2.1 This chapter firstly summarises the main conclusions of the review. It then sets out the recommendations of the review and the Tax Office's response to these recommendations.

Introduction

2.2 GST audits are activities by the Tax Office which are directed to ensuring compliance with the GST law and which involve direct contact with the taxpayer. These activities play an important role in providing confidence to the community that all businesses liable to pay the GST are paying their fair share. Our tax system involves taxpayers making a self assessment of their GST liability. Without a GST audit program there is a risk that taxpayers may self-assess their GST liability inaccurately, thereby receiving a competitive advantage over those businesses which do self-assess accurately.

2.3 The review was prompted by concerns raised by large taxpayers on the following issues:

  • the nature of the GST audit adjustments that have been reported by the Tax Office as being the results of its GST audit activity on large taxpayers;
  • the Tax Office's imposition of penalties and interest in large taxpayer GST audits; and
  • other issues concerning GST audits, including the Tax Office's approach to margin scheme valuation cases and to cases involving classification issues, the length of time of GST audits, Tax Office communication processes during GST audits, the training of GST auditors and other issues.

2.4 The conclusions of the review on each of these issues were as follows.

Nature of GST audit adjustments being made and reported by the Tax Office

2.5 The review has found that, based on a sampling process, only 32 per cent of the dollar value of all GST audit adjustments made for large taxpayers by the Tax Office appear to involve net contributions to the revenue that were made as a result of a Tax Office initiated compliance activity.

2.6 It also found that 42 per cent of the dollar value of all reported GST audit adjustments for large taxpayers arose as a result of an unprompted voluntary disclosure.

2.7 Neither of these results has been readily apparent from the GST audit results reported by the Tax Office to the community and the States and Territories. These Tax Office reports have therefore not given a clear indication of the results of GST audits in terms of their real contribution to revenue and may give an overly negative picture of compliance levels within the large taxpayer segment.

2.8 This situation appears to be compounded by the Tax Office's use of liabilities raised as a basis for reporting performance, unadjusted by the difference between liabilities and actual collections. Liabilities raised from compliance activities appear to be reduced compared to actual collections, but the reasons and components of this reduction are not fully reported.

2.9 It is also compounded by the Tax Office's internal and external reports not setting out the sources of, or amounts eventually collected in penalties in GST audit cases or the amount, source and eventual collections of the general interest charge (GIC) in such cases.

2.10 Generally, the Inspector-General considers that the Tax Office should, for audit reporting purposes, work towards identifying those GST audit adjustments which have arisen from unprompted voluntary disclosures and those that have not. The Tax Office should then identify how much of the adjustments which have not arisen from unprompted voluntary disclosures involve real contributions to the revenue and how much of these adjustments do not.

2.11 One result of the Tax Office's failure to adequately identify for both internal and external purposes the source and overall revenue outcomes of its GST adjustments is that the Tax Office has not matched its identification of risks for large cases and allocation of resources towards its GST compliance work with true outcomes from its compliance activities.

2.12 This review has also established that there is a low ‘strike rate' in GST audits and many unresolved audits are chasing elusive issues with no outright revenue gain. A ‘strike rate' is the percentage of audit cases which achieved a result over the number of audit cases completed. The low strike rate in GST audits would be even lower if cases that do not deliver a revenue gain were excluded. Combined with the low level of net revenue gain this suggests a substantial unnecessary cost to business from GST active compliance work on large taxpayers.

2.13 The Inspector-General has made two recommendations aimed at improving the Tax Office's analysis and reporting of its GST audit results for large taxpayers. These recommendations should lead to better outcomes in terms of the Tax Office better targeting its GST audit resources to the areas of greatest actual risk. These recommendations have been agreed to by the Tax Office.

2.14 The Inspector-General has also recommended that the Tax Office introduce a formalised consolidated policy for how it will handle unprompted voluntary disclosures for tax adjustments, including GST. This is because it does not presently have a single policy document which clearly sets out for taxpayers (or for Tax Office staff) the consequences — in terms of the requirement to pay tax, penalties and interest — that will arise from the disclosure of tax errors made for previous tax periods. The Tax Office has also agreed with this recommendation.

