arising from these investigations.

3.11 In late 2005, after ongoing discussions with industry members and their representatives the Tax Office reached an agreed outcome including the withdrawal of Taxpayer Alert TA 2002/7 and a return to the view expressed in Miscellaneous Taxation Ruling MT 2030.

3.12 To date, the Tax Office has discontinued retrospective amendment action and is seeking to develop self-regulatory guidelines with particular industry members.

3.13 The Tax Office has acknowledged that it took far too long to resolve the technical and compliance issues arising from this project. The Inspector-General found that the resolution of the technical issues and the establishment of a corporate technical view were on the critical path of developing an effective mitigation strategy. Given this, the Inspector-General believes that the time frames for resolving the technical and compliance issues arising from this project were excessive and not reasonable in the circumstances. The Inspector-General believes that the following factors contributed to the excessive timeframes in resolving the technical and compliance issues:

  • An inability to conclude in a timely manner a corporate position on how the law should apply.
  • Prolonged internal differences of opinion on the legal position and compliance strategies, sometimes at very senior levels.
  • Objective interpretation of the law clouded by attempts to deliver particular enforcement strategies — for example, there appeared to be a great reluctance by the Tax Office to acknowledge the strengths of the taxpayers technical position due to the underlying belief that foreign nationals on working-holiday maker visas should not be entitled to a LAFHA.
  • Lengthy, delaying diversions to consider the potential application of Part IVA as a silver bullet compliance strategy. This process was eventually abandoned when it was realised that the primary tax laws (income tax and FBT) provided an adequate framework for compliance (provided an interpretation could be arrived at).
  • On again-off again test case strategies that were eventually all abandoned (at the cost of more timely and objective resolution).
  • Plans to pursue one-size-fits-all, anti-avoidance enforcement action against a large number of working holiday visa employees based on a view of the law that the Tax Office subsequently withdrew and on very little casework that examined the individual circumstances of those taxpayers receiving LAFHAs.

3.14 The following are examples of how these factors contributed to the excessive timeframes in this project:

Time taken to prepare and release position paper
  • The Tax Office released a draft position paper in September 1999 to the taxpayer entities examined as part of the project. The taxpayers' representatives were critical of the draft position paper and it was subsequently withdrawn in October 1999.
  • The Tax Office released a further position paper in November 2002, where it expressed the view that the amounts said to be LAFHA benefits did not satisfy the criteria in section 30 of the FBTAA and, alternatively, the Commissioner contended that the general anti-avoidance provisions of Part IVA of the ITAA 1936 would apply. Following external criticism of the position paper by the taxpayer entities and their representatives the Tax Office withdrew its position paper in May 2003.
  • Throughout this period a number of persons, both internal tax officers and external taxpayers and their representatives, expressed some concern about the delay in finalising the Tax Office view and the position paper.
Time taken to have issues considered by Part IVA Panel and Public Rulings Panel
  • In October/November 1999 the Tax Counsel Network advised that the argument for Part IVA was not strong enough to take before the Part IVA Panel.
  • In December 2000 the Tax Office received counsel's advice on the application of Part IVA on a number of arrangements. The advice indicated that there was a strong argument for the application of Part IVA in the arrangements set out in the brief to counsel. The Tax Counsel Network decided that Part IVA applied to the factual circumstances and that a submission should be prepared for the Part IVA Panel.
  • The Part IVA issue first went to Part IVA Panel in September 2001, nearly two years after commencement of the project. The Part IVA Panel examined the arrangement set out in the submission and indicated that there was a strong argument for the application of Part IVA and requested the audit project team to put forward a further submission. The taxpayers were not provided with an opportunity to comment on the submission put to the Part IVA Panel.
  • The Part IVA issue went back to the Part IVA Panel in July 2002, nearly one year after the 1st Part IVA Panel meeting. The Part IVA Panel again considered the audit project team's submission that set out a number of factual scenarios for three different categories of arrangements. The Part IVA Panel concluded that Part IVA would apply in two of the arrangements. The Part IVA Panel requested that the audit project team process assessments and Part IVA determinations, complete the rewrite of MT 2030 and draft a Taxpayer Alert directed primarily at the individuals and not the promoter companies. The taxpayers were not provided with an opportunity to comment on the submission put to the Part IVA Panel.
  • In September 2002 the Tax Office released Taxpayer Alert TA 2002/7, which was met with external criticism for the lack of consultation prior to its release and its inaccurate characterisation of the majority of the arrangements. The Taxpayer Alert described employment relationships that involved a labour hire firm, a special purpose company and a foreign national employed in Australia. It also expressed the Tax Office view that these arrangements attempted to re-characterise a substantial amount of the foreign national's Australian sourced salary as a tax free LAFHAs. The Taxpayer Alert outlined the taxation issues that arose from the features of the arrangements including whether the amounts described as LAFHA payments received by the foreign national employee were exempt and the application of the general anti-avoidance provisions of Part IVA.
  • The third Part IVA Panel meeting was held in April 2003. The taxpayers and their representatives were allowed to put forward a submission on the application of Part IVA. The Part IVA Panel concluded that there was no need to apply Part IVA to include amounts in assessable income. The Part IVA Panel also set out a forward resolution strategy noting that although there was some concern with the compliance and administrative burdens of examining each taxpayer on a case by case basis, this was the outcome according to the law.
  • The redraft of MT 2030 was first considered by the Public Rulings Panel in February 2003. It was reconsidered by Public Rulings Panel in May 2003 and again in November 2004.

3.15 The Inspector-General believes that the consideration and application of Part IVA is a serious matter, with potential adverse consequences for taxpayers both in terms of administrative penalties and reputation. The Inspector-General considers that, as demonstrated in this case study, the propensity for the Tax Office to consider the application of Part IVA so as to deliver leveraged approaches to compliance, especially where there is a potentially wide group of taxpayers involved, can contribute to significant delays.

3.16 The Inspector-General notes that the Tax Office has a number of processes and procedures regarding the application of Part IVA, some of which are quite recent, including:

  • A new Practice Statement PS LA 2005/24 that provides instruction and practical guidance to tax officers on the application of Part IVA. Recent changes include the opportunity for a taxpayer (and/or a representative of the taxpayer at the taxpayer's election) to attend a Panel meeting and address the Panel.
  • The referral of the proposal to apply Part IVA to the Tax Counsel Network for consideration and approval.
  • The referral of Part IVA applications to the General Anti-Avoidance Rules Panel.

