4.1 This chapter sets out the legal and administrative rules for the imposition and remission of penalties and interest in GST audits and the concerns that were raised in submissions to this review about how these rules are currently being applied by the Tax Office to GST audits conducted on large taxpayers. It then sets out the Inspector-General's overall findings in relation the Tax Office's imposition of penalties and interest in large taxpayer GST audits.
4.2 Where additional GST is payable as a result of an audit, a tax shortfall arises. In such cases, the Tax Office, in addition to collecting the actual tax shortfall, may also apply an administrative penalty known as a tax shortfall penalty. This penalty arises under Part 4-25 of Schedule 1 to the Taxation Administration Act 1953.
4.3 For GST, tax shortfall penalties may arise:
- where the taxpayer has made a false or misleading statement to the Tax Office (for example, by omitting to pay GST on a taxable supply or by over claiming an input tax credit); or
- where the taxpayer has entered into a GST tax avoidance scheme.
4.4 The GST penalty regime is part of the uniform penalty regime that applies to most federal tax obligations with effect from 1 July 2000. This regime was implemented to ensure that a common penalty applies where a taxpayer has failed to satisfy the same type of obligation under different tax laws.
4.5 The GST penalty legislative regime for tax shortfalls sets out a base penalty amount which increases according to the degree of culpability of the taxpayer.
4.6 The base penalty amounts for GST shortfalls arising from false statements are as follows:
- where the taxpayer has failed to take reasonable care: 25 per cent of the tax shortfall;
- where the taxpayer has been reckless: 50 per cent of the tax shortfall;
- where the taxpayer has intentionally disregarded the law: 75 per cent of the tax shortfall.
4.7 The base penalty amounts for GST shortfalls that arise from tax avoidance schemes are as follows:
- where it is reasonably arguable that the anti-avoidance rules do not apply: 25 per cent of the amount of tax benefit obtained from the scheme ;
- in all other cases: 50 per cent of the tax benefit obtained from the scheme.
4.8 These base penalty amounts can then be increased by 20 per cent according to whether the taxpayer:
- has prevented or obstructed the Tax Office's investigation of the tax shortfall; or
- has previously been penalised for a shortfall.
4.9 If a taxpayer has voluntarily disclosed a tax shortfall to the Tax Office before being advised of a tax audit any tax shortfall penalty is reduced by 80 per cent. If the taxpayer voluntarily discloses the shortfall after being advised of a tax audit, any penalty is reduced by 20 per cent.
4.10 No tax shortfall penalty is payable if a taxpayer has relied on Tax Office advice or a general administrative practice.
4.11 The Commissioner has the discretion to remit all or part of an administrative tax shortfall penalty.
4.12 Where the Commissioner decides not to remit a penalty or to remit only part of the penalty he must give written notice of the decision and the reasons for the decision to the taxpayer.11
Administrative rules for penalties
4.13 The Commissioner has issued a number of public rulings, practice statements, fact sheets and other material which set out how he will administer the legislative rules on tax shortfall penalties under the uniform penalties regime. Most of this material is not GST-specific but some of this material contains examples which deal with GST penalties. The Commissioner has also issued other internal guidelines to his staff on how these uniform penalties are to be applied. Some of this internal material is GST-specific.
4.14 Over the years since the GST was introduced the Commissioner has progressively adopted a harder stance on the application of tax shortfall penalties for post-2000 audit adjustments in his published guidelines.
4.15 For the first year of the GST, penalties were generally only applied if the taxpayer acted with intentional disregard of the law.12 For GST returns13 lodged from 1 August 2001 to 31 March 2004, penalties were only generally applied if the taxpayer acted recklessly or with intentional disregard of the law.14 The current administrative rule, which has applied for GST returns lodged after 1 April 2004, is that penalties will be applied fully in accordance with the legislative rules for penalties that is, they will be applied if the taxpayer has acted with a lack of reasonable care, recklessly or with intentional disregard of the law.15
4.16 Under the current published administrative rules for the application of penalties in GST audits, which are contained in Practice Statement PS LA 2006/2, the Commissioner has indicated that he will generally not levy a tax shortfall penalty in the following circumstances:
- where an isolated bookkeeping or record keeping mistake has been made, the mistake does not relate to an extraordinary transaction, the mistake was honest and unintended and the taxpayer has a good compliance history16;
- where the taxpayer has, prior to being notified of an audit, made an unprompted voluntary disclosure of a GST adjustment to the Tax Office and the entity has made an honest mistake17;
- where GST has been paid by (or a credit has been claimed by) the wrong entity in a related group of entities and the entities have not acted recklessly or with intentional disregard of the law18;
- where a taxpayer does not have a valid tax or recipient created tax invoice but has made an acquisition that otherwise qualifies for an input tax credit19;
- where the mistake is corrected in a subsequent tax period in accordance with the guidelines contained in the Tax Office's guide on Correcting GST Mistakes-07/200420; and
- where a penalty would lead to an unjust result.21
Internal Tax Office guidelines on penalties
4.17 Tax Office auditors principally rely on the rulings, practice statements, fact sheets and other material which has been made public by the Tax Office when applying penalties. However, they also rely on a number of internal work procedure documents and guidance notes which set out certain procedural steps which they must follow when dealing with tax shortfall penalties.