The Tax Office's imposition of penalties and interest in large taxpayer GST audits

Penalties

2.15 The review found that the overall level of penalties ultimately applied in large taxpayer GST audits was small in size compared to those applied in GST audits of smaller taxpayers.1

2.16 However, this review also found that there were systemic issues which adversely affected the Tax Office's imposition of (shortfall) penalties at the initial audit stage in a significant percentage of large taxpayer GST penalty cases examined for the 2006/07 year and earlier years. Examples were found of :

  • cases where the Tax Office believed that the taxpayer was ‘reckless' despite the matter being arguable in law;
  • cases where penalties were applied at full rates despite the taxpayer having previously disclosed the nature of the adjustment to the Tax Office;
  • cases where penalties were applied despite the taxpayer having obtained and followed credible legal advice that the position they were adopting was correct;
  • cases where different penalty rules were applied to smaller taxpayers as opposed to larger taxpayers (for example, on whether a disclosure of an error had been made before or after an audit had commenced); and
  • cases where the rules on the scope of an audit (and hence the level of penalties charged) were being applied inconsistently to large taxpayers.

2.17 Some of these penalties were eventually remitted but only after they had reached an internal appeal stage.

2.18 The review also found that the Tax Office's internal and external reports on penalties are limited in nature. No reports are regularly produced which indicate matters such as:

  • the nature of taxpayers who have attracted GST penalties (including matters such as the size of the relevant taxpayer and the industry in which it operates);
  • the nature of the issues that attracted penalties; and
  • how much of the relevant penalty has actually been collected.

2.19 The review has made a recommendation aimed at improving the Tax Office's administration of penalties in large taxpayer GST audits. The Tax Office has agreed to implement this recommendation.

General interest charge

GIC in revenue-neutral cases

2.20 Cases examined during the review suggest that the imposition of a general interest charge is inappropriate in relation to certain ‘procedural' compliance adjustments which are revenue-neutral and which are made as a result of a GST audit. GST audit cases examined during the review which initially attracted a significant initial GIC charge that was compounded over a number of tax periods included:

  • cases where the Tax Office levied GST on a supplier but at the same time (or shortly thereafter) allowed a corresponding input tax credit (ITC) for the GST to the purchaser of the supply. This meant that correction of the error resulted in no net revenue being payable to the Tax Office. These transactions are referred to as ‘wash transactions' by the Tax Office;
  • situations where a legal technicality was breached by the taxpayer being audited. Examples include input tax credits being claimed on the basis of invalid tax invoices and situations where an input tax credit was not available because of the absence of an agreement between the parties for the purchaser of a supply to create the relevant tax invoice;
  • cases where the wrong entity in a group of companies claimed an input tax credit or paid GST but in the correct period; and
  • cases where GST was charged by one party to a transaction and fully claimed as a refund by the other party but where no GST was in fact payable or claimable on the relevant transaction.

2.21 Cases in the second to fourth categories above are, like wash transactions, generally corrected in a subsequent tax period with no net gain to the revenue.

2.22 The Inspector-General considers that the imposition of a general interest charge is inappropriate in all the above kinds of cases. An alternative to the GIC regime in these cases could be a penalty set at suitable level which is imposed under either the existing penalty regime or possibly under a new legislative penalty which applies to cases involving no net loss to the revenue. This penalty would be applied only in cases that warrant it (such as cases involving wilful and repeated transgressions of the relevant technicality).

2.23 The Tax Office has maintained, contrary to the view of the Inspector-General, that GIC will continue to be payable in the first of these categories of cases involving procedural adjustments, but at a reduced rate which is seven percentage points lower than the normal GIC rate. It has confirmed that cases in the other three categories will generally not attract GIC, at least where the error is one that the taxpayer has not previously made.