3.17 The Inspector-General notes the role of the Panel in assisting the Tax Office in its administration of Part IVA by providing independent advice. The Panel does not investigate or find facts, or arbitrate disputed contentions. The Panel provides its advice on the basis of the contentions of fact which have been put forward by tax officers and by the taxpayer.

3.18 The Tax Office's Practice Statement states that a taxpayer invited to attend the Panel meeting will, by a reasonable time prior to the meeting, be informed of the contentions of fact giving rise to the issue referred to the Panel, and of the substance of the Tax Office's proposed approach to the application of Part IVA. The Practice Statement indicates that generally, this advice will be by way of reference to a position paper already provided to the taxpayer or by an updated paper prepared following consideration of a response by the taxpayer to the position paper. However, matters brought to the Panel by tax officers must be supported by a submission signed off by the relevant Tax Counsel Network officer. The submission must set out:

  • the relevant facts;
  • the operation of the relevant tax law, other than general anti-avoidance regime;
  • the operation of any relevant non-tax law;
  • the scheme or arrangement as identified by the Tax Office;
  • the relevant counterfactuals;
  • the tax benefits and the taxpayers as identified by the Tax Office; and
  • the weighing each of the factors in applying the applicable purpose test.

3.19 The Inspector-General welcomes the Tax Office's recent initiative in allowing taxpayers to attend Panel meetings and believes this represents a positive step forward in promoting openness and transparency in the tax system. The Inspector-General also notes the positive results achieved by the taxpayers and their representatives in this case study after being permitted to put a written submission to the Part IVA Panel.

3.20 The Inspector-General believes that to ensure that taxpayers may effectively assist the deliberative process of the Panel in providing advice to the decision-maker, they must have access to all relevant information before the Panel which may not be included in the position paper. This would include information that goes to the facts of the scheme or arrangement and the conclusions or inferences to be drawn from the facts.

Time taken for decisions concerning the Tax Office's technical view and compliance approach

3.21 The Inspector-General found that the Tax Office struggled over many years to interpret and administer the LAFHA provisions. There were ongoing discussions, which included prolonged internal differences of opinion on the legal position and compliance strategies, sometimes at very senior levels at times. For example:

  • In May 2003 the then Second Commissioner Law indicated that in interpreting the meaning of the term 'additional' there was no presumption that additional expenses would be incurred simply because an individual was required to relocate. The view was also taken that ideally this amount should be attributable to the net difference between the cost of living at their former place of residence and the cost of living in the locality to which they have temporarily moved.
  • In December 2003 the then Commissioner of Taxation expressed the view that the exempt accommodation component was to be read as an allowance paid to compensate for the full amount of rent likely to be incurred (that is, the gross approach should be adopted instead of the net approach) and that rent saved at the usual place of residence was not to be taken into account.
  • External legal opinion obtained by the Tax Office in 2004 was also equivocal on this point but appeared to suggest an alternative position on the meaning that should be attributed to the term 'additional'.
  • It was not until April 2005 that the current corporate decision was made on how to finalise the technical and compliance issues relating to the meaning of the term 'additional' arising from this project.

3.22 In this context, it may be that views about the term 'additional' have been influenced by attempts to achieve administrative alignment between section 21 (which deals with exempt expense payments for accommodation) and section 31 (LAFHAs). To be exempt from FBT, reimbursement or expense payments under section 21 do not require costs to be 'reasonable' or 'additional' whereas exemption under section 31 includes such requirements.

The Tax Office's approaches to the issue, the reasons for them, and if they were reasonable in the circumstances, including its compliance, legal and resolution approaches

The adverse impacts and costs that the Tax Office's approaches and timeframes may have had on businesses and other areas of the community

Stakeholder concerns

3.23 The ICAA submitted that feedback received from members suggested that the Tax Office's approach to the issue had been one-sided, failing to recognise the strength of the taxpayers' position despite being reasonable in the circumstances.

3.24 The ICAA was of the view that the Tax Office's unwillingness to accept merit in counter arguments gave rise to considerable professional costs to the industry. The ICAA submitted that it was not possible to quantify these costs without a great deal of effort but clearly over the period of seven years involved, the costs incurred by various taxpayers in professional fees, let alone in senior management time, would have been material. The ICAA also submitted that the perception raised has been that the Tax Office has been unwilling to change its position regardless of the facts before it, nor on a reasonable interpretation of the law.

3.25 The Taxation Institute of Australia (TIA) submitted that the Tax Office's approach during 2002 and 2003 appeared to be an over reaction to an aggressive use of the LAFHA provisions by a small group of labour hire firms, and also appeared, in part, to be driven by tax officers who had limited FBT experience. The TIA expressed the view that the solutions being suggested created considerable uncertainty and left the majority of businesses with even more uncertainty as to when the LAFHA concession could apply.

3.26 The TIA was also of the view that the LAFHA story demonstrated the Tax Office making de facto law by administrative pronouncement. It submitted that while the Tax Office clearly has the role of administering the law, and announcing the interpretations that it considers are expressed in the Act, it is not appropriate for the Tax Office to make de facto law by announcement where the announcement is a novel and strained interpretation of the Act. The TIA suggested that the withdrawal of various Tax Office announcements demonstrates the problematic nature of the means of 'solving' difficult problems.

Review Findings and Conclusions

3.27 The Inspector-General accepts that the Tax Office had reason to be concerned about the potential revenue impacts, in particular where there was evidence of potentially excessive LAFHA payments. However, as discussed previously, this review has found that the timeframes for resolving the technical and compliance issues arising from this project were excessive and not reasonable in the circumstances. This resulted in taxpayers involved in the Tax Office's compliance processes incurring higher than necessary costs as a result of these protracted and prolonged timeframes.

3.28 The Inspector-General considers that there were two features of the Tax Office's compliance and resolution strategies that contributed to the excessive timeframes in dealing with this dispute — namely, the ongoing changes in strategy and the adoption of global approaches to resolve the dispute.

Ongoing changes in strategy

3.29 The Tax Office had a number of options available to it to progress the resolution of the ongoing dispute. For example, it may have:

  • Pursued a litigation strategy with test cases selected from a wide spectrum of factual scenarios.
  • Issued amended assessments to taxpayers and allowed them to then exercise their review and appeal rights.
  • Duly recognised the taxpayers' entitlement to a LAFHA under the current law, discontinued any further audit activity and then either have:
    • formally approached the Treasury seeking law change or law clarification, or
    • issued further guidance to the community in the form of a taxation ruling or taxation determination setting out its technical views and its compliance responses.