4.18 For GST penalties these internal documents require tax officers dealing with large taxpayer GST audits to provide written notice to taxpayers of matters such as:
- the reasons why a taxpayer was considered liable for a penalty (even in cases where that penalty is remitted to nil);
- the reasons for any remission of penalty; and
- the practice statement or other published material relied on when remitting a penalty.
4.19 A general interest charge (GIC) is imposed on any tax or penalty that remains unpaid after the date it becomes due and payable. The interest charge is separate to any penalty imposed. It represents compensation to the revenue for the delay in payment of tax, acts as an incentive for payment of tax liabilities by their due date and ensures that taxpayers who fail to fulfil their payment and return or statement obligations do not receive an advantage over those who meet their tax liabilities in full by the due date.
4.20 Where a GST audit leads to a tax adjustment creating a liability to pay additional tax, the interest charge will be imposed from the original date that the tax was due until the date the tax is paid. For large taxpayers who lodge monthly GST returns the original date that the tax was due will be 21 days after the end of the month to which the adjustment relates.22
4.21 The amount of interest arising from a GST audit adjustment is calculated on a daily compounding basis and is calculated by adding seven percentage points to the 90 day bank bill rate.23
4.22 The amount of interest charge that arises from a GST audit adjustment differs from that which arises in an income tax audit adjustment.
4.23 For income tax audit adjustments the rate of interest charged is the 90 day bank bill rate plus three percentage points for the period from when the tax was originally due up until the date before the Commissioner issues an amended assessment. No interest is charged for the period between service of the amended assessment and the due date shown on that amended assessment.
4.24 The Commissioner may remit interest arising from GST audit adjustments in the following circumstances:
- the delay in payment was not caused directly or indirectly by an act or omission of the taxpayer and the taxpayer has taken reasonable action to correct the situation;
- the delay in payment was caused directly or indirectly by an act or omission of the taxpayer, they have taken reasonable action to correct the situation and it would be fair and reasonable to remit all or part of the charge; and
- there are special circumstances which make it fair and reasonable to remit or it is otherwise appropriate to do so.24
4.25 The Commissioner has issued a number of practice statements, manuals and other material which set out how he will administer the legislative rules on interest. These are largely not GST specific, although some of this material contains sections which are GST-specific. He has also issued other internal guidelines to his staff on how interest is to be applied.
4.26 The principal published guidelines for the remission of interest are contained in Practice Statements PS LA 2003/2, PS LA 2004/11 and PS LA 2006/8 and the ATO's Receivables Policy.
4.27 Under these guidelines remission of the GIC will only occur where a taxpayer's individual circumstances warrant this result. Paragraph 93.5.1 of the ATO's Receivables Policy confirms that this is the Tax Office's underlying policy with respect to the remission of GIC. It states:
The law imposes GIC in all cases and the Commissioner will take steps to recover those charges, even after a primary debt is finalised. However, the legislation acknowledges that situations exist where it would be fair and reasonable for the GIC to be remitted. The Commissioner has the discretion to remit the GIC in part or in full depending on the circumstances that led to the late payment.
4.28 Under the Tax Office's guidelines for the remission of GIC, the seven percentage point uplift factor for interest will generally be remitted, and interest charged at the 90 day bank bill rate only in the following three circumstances:
- where there have been delays by the Tax Office and certain reasonable delays by the taxpayer;
- where the taxpayer has made an unprompted voluntary disclosure;
- where the transaction is a 'wash' transaction as defined. These transactions are defined in PS LA 2003/2 as being a transaction which involves GST not being charged on a taxable supply, where the supply is made to a GST registered recipient who would have been entitled to claim a full input tax credit on the supply. The term 'wash' in this context refers to the fact that there is no net tax effect on the revenue from such transactions.