2.24 The Tax Office has indicated it is reluctant to impose a penalty under existing penalty provisions as an alternative to the GIC because this process would imply that the general interest charge is a penalty. This comment ignores the fact that, while the GIC is not a penalty in itself, it can have a penalty effect where, as is currently the case for GST audits, it is imposed for periods where the taxpayer is unaware that the GIC is accruing at a rate which is well in excess of the usual cost of finance for the taxpayer. This penalty-like effect of the GIC has been noted in other reports prepared by the Inspector-General.2

GIC in cases involving unprompted voluntary disclosures

2.25 The review has also found that the Tax Office has not consistently applied its policy on GIC in cases involving unprompted voluntary disclosures. This policy is that the GIC in such cases will generally be calculated at a rate which is seven percentage points less than the prevailing GIC rate. The Inspector-General has recommended that the Tax Office should review all large taxpayer GST audit adjustment cases where GIC has been charged at a rate which is in excess of the rate set by its policy. The Tax Office has not agreed with this recommendation, but has agreed to review all such cases identified as falling into this category as a result of the fieldwork conducted by staff of the Inspector-General for this review.

Other issues with GIC

2.26 In addition, the review found that the Tax Office does not prepare reports on the amounts of GIC actually imposed, remitted or ultimately collected in GST audit cases. As a result it is not in a position to know the quantum of GIC being generated in GST audit cases, nor the nature of the taxpayers who have become liable for such interest, the issues that generated the interest charge and whether or not this interest was ultimately collected.

2.27 Furthermore, the review found that existing Tax Office internal review processes for GIC decisions may not be fully achieving their quality control aim. When responsibility for GIC remission decisions was transferred from the Operations area of the Tax Office to the GST audit area this process was largely not accompanied by some processes and procedures which exist in the Operations area for ensuring that GIC remission decisions are made correctly.

2.28 The Inspector-General has recommended that steps be taken to improve the Tax Office's quality control of GIC remission decisions for large taxpayer GST audits. The Tax Office has agreed with this recommendation.

Other issues concerning GST audits of large taxpayers

Margin scheme valuation cases

2.29 The review found that the Tax Office has been inappropriately dealing with cases involving margin scheme valuations in a number of instances. Margin scheme valuation cases are those where the GST payable on the sale of real property acquired before 1 July 2000 is calculated on the difference between the consideration received for the property and its value as at 1 July 2000.

2.30 The Tax Office has inappropriately dealt with a number of these cases by failing to supply taxpayers with reasons why their valuations do not meet Tax Office requirements. It has also failed to inform taxpayers of alternative valuation amounts the ATO has obtained from the Australian Valuation Office (AVO). Additionally, it has a practice of challenging and invalidating taxpayer valuations using AVO ‘critiques' and then using the original purchase price — even from years earlier — as a basis for adjustment, when it could take steps to narrow the dispute to the difference between the value referred to in the AVO critique and the taxpayer's valuation.

2.31 The Inspector-General has recommended that:

  • taxpayers are supplied with reasons why their valuations do not meet Tax Office requirements as soon as possible during the course of a GST audit involving a margin scheme valuation issue and that these reasons include the alternative valuation amount the Tax Office has obtained from the Australian Valuation Office, whether that amount is set out in a ‘critique' or in a full valuation; and
  • disputes on margin scheme valuations are confined to the difference between what the Tax Office considers to be an acceptable valuation amount and what the taxpayer contends is an acceptable amount.

2.32 The Tax Office has agreed to the first part of this recommendation but not to the second.

Audit cases involving classification issues

2.33 The review found that there are also a number of cases where taxpayers are contending that the Tax Office has changed the GST classification of a food item without warning and has sought to apply the new classification retrospectively throughout the supply chain.

2.34 The Inspector-General has recommended that the Tax Office should introduce a system of binding pronouncements for GST. Such pronouncements were used for many years by the Tax Office in administering sales tax. The Tax Office has agreed with this recommendation.

Timeframes for GST audits of large taxpayers

2.35 The review found that the Tax Office does not have GST audit timeframe benchmarks which can be readily compared with those of other countries or with the benchmarks for other types of audits that are conducted on large taxpayers. It is also taking far too long to finalise some audits, particularly specific issue audits. In some cases, the Tax Office has not applied adequate governance to the planning, management and taxpayer interface of its audit activities. Technical decisions are also taking far too long to be made and communicated to taxpayers in some cases. Furthermore, audit letters are not always issued and risk reviews become audits without taxpayers being aware of the transition.