3.30 Between 1999 and 2004 there were no fewer than five different strategies adopted by the Tax Office, ranging from the mass application of Part IVA to test case litigation to a re-write of MT 2030 and the release of further taxation rulings and determinations. Ultimately, the Tax Office sought to work with particular industry groups to develop self-regulatory guidelines.

3.31 An important consequence of these ongoing changes in compliance and resolution approaches was that the Tax Office never pursued a particular strategy to finality. For example, in May 2002, after meeting with Treasury, it was agreed that the Tax Office should pursue a litigation strategy. Despite initial work to identify potential test cases, this strategy was abandoned once the Part IVA Panel decided that Part IVA may apply to the factual circumstances outlined in the auditor's submission. Ultimately, this strategy was also abandoned in favour of again selecting representative cases to test the Tax Office view of the law in respect of the particular factual circumstances and issue a taxation determination or some other form of advice communicating the Tax Office's view of the application of the income tax law and FBT law to the particular factual circumstances. Again, this strategy was also not pursued with the Tax Office accepting to review guidelines for self-regulation prepared by industry representatives for use by its members when providing LAFHA fringe benefits to employees.

3.32 The Inspector-General believes that the ongoing changes in strategy reflected an inability within the Tax Office to conclude in a timely manner a corporate position on how the law should apply. Although the audit project team appropriately escalated technical issues these took far too long to be resolved. This was primarily caused by:

  • Prolonged internal differences of opinion on the legal position and compliance strategies, sometimes at very senior levels and between different Tax Office areas.
  • Objective interpretation of the law clouded by attempts to deliver particular enforcement strategies — for example, there appeared to be a great reluctance by the Tax Office to acknowledge the strengths of taxpayers technical positions due to the underlying belief that foreign nationals on working-holiday maker visas should not be entitled to a LAFHA.
  • A lack of guidance in the relevant extrinsic materials on the purpose and scope of the LAFHA provisions so as to assist in the interpretation of the provisions. The Inspector-General notes that in December 2000 the Tax Office first sought independent legal advice on a number of issues including 'secondment' and 'usual place of residence'. In August 2003 the Tax Office subsequently sought further advice seeking legal clarification on a number of key issues relating to the operation of the LAFHA provisions. The Inspector-General considers that the obtaining of independent advice assisted the Tax Office in ultimately arriving at a corporate view on these key technical issues.

3.33 In its business model the Tax Office has stated that:

…while tax law is a matter for government, the Tax Office's responsibility is to administer the law in a way that builds community confidence and encourages high levels of voluntary compliance.

3.34 The Inspector-General acknowledges the complexity of the technical issues and notes the Tax Office's concerns in July 2002 that the tests set out in LAFHA provisions are difficult to apply and further guidance from judiciary was required. In July 2005 the Tax Office again expressed concern with the ongoing administrative difficulties faced by the Tax Office, employers and employees.

3.35 The Inspector-General also acknowledges the broader implications of the Tax Office's interpretation of the LAFHA provisions on other taxpayers. This includes the potential compliance burdens on employers, for example, in having to examine the individual circumstances of each employee to ensure that they satisfy the requirements of the LAFHA provisions. Equally, the Inspector-General recognises the broader environment and possible impact that the Tax Office's interpretation of these provisions could have had on the movement of employees both into and out of Australia.

3.36 However, ultimately the Tax Office is charged with the administration of the tax system, which includes interpreting and applying the law. In most instances the Tax Office does this well, but when faced with issues that are complex, novel or where there is some uncertainty in the law, as is demonstrated by this case study, the Tax Office must take appropriate steps to ensure that active compliance activities are resolved in a manner that is timely and minimises taxpayer uncertainty. The Inspector-General found that it was not until April 2005 that the Tax Office had a clear, finalised corporate view on the key technical issues and compliance strategies. The Inspector-General found that this clear, finalised direction allowed the Tax Office to move to a position where it could effectively work with the taxpayers to resolve the dispute and that it is presently doing so.

3.37 Effective administration requires the timely interpretation of the tax laws and decision-making so as to provide taxpayers with sufficient certainty on the application of the law and allow for disputes to be resolved or, if necessary, progressed to the tribunal and courts. Excessive delays in reaching a corporate technical position erode community confidence in the tax system and fuel perceptions of unfairness.

3.38 The Inspector-General notes the Tax Office's recent initiatives to improve the quality and timeliness of its review and audit programs, such as:

  • the better management of priority technical issues through the procedures as set out in Practice Statement PS LA 2003/10; and
  • the introduction of case leadership roles for the large business and small to medium enterprise (SME) segments.

3.39 However, the Inspector-General believes that these processes could be strengthened so as to minimise prolonged delays in finalising significant technical issues and provide adequate avenues for comment or review available to taxpayers where the current processes and procedures are not leading to a timely resolution of a dispute.

Improvements in timeliness of technical decision-making

3.40 The Inspector-General notes that the Tax Office has introduced specific procedures in relation to priority technical issues. These procedures are designed to ensure that processes for the identification and resolution of priority technical issues are aligned with the Tax Office Risk Management Policy and are managed according to Tax Office policy and processes for project management.

3.41 Once an issue or risk is identified as a priority technical issue a senior tax officer is allocated as the Risk Owner and a tax officer is allocated as the Priority Technical Issue Owner (PTI Owner). The responsibilities of the Risk Owner include:

  • managing the overall mitigation strategy/project for the relevant risk (of which resolution of the priority technical issue is a part) including, for example, Taxpayer Alerts, call centre scripts, communication strategies, systems requirements, follow up compliance strategies, advice to Government;
  • ensuring that the PTI Owner is given every assistance in resolving the technical issue;
  • liaising with the PTI Owner and stakeholders in planning the technical issue resolution strategy and establishing milestones and deadlines;
  • in consultation with the PTI Owner, engaging as early as possible all relevant stakeholders; for example, Aggressive Tax Planning, International Strategy & Operations, Policy Management Division, Office of the Chief Tax Counsel branches, Goods and Services Tax or other business lines or parties external to the Tax Office (including consultative processes, as necessary);
  • regularly reviewing progress of resolution of the technical issue (with the PTI Owner and stakeholders) to ensure that milestones and deadlines are being met and/or updated;
  • advising the PTI Owner of any new intelligence, changes to the importance of resolution of the technical issue to risk mitigation strategy or changes to the rating of the associated risk;
  • ensuring that any related cases are maintained in the appropriate case management systems and finalised once the technical issue is resolved (ensuring also that cases are delayed only where absolutely necessary); and
  • determining any residual risk and evaluating the risk mitigation strategy on completion, in accordance with proper risk and project management methodology.