4.29 Under these practice statements interest arising from a GST audit adjustment will generally be remitted to nil in the following circumstances:
- where there has been no action by the Tax Office on a GST audit for 30 days or more and it was possible for the case to progress during that time;
- where the delay is outside the taxpayer's control due to a disaster or serious illness; or
- where the taxpayer has reasonably relied in good faith on Tax Office advice, a general administrative practice or an ATO Interpretative Decision (ATO ID).25
Internal Tax Office guidelines on GIC
4.30 Tax Office auditors principally rely on the rulings, practice statements, fact sheets and other material which has been made public by the Tax Office when dealing with GIC. However, they also rely on a number of internal work procedure documents and guidance notes which set out certain procedural steps which they must follow when dealing with GIC. However, this internal material is not as detailed as that which has been developed for penalties.
Concerns raised in submissions to the review about the Tax Office's application of penalties and interest in large taxpayer GST audits
4.31 Submissions made to this review in relation to the issue of penalties and interest levied on large taxpayers during GST audits principally focused on the Tax Office's application of interest rather than penalties. This is understandable given that the amount of penalties ultimately levied on large taxpayers as a result of GST audits has, until the 2006/07 year, been quite low.26
4.32 Submissions made to this review in relation to the application of interest made the following assertions:
- the legislative rules for interest in GST audits were inappropriate in a number of key respects;
- the Tax Office's administrative guidelines for the application of interest were in some key respects inappropriate;
- the Tax Office was not following either the legislative or administrative guidelines for interest in a number of cases; and
- the Tax Office took too long to reach a decision on the amount of interest that would be levied in a number of cases.
4.33 Similar concerns were raised in relation to the Tax Office's application of penalties.
4.34 In relation to the legislative guidelines for the application of interest and penalties in GST audits many submissions asserted that a number of the changes to the interest and penalties regime that were made as a result of Treasury's Review of Aspects of Income Tax Self Assessment (RoSA)27 had not been carried through to the GST regime. In particular submissions stated that the reduced rate of interest (known as the shortfall interest charge) where additional tax is payable as a result of an income tax audit should also be implemented for GST.
4.35 The extent to which changes to interest that were made to the income tax regime as a result of the RoSA review should be extended to other taxes such as GST is currently the subject of review by the Board of Taxation. The terms of reference of the Board of Taxation's review do not extend to examining the GST penalty regime and the extent to which it may differ from the income tax penalty regime.
Internal Tax Office reports on penalties and interest
4.36 The Tax Office produces reports on the amount of penalty that is initially levied in large taxpayer GST audits. These are the amounts of penalties which are reported in the Tax Office's Annual Report for each year. However no reports are regularly produced which indicate matters such as:
- the nature of taxpayers who have attracted GST penalties as a result of an audit (including matters such as the size of the relevant taxpayer and the industry in which it operates);
- the nature of the issues in audits which attracted penalties;
- how much of the relevant penalty imposed during the audit has actually been collected.
4.37 The penalty amounts recorded in the Tax Office's internal reports show that, for the 2006/07 year, $6 million was levied on large taxpayers. For the 2005/06 year, $1 million of penalties were levied and, for the 2004/05 year, $44 million of penalties were levied.
4.38 However the $44 million penalties actually levied for 2004/05 have been reduced by at least $42.4 million (that is, to a maximum of $1.6 million) as a result of a single case being settled. Penalties for the 2005/06 year also appear to have been subsequently reduced significantly in a number of cases examined by the Inspector-General.
4.39 The Tax Office's internal reports on penalties applied in GST audit cases therefore do not provide a basis for assessing the extent to which penalty decisions (including decisions on the remission of penalties) are being applied consistently and in accordance with existing guidelines. They also do not provide an indication of the level of large GST taxpayers' culpability with respect to GST errors that they may have made.
4.40 During the review the Tax Office advised that it is currently looking for a corporate reporting solution for the reporting of cases where significant amounts of shortfall penalty have been imposed or remitted, and how this may be reflected in external reports. It is currently exploring with the Change Program how this approach may be supported.