2.36 The Inspector-General has made a recommendation to address each of these issues. This recommendation has been agreed to by the Tax Office.

Communication and other issues concerning GST audits

2.37 Large GST taxpayers do not always receive letters notifying them of the commencement and finalisation of a GST audit.

2.38 There are also some cases where taxpayers and/or advisers in large GST audit cases are being denied access to the relevant Tax Office decision maker on their case.

2.39 The Tax Office has created a perception that it has a view that retrospective ITC claims, particularly for financial services arising from reappraisal of apportionment methodologies, are somehow indicative of non-compliance or bad practice. The law allows up to four years for ITCs to be claimed. It would be inappropriate for the Tax Office to attempt to thwart legitimate claims for retrospective credits or to read them as a sign of compliance risk.

2.40 Auditors do not in some cases understand the business they are auditing. Training needs to be improved for auditors particularly in business process and activity and how to focus on revenue adding issues.

2.41 Feedback is not always provided to individual auditors on the results of the cases they have audited, in terms of the final outcome of cases after they have gone through the appeal process.

2.42 The review has also established that, when conducting GST audits on imported items, the Australian Customs Service (Customs) does not apply materiality guidelines similar to those contained in the Tax Office's GST mistakes fact sheet.

2.43 The Inspector-General has made a number of subsidiary recommendations to address these communication and other issues associated with GST audits. All of these recommendations have been agreed to by the Tax Office.

Key recommendations

Key Recommendation 3.1

The Tax Office should ensure that there is greater transparency in the presentation of its GST audit results to the community by:

  • identifying those GST audit adjustments which have arisen from unprompted voluntary disclosure and those that have not;
  • identifying how much of reported GST audit adjustments which have not arisen from unprompted voluntary disclosures involve a net contribution to the revenue and how much of these adjustments involve revenue-neutral or other kinds of adjustments which do not; and
  • identifying the quantum of credit amendments made by taxpayers to prior year GST returns which the Tax Office has not included as GST audit adjustments.

Tax Office response

Dot point 1

2.44 The Tax Office agrees with this recommendation and is in the process of implementing it. The GST Risk and Strategy and Large Active Compliance (RS & LAC) Business Plan for 2007-08 includes a commitment to plan and report separately on active compliance activities and unprompted voluntary disclosures. Work is currently under way by the Tax Office Compliance Support and Capability unit to introduce Tax Office wide reporting procedures to deal with voluntary disclosures.

Dot point 2

2.45 The Tax Office agrees with this recommendation and will work to separately report revenue-neutral adjustments.

Dot point 3

2.46 The Tax Office notes this recommendation and will investigate the extent to which we can report credit amendments associated with audits.

Key Recommendation 3.2

The Tax Office should ensure that, for risk management purposes, it fully understands the nature of the GST audit results it is achieving for large taxpayer GST audits with a view to ensuring that the resources it allocates to these audits are being appropriately balanced against the risk management outcomes of these audits.

Tax Office response

2.47 The Tax Office agrees with this recommendation on the basis that we have, as part of major organisational changes made in November 2006, established an area with responsibility for identifying and managing GST risks in the large market to achieve these outcomes. Based on our most recent assessment of the risks in the large market, the Tax Office believes it has appropriately allocated audit resources to this market.

Key Recommendation 3.3

The Tax Office should provide the whole community with a consolidated statement or guide on how they can make voluntary disclosures and how they will be treated in terms of tax, penalties and GIC when they do so.

Tax Office response

2.48 The Tax Office agrees with this recommendation.

Key Recommendation 4.1

The Tax Office should enhance its processes for the proper application of penalties in GST large taxpayer audits by:

  • issuing GST–specific guidance for its staff on the application of penalties which arise as a result of a GST audit;
  • ensuring that this guidance covers what kinds of disclosures will give rise to a reduction in penalties, when a disclosure will be considered to have been voluntary and when any voluntary disclosure will be considered to have been made before or after the start of an audit;
  • continuing to conduct periodic reviews of the extent to which penalties in large taxpayer GST audits are being applied appropriately; and
  • ensuring that, where a penalty is reduced after the issue of an audit report as a result of either an internal or external review process, feedback on the reasons for the reduction is provided to all Tax Office staff who were involved in the initial setting of the penalty.