3.42 These procedures also establish a Priority Technical Issues Committee. This Committee is chaired by the Second Commissioner Law and provides guidance and direction to the PTI and Risk Owners, and monitors the management of PTIs within the established corporate framework.

3.43 The Inspector-General believes these recent improvements are a positive step forward in the management of issues that are complex, novel, or where there is some uncertainty in the law. The Inspector-General considers that these processes could be strengthened so as to minimise prolonged delays in finalising such issues and provide a circuit-breaker in the resolution of key technical issues. The Inspector-General believes that the Priority Technical Issues Committee is well-placed to take on this role and ensure that key technical issues are managed and resolved in a timely and effective manner.

Improvements in case management and development of resolution strategies

Adoption of a global approach

3.44 From the initial stages of the audit project the Tax Office adopted a global approach in dealing with the compliance issues arising from this dispute. For example, the Tax Office sought to deny LAFHA entitlement on the basis of the type of visa. When that position was criticised it then sought to apply Part IVA until that strategy was eventually dropped following comments by the then Second Commissioner Law. This took from April 1999 until April 2003 to achieve. Part of this strategy also involved potentially issuing around 6,000 amended assessments to taxpayers on the basis that the particular arrangements identified by the Tax Office were wide-spread amongst all taxpayers involved, yet denied by the industry as being representative of the factual circumstances.

3.45 The Inspector-General considers that the Tax Office's compliance and resolution strategies were initially geared towards a one-size-fits-all approach, given the involvement of a large number of taxpayers and the lack of adequate resources required to adopt a case-by-case approach. However, the Inspector-General believes that where you have a potentially wide group of taxpayers, the development of compliance and resolution strategies should consider how the Tax Office will ensure that it adequately differentiates between taxpayers, especially where the legislative provisions require a case-by-case analysis.

3.46 In these instances it is important that the Tax Office's compliance and resolution strategies duly recognise the balance that needs to be achieved between considerations of administrative efficiency in dealing with groups of taxpayers and examining the conduct and circumstances of a taxpayer.

Compliance-focussed approach

3.47 In its business model the Tax Office has stated that it is required to operate variously as:

  • a trusted authority on the law;
  • a professional advisor and educator, ensuring people have the information and support they need to meet their obligations under the law;
  • a firm enforcer of the law; and
  • a fair administrator who recognises people's circumstances in meeting their obligations.

3.48 In most cases, these roles are complimentary, in the sense that the application of the law is clear and the Tax Office assists taxpayers to meet their tax obligations. However, it is where the application of the law is uncertain, or the outcome is inconsistent with what the Tax Office believes was intended or an interpretation of the law gives rise to an unintended revenue consequence that there is potential for tension between these roles. The consequence of such tension is the introduction of uncertainty for taxpayers and unfairness in the tax system. Taxpayers need to see that the Tax Office's compliance strategies are being shaped by an objective consideration of the law rather than driven by a belief that a taxpayer should not be entitled to a particular tax benefit. Taxpayers also need to see that the Tax Office is willing to acknowledge the strengths of a taxpayer's arguments and take those into account in its decision-making. But it is important to note that this is not to suggest that the Tax Office should simply roll over each time it is challenged. Taxpayers and their representatives must also understand and appreciate the various roles of the Tax Office and how particular technical and compliance approaches may be important in achieving wider voluntary compliance.

3.49 In the course of this review the Inspector-General found that the Tax Office has been forced to concede that the law does not support the key compliance tests that it believed should have given effect to the policy intentions. Taxpayers expressed the concern that the position of the Tax Office has consistently been driven by its view of what the policy should be regarding the payment of LAFHA and its efforts have been largely directed to finding ways that the law can be applied to support that policy. Taxpayers also allege that there is little doubt that if the law supported the Tax Office's attack, then the issue would not have been outstanding and debated for seven years at a great cost to the taxpayers involved.

3.50 The Inspector-General considers that the taxpayers' concerns have some validity. The Inspector-General believes that part of the Tax Office delay may be attributed to it seeking to address a perceived, and escalating, compliance risk in an environment where the law did not adequately support the Tax Office view. The Inspector-General believes that this resulted in an objective consideration of the law being clouded by attempts to deliver particular enforcement strategies.

3.51 After seven to ten years of to-ing and fro-ing, the Tax Office appears now to have given up, and acknowledged that the legal analysis and submissions from the taxpayers in question were not able to be rebutted. Accordingly, the Tax Office has accepted that the arrangements entered into are acceptable under the current law.

3.52 The Inspector-General believes that when faced with issues that are complex, novel or there is some uncertainty in the law or the Tax Office is seeking to address a wider compliance risk then the Tax Office must be more proactive and take additional steps to demonstrate to the community that it is balancing its different roles in the tax system. For example, where the law is uncertain, then the Tax Office should actively seek to run test cases so as to obtain judicial guidance on the interpretation of the tax laws. In circumstances of complexity or uncertainty it is important that the Tax Office demonstrates to taxpayers and the community that it has a real interest in also achieving certainty and clarity rather than just being seen to be seeking a compliance outcome.

3.53 In deciding its compliance and enforcement strategies, the Tax Office also needs to consider if it has contributed to the situation by not adequately fulfilling its role in ensuring people have the information and support they need to meet their obligations under the law.

Case management

3.54 The Inspector-General considers that the audit project team were not adequately resourced to undertake a case-by-case analysis or to properly consider taxpayers' individual circumstances. Although there were potentially 10,000 employees involved and the Part IVA Panel had noted the requirement according to the law to examine each taxpayer on a case-by-case basis, the audit project team comprised of only four tax officers. In effect the absence of appropriate resources also dictated the necessity of seeking to adopt blanket or global approaches in dealing with this dispute.

3.55 The Inspector-General also considers that despite the involvement of many senior tax officers in the audit project, there was no single senior tax officer that had overall ownership of the technical and compliance issues until late in the dispute. The Inspector-General found that once a senior tax officer was allocated to the dispute with overarching ownership of the resolution of the dispute this provided a central focal point for internal discussion, a more co-ordinated approach by the Tax Office and a senior contact point for the taxpayers and their representatives. These aspects helped improve the relationship between the taxpayers and the Tax Office and progress the dispute towards resolution.

3.56 The Inspector-General notes that the Tax Office has recently introduced a number of initiatives to improve the quality and management of active compliance activities. For example, case leadership roles involve senior tax officers reviewing major cases and determining lines of investigation so as to progress cases, especially some of the older cases. The process includes workshopping cases with tax office experts — and industry specialists as necessary — to ensure that they have identified the right tax risks and technical issues. The case leadership roles also work with teams to progress cases, including guiding its information gathering processes.

3.57 The Inspector-General believes that the case leadership roles provide a good framework for the management of resolution strategies where the issues are complex, novel, or where there is some uncertainty in the law. However, the Inspector-General is concerned that there are no formal avenues for escalation, review or comment of the Tax Office's resolution strategies where they are not leading to a timely resolution of a dispute. For example, this may be in circumstances where there is no clear Tax Office view and no amendment action to generate objection and appeal rights to allow the Tax Office view to be challenged. In such situations, taxpayers are left in limbo with potentially adverse consequences on their business and personal lives caused by unnecessary delays in resolving the dispute.

3.58 The Inspector-General believes that these processes may be strengthened by requiring the escalation of cases involving priority technical issues and other issues requiring precedential views to case leaders after a reasonable time has elapsed. The Inspector-General also believes that taxpayers should then have mandatory rights of representation to these case leaders. The Inspector-General considers that this will allow taxpayers, who feel that they have reached a stalemate in respect to their dispute, to have an opportunity to discuss their concerns at a more senior level within the Tax Office. This should be in the spirit of reaching a common understanding of the facts and technical issues arising from the dispute and seeking to resolve the dispute without recourse to litigation.

3.59 The Inspector-General also found that the file management by the audit project team was good with detailed file notes and all relevant documents kept chronologically on file.

Timely communication of issues to taxpayers

3.60 The Inspector-General notes that the relationship between the Tax Office and the industry members and their representatives was generally co-operative throughout the audit project. The majority of the industry members provided information to Tax Office and sought to cooperate with Tax Office to obtain guidance regarding LAFHA entitlement and quantum. Furthermore, the Tax Office provided the industry members and their representatives an opportunity to provide a written submission to the Part IVA Panel and to appear before the Public Rulings Panel.

3.61 However, the Inspector-General also found some examples of where the conduct or approach of either the Tax Office or the industry members and their representatives strained the generally co-operative relationship, including:

  • Initial reluctance on the part of the Tax Office to clearly articulate their views on the application of the LAFHA provisions and Part IVA to the factual circumstances despite taxpayer requests.
  • Concerns by members of an industry association and their representatives that the Tax Office was not interested in understanding their industry.
  • The Tax Office released Taxpayer Alert TA 2002/7, which was met with external criticism for the lack of consultation by the Tax Office prior to its release and its inaccurate characterisation of the majority of the arrangements. The taxpayers' representative was particularly incensed at the Tax Office's failure, after repeated requests, to withdraw the Taxpayer Alert which said that the anti-avoidance provisions applied to their arrangements even though the Tax Office had informed them that their view had changed and those provisions did not apply. There was also concern that the Tax Office did not withdraw Draft Taxation Determination 2000/D5 even though its view had changed. (This Draft was only withdrawn after the Inspector-General wrote to the Commissioner during the course of this review indicating that such action would be appropriate.)
  • Some taxpayers either were not able to or failed to provide the Tax Office with requested information.
  • Repeated attempts by the industry association members and their representatives to work with the Tax Office to arrive to a workable solution.
  • Industry association members and their representatives expressed disappointment with the adequacy of the Tax Office's position paper and its failure to properly address or respond to the technical issues and merit of their arguments. The taxpayers' representative also expressed the view that the position paper did not provide guidance on the Tax Office's view on key principles despite ongoing delays in issuing the position paper.

3.62 Professional associations have noted the different purposes of a position paper. They indicate that sometimes position papers are issued at a time when the Tax Office's views are advanced and assessments are about to issue. On other occasions, position papers are issued at a time when the facts are far from certain and the Tax Office wants the taxpayer to comment on the facts and technical views. They submit that the Tax Office should identify the purpose of the position paper at the outset of the audit so as to improve transparency.

3.63 The Inspector-General agrees with these general views noting the difference in expectations between the Tax Office and the taxpayers as to the function and role of the position paper in the audit project. The Inspector-General believes that the position paper is an important part of the current dispute resolution process. Not only does its serve to set out what the Tax Office believes are the facts, issues and its view of the application of the law but it also demonstrates whether the Tax Office has listened and appropriately dealt with the taxpayers views and arguments. It also shapes the relationship between taxpayers and the Tax Office.

3.64 In a recent speech the Commissioner of Taxation noted the importance of the Tax Office being open, transparent and accountable including sharing Tax Office approaches with the community, inviting feedback on the Tax Office's decisions, being open to constructive criticism, accepting mistakes and recognising where it needs to make changes.

3.65 The Inspector-General supports the Tax Office's vision in seeking to develop a 'community-first culture'. Maintaining a taxation ruling, taxation determination or other interpretative decision in the market place to attain a particular compliance response where the Tax Office has changed or is uncertain with its view does not promote a community first culture. The Inspector-General considers that this review demonstrates the need for the Tax Office to improve its responsiveness in withdrawing taxation rulings, taxation determinations and other interpretative decisions where there is a change in the Tax Office's view. This is especially so where there is potential for adverse impact on taxpayers.

Clear guidance on when under audit

3.66 Taxpayers and their representatives, in both this review and in past instances, have raised concerns with the considerable confusion about whether a Tax Office compliance activity constitutes an audit or not, with ramifications on whether a taxpayer can make a voluntary disclosure and seek to minimise the impact of any penalties.

3.67 In this case study the Inspector-General found that while the Tax Office was informing members of an industry association that they were not under audit and seeking their assistance as part of the project, the Tax Office was proposing to issue individual taxpayers with amended assessments, issue Part IVA determinations and impose administrative penalties.