Tax Office response

Dot point 1

2.49 The Tax Office agrees with this recommendation. This guidance may be in the form of a single document or a number of documents which together provide the level of detail needed by GST auditors to impose penalties.

Dot point 2

2.50 The Tax Office agrees with this recommendation.

Dot point 3

2.51 The Tax Office agrees with this recommendation and is of the view that continuation of the periodic technical quality reviews of the application of the penalty regime imposed in large taxpayer audits will meet this requirement. During the 2006-07 year the National Technical Quality Review (TQR) results show that penalty decisions met corporate benchmarks.

Dot point 4

2.52 The Tax Office agrees with this recommendation as it has already been implemented as a separate initiative unrelated to this review.

Key Recommendation 4.2

The Inspector-General recommends:

  • that the Tax Office's existing policy on wash transactions should be altered so that full remission of GIC on a one-off wash transaction error becomes the norm rather than the exception;
  • that the Tax Office should issue a specific policy to reflect that it will generally fully remit GIC in cases where a wrong entity has accounted for the GST; and
  • that the Tax Office addresses any undesirable behaviour on the part of the relevant taxpayer in relation to failing to account for GST on one-off wash transaction errors or other similar transactions which involve no revenue loss through the existing penalty regime rather than the GIC regime.

Tax Office response

2.53 The Tax Office does not agree with this recommendation.

Dot point 1

2.54 The scheme of the Act does not take into consideration the treatment of another taxpayer when applying GIC to an entity which has made a mistake.

2.55 Each case for remission of GIC will be considered on its own circumstances and merit. Interest charges are automatically imposed by the law in all relevant shortfall cases. The scheme of the Act is to apply GIC to individual taxpayers whose responsibility it is to correctly report an obligation within the correct time period. The scheme introduced by Parliament clearly intends for GIC to be applied where individual taxpayers failed to report correctly within the nominated time.

Dot point 2

2.56 The Tax Office is currently reviewing its practice statement PSLA 2003/2 in relation to GST ‘wash' transactions and these comments will be considered as part of this review.

Dot point 3

2.57 Penalty and GIC are two separate and distinct regimes. The culpability of the taxpayer remains a matter for the administrative penalties regime and not the GIC regime.

Inspector-General's comments on Tax Office response

2.58 In view of the Tax Office's response to this recommendation, the Inspector-General makes the following key recommendation to the Government:

Key Recommendation 4.2A

The Inspector-General recommends that the Government consults with the community on the need for legislative changes which have the effect of requiring or allowing the Tax Office to:

  • adopt a default position of fully remitting the general interest charge in GST audit cases which result in adjustments that involve no net loss to the revenue such as wash transactions, cases involving documentation issues and cases where GST has been paid by the wrong entity; and
  • where warranted, address any undesirable behaviour on the part of the relevant taxpayer in relation to failing to account for GST on such transactions through a form of penalty.

Key Recommendation 4.3

The Tax Office should review all large taxpayer GST audit adjustment cases which have involved unprompted voluntary disclosures where GIC has been charged at the full rate with a view to re-setting the GIC rate in these cases to the bank bill rate, being the rate which generally represents Tax Office policy.

Tax Office response

2.59 The Tax Office disagrees with Recommendation 4.3.

2.60 The Tax Office policy (PSLA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods of remission of GIC) provides that a voluntary disclosure itself is not a ground for routine remission to the bank bill rate (base rate). However, the policy does provide that there may be some cases where the circumstances surrounding the voluntary disclosure will make it fair and reasonable to remit interest charges. Any remission of interest charges on the basis of a voluntary disclosure will have regard to the specific circumstances and will consider matters such as:

  • how soon the disclosure was made after the error was first detected;
  • whether it was made before the notification of the commencement of an audit;
  • the size of the shortfall, either in monetary terms or in relation to the totality of the taxpayer's affairs, and
  • the taxpayer's compliance history, including the number of times a taxpayer has had to disclose shortfalls following an initial self-assessment of liability.