3.68 For example, the Tax Office received an email from a taxpayer requesting that the Tax Office issue them with a formal audit letter. The taxpayer stated that this was being requested as, in their view, the Tax Office's intended outcome of the investigation was the issuing of prior year amended assessments which was consistent with what occurred as part of a formal audit. The taxpayer also requested whether, once the Tax Office has determined its position, it would seek to apply this on a retrospective or prospective basis.

3.69 In a reply the Tax Office stated that they were not in a position to issue a formal audit letter. The reply mail indicated that the Tax Office had earlier informed the taxpayer that they were not formally auditing their business but have been conducting interviews with several of their clients. The Tax Office also stated that its requests for payroll records in relation to individual taxpayers who have or had connection with the taxpayer should not be interpreted as the initiation of an audit. The Tax Office stated that, on this basis, it would be most inappropriate for it to issue a formal audit letter.

3.70 The Inspector-General notes that the Tax Office's reply was after it had decided to internally:

  • seek legal advice on a number of issues arising from the audit project;
  • seek direction from the Aggressive Tax Planning Steering Committee which advised the audit project team to take a 'slowly, slowly approach' and issue only a small manageable number of amended assessments;
  • issue amended assessments in respect of an individual taxpayer; and
  • refer an application to the Part IVA Panel with the Panel noting that there was a strong argument for the application of Part IVA.

3.71 In its reply, the taxpayer stated that it was not convinced by the Tax Office's conclusions that the project was not an audit of the entity and its clients or that the information gathered under the name of the umbrella project would not be used by the Tax Office to issue amended assessments. In order to protect its rights under the law, the taxpayer again requested that the Tax Office issue a formal audit letter and a formal legal indemnity to protect it from the Tax Office taking any retrospective amendment action against the taxpayer and its clients in respect of LAFHAs.

3.72 The Inspector-General also found some evidence in this case study of the Tax Office, especially at more senior levels, seeking to limit the disclosure of information to taxpayers regarding its approaches. For example, a taxpayer requested that the Tax Office view be documented in respect of its treatment of LAFHAs. The audit project team prepared a draft letter referring to MT 2030 and providing some details on the deliberations of the Part IVA Panel on the application of the general anti-avoidance provisions to the identified arrangements. The draft letter also indicated that the Tax Office proposed to shortly commence issuing amended assessments to reflect its view and that a new ruling was also being prepared.

3.73 The release of this draft letter to the taxpayer was stopped on the basis that it was inappropriate to quote minutes of the Part IVA Panel, there should be no mention that a new public ruling was being drafted and there should be no mention that assessments may issue after the ruling was drafted.

3.74 The Inspector-General notes and welcomes the recent statements by the Commissioner of Taxation emphasising a values-based administration to better meet the needs and expectations of the community. In particular, the Commissioner of Taxation stated that:

Being open and transparent is not just about sharing good news stories with the community. It's about sharing our approaches with the community and inviting feedback on the decisions we make, being open to constructive criticism, accepting mistakes and recognising where we need to make changes. Sure, 'a warts and all' approach can be uncomfortable, but I believe that it helps to build trust in the Tax Office.

3.75 The Inspector-General believes that in the spirit of being open and transparent, where the Tax Office contemplates issuing amended assessments, issuing Part IVA determinations or imposing administrative penalties as a result of active compliance activity it should notify taxpayers that they are subject to audit.

The provision of timely and objective guidance to the community

The extent and cause of uncertainty to affected taxpayers, including any initial Tax Office guidance or representations

Stakeholder concerns

3.76 The ICAA submitted that the Tax Office's inquiry into this matter caused considerable uncertainty within the industry. During the course of this matter, the Tax Office issued and then retracted Taxpayer Alert TA 2002/7, and similarly issued and subsequently withdrew Draft Taxation Determination TD 2000/D5. The disruption and uncertainty that this type of action gives rise to is difficult to estimate. However, the ICAA submitted that it stands to reason that the disruption and uncertainty would have been significant.

3.77 The TIA submitted that throughout the entire period, employers have had to deal with the continuing uncertainty as to when the LAFHA treatment legitimately applies, and this has added to the cost for employers because this needs to be established on a case by case basis (that is, taking account of the particular circumstances of the employee) when there is an increasingly mobile workforce (much of the mobility being at the request of the employer). The TIA submitted that in these circumstances, employers end up taking a variety of views.

3.78 The TIA submitted that given the extent of global and national transfers, it is a sufficiently significant problem to have been raised in the cost of compliance submission. The relationship between the LAFHA provisions and the travel provisions under the Income Tax Assessment Act are difficult to navigate for an employer.

3.79 The TIA noted that the combination of old FBT legislation, with Tax Office Determinations/Rulings filling the gaps, has led to significant uncertainties as to the requirements for FBT-free LAFHAs. Practitioners have argued that the rules need to be updated and clarified so as to avoid unnecessary cost to business, and this will probably require legislative changes. The TIA expressed the view that it would have expected the Tax Office to have again pressed for a change in legislation, rather than adopting the approach that was taken which, in the end, seems to have achieved nothing.

3.80 Representations by legal and accounting advisers also noted the general uncertainty regarding the Tax Office's approach to LAFHAs. Many said that they were taking a very conservative approach so as to minimise any future Tax Office compliance response. They indicated that this is not an appropriate situation — namely one where uncertainty in the law and the Tax Office position is used to effect compliance and make taxpayers adopt a conservative approach. One legal adviser submitted that the current Tax Office view, as set out in MT 2030, did not provide sufficient guidance to the community around what factors the Tax Office would take into consideration in determining what was 'reasonable' for the purposes of a LAFHA. It was suggested that a taxation determination on this matter would provide some guidance on methods which would be acceptable to the Tax Office.

3.81 Stakeholders also referred to a cost of compliance submission to Government on 4 August 2004, on behalf of the professional bodies, consisting of the ICAA, Law Council of Australia, National Tax & Accountants Association, National Institute of Accountants, Taxpayers Australia and the TIA.

3.82 The submission outlined the cost of compliance and other difficulties faced by employers as a consequence of the fringe benefits tax legislation. The submission noted that a common and consistent theme in feedback received from members of all the professional bodies was the excessive and inappropriate compliance burden for business due to the fringe benefits tax.