2.61 As the circumstances of each taxpayer are invariably different it is unlikely that the application of the policy will result in remission of interest to base rate in every case where a voluntary disclosure is made.

2.62 The Tax Office is satisfied, based on its Technical Quality Reviews, that GIC has been appropriately applied in GST audits cases.

Inspector-General's comments on Tax Office response

2.63 The Inspector-General acknowledges the Tax Office's case-by-case approach and the relevance of considering the specific circumstances as outlined in their response. The Inspector-General also agrees that this approach will mean that some voluntary disclosures will not have the GIC reduced to the bank bill rate. However, the Inspector-General is disappointed that the Tax Office has declined to review all voluntary disclosure cases that have full GIC applied because the sample of cases examined as part of the review showed greater variance of treatment than would be expected including a fairly high proportion with full GIC (refer to para 4.118 of the report). The Inspector-General also notes that this issue was raised as a concern in a number of submissions to the review. However, the comments in the report on this issue may raise awareness in the community and lead to affected taxpayers taking the matter up with the Tax Office.

Key Recommendation 4.4

The Inspector-General recommends that the Tax Office enhance its processes for ensuring that GIC imposition and/or remission decisions in large taxpayer GST audits are being made appropriately and consistently by:

  • issuing detailed GST–specific guidance for its staff on GIC remissions which arise as a result of a GST audit;
  • ensuring that large taxpayer GST auditors are appropriately trained on the Tax Office's guidelines for GIC imposition and remission; and
  • ensuring that GIC remission decisions for large taxpayer GST audits are subject to adequate internal quality controls.

Tax Office response

Dot point 1

2.64 The Tax Office agrees with this recommendation.

Dot point 2

2.65 The Tax Office agrees with this recommendation on the basis that it is already providing training and support to GST auditors in the correct application of the Tax Office's policies on the application of general interest charge as part of an initiative that had commenced prior to the commencement of this review.

Dot point 3

2.66 The Tax Office agrees and will ensure that GIC remissions are subject to internal quality controls.

Key Recommendation 5.1

The Inspector-General recommends that the Tax Office takes steps to:

  • ensure that taxpayers are supplied with reasons why their valuations do not meet Tax Office requirements as soon as possible during the course of a GST audit involving a margin scheme valuation issue and that these reasons include the alternative valuation amount the Tax Office has obtained from the Australian Valuation Office, whether that amount is set out in a ‘critique' or in a full valuation; and
  • ensure that disputes on margin scheme valuations are confined to the difference between what the Tax Office considers to be an acceptable valuation amount and what the taxpayer contends is an acceptable amount.

Tax Office response

Dot point 1

2.67 The Tax Office agrees although it notes that not all critiques provided by the AVO will include an alternative estimated valuation. However, where an alternative estimated valuation is provided as part of the AVO critique this will be communicated to the taxpayer.

Dot point 2

2.68 The Tax Office notes this recommendation. The Tax Office is currently examining options by which it can, within the law, substitute an alternative valuation rather than use the last sale price in those cases where it believes the taxpayer's original valuation is not an approved valuation. In November 2007, the Tax Office put a proposal along these lines to the GST Sub Committee of the National Taxation Liaison Group for consideration and feedback.

Key Recommendation 5.2

Because of competitive winners/losers as a result of different GST classifications in the market place, the Tax Office must review its current approaches to ensure binding GST decisions in relation to new products coming onto the market are made and communicated quickly into the market to ensure that there is improved through-the-chain certainty, better compliance and lower costs.

Tax Office response

2.69 The Tax Office agrees with this recommendation.

Key Recommendation 5.3

The Inspector-General recommends that the Tax Office:

  • expeditiously resolves GST large taxpayer audits experiencing significant delays;
  • clarifies in a public statement its position on when a GST audit has started and the circumstances in which this will occur orally or by letter;
  • takes steps to ensure that technical decisions which impact audits are made without delay; and
  • should review, in consultation with taxpayers and their representative associations, the existing benchmark times to complete GST audits and should also work with other countries to develop appropriate approaches to comparing benchmark times to complete a GST/VAT audit.