3.83 The submission noted that small and large business as well as tax practitioners continued to experience real problems in complying with the requirements imposed under the FBT legislation. The submission indicates that it is the employer and not the employee that is continually under pressure to get it right and it is the employer that is ultimately left exposed in terms of record keeping errors and any fraud perpetrated by the employee.

3.84 Relevantly, the submission noted that many of the FBT provisions have failed to keep up with business change and often result in employers having to make decisions using legislation that does not reflect modern practices, technology or the intention of other legislation. The submission also raised concerns with the Tax Office resorting to applying administrative solutions to overcome legislative defects in the FBT law, noting that this was not an ideal way to address problems in the law.

Review Findings and Conclusions

Current environment

3.85 The current administrative outcome and legal position appears to be that anyone, including backpackers, who claims to be living away from their usual place of residence can receive tax-free remuneration to cover their accommodation and food expenses for extended periods. In simple terms, some employees including overseas visitors to Australia who find employment after they arrive, can effectively salary sacrifice for normal living expenses.

3.86 The following example of a case that the Tax Office has recently allowed shows how it is currently administering LAFHA.

The taxpayer came to Australia on a working holiday visa in 1998. After 12 months he decided to extend his stay. He obtained sponsorship, found a job and over three years received a substantial part (31 per cent) of his remuneration as a tax exempt LAFHA on the basis that he was living away from home in order to undertake employment duties and was incurring additional expenses. The Tax Office sought to amend his assessable income to include the LAFHA, but subsequently allowed the taxpayer's objection in late 2005 on the basis that the circumstances met the requirements of MT 2030. From a total income over the three years of $170,169 the taxpayer received over $52,000 tax-free.

Year Tax-free LAFHA Salary returned as taxable Total remuneration
2001 $26 061 $63 849 $89 910
2000 $18 978 $41 977 $60 955
1999 $ 7 615 $11 689 $19 304
Total $52 654 $117 515 $170 169

3.87 In July 2005, the Tax Office discussed its concerns about the operation of the LAFHA provisions with Treasury. The Tax Office considered that difficulties arose with the practical administration of LAFHAs due to the lack of certainty in the use of such terms as 'usual place of residence', 'additional expenses', 'reasonableness' and issues such as the length of time an employee may be entitled to concessional LAFHA treatment. The Tax Office advised that external legal analysis and submissions were not able to be rebutted and that the practices subject to the audit project are acceptable under the current law. The Tax Office indicated that the risks and difficulties identified in 1995 had not abated and may have increased. The Tax Office also advised that the reasons for the amendments being introduced and the acceptance at that time of the administrative difficulties faced by the Tax Office, employers and employees were still present. The Tax Office advised that it would continue to monitor LAFHAs and would, as necessary, inform Treasury of further developments. In the absence of such advice, the Treasury file note stated that Treasury considered the current FBT law as giving effect to government policy.

Tax Office attempts to provide further guidance

3.88 The stakeholder concerns do suggest general uncertainty amongst practitioners and advisers in the operation of the LAFHA provisions and the Tax Office's administration of these provisions. The Inspector-General considers that where you have a dispute unresolved for a period of seven years with no clear guidance from the Tax Office as to their technical view and compliance approach, especially where you have ongoing changes in approach and strategy, then there will obviously be uncertainty amongst taxpayers.

3.89 The Inspector-General notes that the Tax Office did make some attempts to provide further guidance to taxpayers regarding their technical view. For example, in April 2000 the Tax Office released a draft taxation determination on its view on the term 'usual place of residence'. However, this draft taxation determination was met with significant external criticism, with many believing that the Tax Office was going beyond what was stated by the law. This draft tax determination was later withdrawn.

3.90 The Inspector-General also notes the recent positive steps made by the Tax Office to provide greater guidance to taxpayers including the development of industry guidelines and the additions to the FBT Employers Guidebook. The Inspector-General believes that these provide a good starting point for broader community guidance on the Tax Office's view, in particular, the practical application of that view.

Current Tax Office guidance – MT 2030

3.91 The shortcomings of MT 2030 in providing adequate guidance to taxpayers were first identified in an internal Tax Office report covering issues associated with LAFHAs including problems encountered by employers, by employees, the Tax Office as well as problems with MT 2030 itself.

3.92 The internal report made a number of recommendations for consideration by senior tax officers including issuing an updated Ruling to be read in conjunction with MT 2030, providing additional guidelines regarding the calculation of LAFHAs, the wording to be used in declarations and the application of the LAFHA provisions to specific industries. The report also considered alternatives including the withdrawal of MT 2030 and approaching the Government to change the current manner of taxing LAFHAs.

3.93 The shortcomings of MT 2030 were again highlighted in February 1995, with the proposed amendments to the LAFHA provisions. The Explanatory Memorandum noted that the guidelines issued by the Commissioner of Taxation in MT 2030 had been difficult for many employers to apply.

3.94 Following the then Governments announcement that they were not proceeding with the proposed amendments to the LAFHA provisions, there was internal Tax Office consideration of how to clarify the current state of the law and MT 2030. Various issues and options were considered at an internal Tax Office Technical Network meeting, where it was concluded that doing nothing and relying on the current version was not an option. The discussion group concluded that the best course of action would be for a project to be initiated that would include the drafting of a comprehensive ruling on the subject to replace MT 2030 and ultimately to put forward a proposal for legislative change. However, no further action was taken by the Tax Office to revise MT 2030 as there were insufficient technical resources available at the time to handle the matter.

3.95 During the course of the audit project, concerns were also expressed with the adequacy of MT 2030 in providing adequate guidance to taxpayers. It was noted that although MT 2030 provided suitable guidelines for LAFHA issues, there were cases, such as those being investigated by the audit project team, where MT 2030 fell short of providing definitively 'clear' guidelines.