Tax Office response

Dot point 1

2.70 The Tax Office agrees with this recommendation and will continue its current focus on resolving GST audits in a timely manner. Where an audit is experiencing delays that are within the Tax Office's control, auditors will keep the taxpayer informed of the reason for the delay and the progress of the case. We will continue to apply the procedures we have in place to ensure the active case management of cases exceeding cycle time.

Dot point 2

2.71 The Tax Office agrees with this recommendation and will take this into account as part of the review of the 2006 Large business and tax compliance booklet.

Dot point 3

2.72 The Tax Office agrees with this recommendation. However, there will at times be delays in the resolution of technical issues that arise in the large market due to their complex nature.

Dot point 4

2.73 The Tax Office agrees with this recommendation.

Subsidiary recommendations

Subsidiary recommendation 5.1

The Inspector-General recommends that large taxpayer GST auditors should always confirm the date of commencement and finalisation of an audit in writing. If advice of the commencement or finalisation of an audit is given orally this advice should be confirmed in writing within a reasonable time thereafter.

Tax Office response

2.74 The Tax Office agrees with this recommendation

Subsidiary recommendation 5.2

The Tax Office should ensure that GST auditors facilitate access by large taxpayers who are subject to a GST audit to the key technical decision makers involved in their case and also ensure that the large taxpayers are made aware of the senior officer they can escalate issues or concerns to.

Tax Office response

2.75 The Tax Office agrees with this recommendation.

Subsidiary recommendation 5.3

The Inspector-General recommends that the Tax Office takes steps to:

  • ensure that auditors better understand the businesses they are auditing by providing more training on business process and activity and on how to focus on issues that involve a real net gain to the revenue;
  • ensure that auditors understand that businesses may want to exercise their legal rights to correct their GST liabilities for previous years in cases where they have overpaid and that such claims are not, per se, evidence of an attitude of non-compliance with the GST law; and
  • ensure that GST auditors are in all cases provided with individual feedback on the results of the cases they have audited, in terms of the final outcome of cases after they have gone through the appeal process.

Tax Office response

Dot point 1

2.76 The Tax Office agrees that it will continue to provide its auditors with skilling on business process and activities to improve their capability in this area.

Dot point 2

2.77 The Tax Office agrees with this recommendation and understands that business will at times exercise their rights to correct prior year GST liabilities. The ATO has never seen this as evidence of an attitude of non compliance. However, it must be recognised that the Tax Office is under an obligation to ensure that a taxpayer has a legal right to the claim it is making. The Tax Office rejects any implication that there has been any systemic problem in relation to this issue.

Dot point 3

2.78 The Tax Office agrees with this recommendation and this process which it has already implemented as part of a separate initiative unrelated to this review.

Subsidiary recommendation 5.4

The Inspector-General recommends that tolerance or materiality levels are aligned across both Australian Customs Service and Tax Office administration of GST.

Tax Office response

2.79 The Tax Office agrees with the recommendation to the extent that it will work with the Australian Customs Service (ACS) to achieve this outcome. It notes that the ACS is currently planning a review of the materiality thresholds. It is intended that this review will be conducted jointly with the Tax Office and will take into account the compliance cost to industry of amending import declarations. It is intended that the revised approach will be published in a practice statement.


1 The Tax Office has advised the Inspector-General that the amount of GST penalties initially imposed on large taxpayers were as follows for the last three years: 2004/05: $44 million (this was later reduced to $2 million as the result of a single case being settled); 2005/06: $1 million; 2006/07: $6 million. The amount of GST penalties initially imposed on non–large taxpayers in the last two of these years was: 2005/06: $126 million and 2006/07: $116 million.

2 See, for example, Inspector-General of Taxation, Review of the remission of the General Interest Charge for groups of taxpayers in dispute with the Tax Office, 5 August 2004 at paragraphs 2.27 to 2.29.