3.96 The Inspector-General also notes that throughout the audit project, steps were taken to re-write MT 2030 or to issue further taxation rulings and taxation determinations on LAFHA to supplement MT 2030. For example:

  • In December 2003 the Tax Office decided to release a series of taxation rulings and taxation determinations on LAFHA. The Tax Office view on the law was to be progressed by releasing approximately four taxation determinations. It was decided that at some later stage these documents could be combined into one single ruling to replace MT 2030. The proposed taxation determinations were:
    • a replacement of Draft Taxation Determination TD 2000/D5,
    • a taxation determination dealing with the switch from a 417 visa to a 457 visa and where a person enters Australia on a 457 visa,1
    • a taxation determination dealing with usual place of residence, and
    • a taxation determination dealing with additional expenses.
  • In August 2004, at an NTLG-FBT Sub-committee meeting, the Tax Office informed practitioners that a review of certain matters concerning LAFHAs, including issues arising from Draft Taxation Determination TD 2000/D5 and Taxpayer Alert TA 2002/7, was drawing to a conclusion. As a result of the review, the Tax Office indicated that it proposed to issue two draft taxation determinations and one draft taxation ruling and that these were being progressed within the Tax Office. These would be released as drafts, at which time the peak bodies and other interested parties would have the opportunity to provide comments and/or formal submissions.
  • In May 2005 the Tax Office indicated to the affected taxpayers that it would no longer be issuing the proposed draft ruling and determinations and that the Tax Office view continued to be set out in MT 2030. However, the Tax Office identified the need to provide some practical guidance concerning quantum associated with LAFHAs and indicated that there would be the development of guidelines, in the form of a Law Administration Practice Statement, for Tax Office compliance staff.
  • In July 2005 the Tax Office advised the Treasury that MT 2030 would, in essence, remain the Tax Office's broad position on LAFHAs.
  • In November 2005, at an NTLG-FBT Sub-committee meeting, the Tax Office informed practitioners that sufficient guidance for a case by case application of the LAFHA provisions was contained in the long standing ruling MT 2030. The Tax Office advised practitioners that MT 2030 provided the broad guidelines necessary to apply those provisions. The Tax Office indicated that it would continue to monitor LAFHA issues and suggested that there may, in the future, be a case that raised issues of significant concern relating to 'reasonableness' which may provide an opportunity to seek clarification from the Federal Court on the interpretation of sections 30 and 31 of the FBTAA.

3.97 To date, MT 2030 continues to represent the Tax Office's view on LAFHAs despite its numerous identified shortcomings in providing clear guidance to taxpayers and practitioners. However, the Tax Office is also reviewing guidelines for self-regulation prepared by industry association members for use in providing LAFHA fringe benefits to employees.

3.98 The Tax Office has provided the Inspector-General with material on the number of private binding rulings on LAFHAs issued during the period of the LAFHA project. The Tax Office advised that from 1 January 2006 to 18 October 2006, there were 74 written requests actioned where LAFHA was an issue. From the available information, 21 cases were requests from employers, with the balance of requests from employees.

3.99 For the 2005 calendar year, the Tax Office advised that there were 109 written requests actioned where LAFHA was an issue, with 26 requests from employers and the balance of requests from employees. For the 2004 calendar year, the Tax Office advised that there were 57 written requests actioned where LAFHA was an issue, with 31 requests from employers.

3.100 The Tax Office also advised that during this period cases were finalised, in the majority of instances, within Taxpayers' Charter requirements and in cases where a ruling was provided, the Tax Office view relied upon was either MT 2030 or the FBT Employer Guide.

3.101 The Tax Office asserts that the low number of applications for written advice on LAFHA and the fact that the applications are dealt with within the Taxpayers' Charter requirements demonstrates that the Tax Office does not struggle to interpret or administer the FBT law relating to LAFHAs generally. Rather, the Tax Office asserts that it is more correct to say that is has struggled for a long time with some arrangements which are pitched at the extreme points of the law. The Tax Office also asserts that it could be presumed that if there was greater uncertainty in the community generally around the LAFHA provisions, there would have been many more requests for written advice than the low number of request previously noted.

Providing community-wide guidance and certainty

3.102 During the audit project, the taxpayers' representative repeatedly expressed concern that the Tax Office was not providing clarification or guidance as to how the Tax Office's concerns may be alleviated. The taxpayers' representative also commented that there was uncertainty around what was the Tax Office's view on the terms 'additional' and 'reasonable' for the purposes of paying a LAFHA and suggested that MT 2030 should be rewritten to clarify such issues.

3.103 The TIA was also of the view that the Tax Office's solution of working with industry groups to develop self-regulatory guidelines fails to address the requirements of certainty and equity. It submitted that not only does it open up the possibility of different industry approaches based on the same legislation, it means there will be no established case law, and it does not address the possibility of future Tax Office changes in attitude (particularly by Tax Office auditors) when once again Tax Office officers not familiar with FBT become involved.

3.104 The Inspector-General agrees with those sentiments and believes that more should be done by the Tax Office to provide community-wide guidance and certainty on its interpretation, administration and practical application of the LAFHA provisions. The Inspector-General notes that on particular issues, for example whether there is a requirement for a pre-existing employee/employer relationship for a LAFHA entitlement, there still seems to be inconsistencies between the internal views expressed by some senior tax officers, the manner that the LAFHA provisions are currently being administered and MT 2030. The Inspector-General believes that community-wide guidance on the key technical issues raised during this case study will also minimise prolonged timeframes in resolving such disputes should they re-emerge in the future.

3.105 The Inspector-General notes that the Tax Office has had a number of informal meetings with the Treasury to discuss its concerns with the operation and scope of the LAFHA provisions. The Inspector-General found that the Tax Office has not formally advised the Treasury on issues regarding LAFHAs where the Tax Office has identified problems in the operation of the tax system that may require legislative change.

Key Recommendation 1

The Commissioner of Taxation should conclude a corporate view on whether the Tax Office should formally advise the Treasury, in accordance with Practice Statement CM 2003/14, that legislative change is required or not.

Key Recommendation 2

In the absence of the Tax Office providing such formal advice to Treasury or any legislative change, then the Tax Office should issue a new public ruling to replace Miscellaneous Taxation Ruling MT 2030. The new public ruling should provide community-wide guidance and certainty on the Tax Office's interpretation, administration and practical application of the LAFHA provisions, and should include clarification of the key technical issues arising from this review such as:

  • usual place of residence;
  • meaning of the term 'additional';
  • factors the Tax Office would take into consideration in determining what was 'reasonable' for the purposes of a LAFHA including guidance on methods which would be acceptable to the Tax Office;
  • causation between employment and entitlement to receive a LAFHA, in particular, whether there is a requirement for a pre-existing employee/employer relationship for a LAFHA entitlement.

1 A 417 visa is a Working Holiday Visa, while a 457 visa is a Temporary Business Long Stay — Standard Business Sponsorship. The latter is a program for employers to sponsor approved skilled workers to work in Australia on a temporary visa. Information obtained from the Department of Immigration and Multicultural Affairs' website.