4.41 The Tax Office also does not prepare any report on the amounts of GIC imposed, remitted or collected in large taxpayer GST audit cases. As a result of this reporting defect, the Tax Office does not know the amounts of GIC actually imposed, remitted or ultimately collected in GST audit cases, including large taxpayer cases. As a result it does not know the extent to which GIC decisions (including decisions on the remission of GIC) are being applied consistently and in accordance with existing guidelines.
4.42 During the review the Tax Office advised that it is possible to manually isolate and calculate the GIC arising from GST assessments in individual cases. This is not done as a matter of course. The Tax Office advised that it is currently reviewing this with a view to determining how it can report on GIC.
Inspector-General's review of GST penalty and interest cases for large taxpayers
4.43 For this review, staff of the Inspector-General examined aspects of GST penalty cases that were evident from internal Tax Office material and publicly available material on GST cases that had been subject to the objection and appeal process. IGT staff also examined in detail the case files for 100 randomly selected large taxpayer GST audits that were finalised during the 2004/05 and 2005/06 years and the ten months ended 30 April 2007. Of these cases that were examined, 16 cases involved the imposition of both penalties and interest at the audit stage, 5 involved the imposition of penalties only at the audit stage and 35 involved only the imposition of GIC at the audit stage. There were 44 cases which involved neither the imposition of GIC or any penalty.
Inspector-General's review of penalty cases
Cases involving GST penalties that have been subject to objection and appeal
4.44 An internal Tax Office report which was based on a sample of 100 GST audit cases drawn from the 2004/05 and 2005/06 years indicates that 78 per cent of objections against GST assessments included a penalty issue. 28 per cent of cases involved a penalty only objection.
4.45 For audit-sourced GST objection decisions which involve a penalty only, 58 per cent were allowed either in full or part. In 33 per cent of cases the objection decision was allowed in full.
4.46 Furthermore, although the number of GST audits conducted in 2005/06 and 2004/05 were similar, there was a 36 per cent increase in the number of GST objections received in 2005/06 compared to 2004/05.
4.47 These figures cover GST objections for all GST taxpayers — not just those in the large category. However, they strongly suggest that there may be an issue with the manner in which penalties are being levied in large taxpayer GST audits.
Fieldwork on penalty cases conducted for this review
4.48 Of the 21 penalty cases examined by the Inspector-General, 15 related to the 2006/07 year. Two of these cases were on hand at year end but had penalties applied thereafter. The penalties levied in these 15 cases totalled $5.5 million. The total number of finalised penalty cases in the large taxpayer market for this year was 26 and the total dollar value of such penalties was $6.3 million. The cases reviewed by the Inspector-General therefore covered 87 per cent of the dollar value (and 58 per cent of the number) of all 2006/07 large taxpayer GST audit penalty cases.
4.49 Of the 15 penalty cases examined for the 2006/07 year, the Inspector-General considers that there are issues which directly affect the level of penalty imposed in 11 of these cases. In most of these cases, these systemic issues affect whether the penalty has been levied at too high a rate, although there are some cases where the systemic issues indicate that the penalty may have been set too low.
4.50 The systemic issue which affected the largest number of cases examined by the Inspector-General (nine cases) related to the Tax Office's practices for levying penalties in cases where there was an issue as to whether the taxpayer had voluntarily disclosed the matter that was subject to an audit adjustment. The next most significant systemic issue related to the Tax Office's practice for levying penalties in cases where a taxpayer has obtained external advice that the position they are adopting is correct (three cases).28
4.51 The Inspector-General considers that these two issues represent systemic issues given that the 11 penalty cases reviewed represent a very high percentage — 67 per cent of the total dollar value — of penalties imposed in large taxpayer GST audits for the 2006/07 year.
4.52 Two issues affected only one case each. In one case a penalty was levied in a situation where the taxpayer was owed a net refund as a result of the audit. This practice is inconsistent with the policy that is applied for other taxes, such as income tax. In the other case, a penalty was levied in a situation where the taxpayer thought it was protected from any penalty because of a practice which had been confirmed in writing by the Tax Office. Again this result is contrary to stated Tax Office policy.
4.53 The two issues which affected more than one case are examined in further detail below.
Levy of penalties in GST audit cases involving voluntary disclosure
4.54 In the nine penalty cases involving disclosures where inappropriate outcomes penalties may have been achieved, the particular issues that were central to these inappropriate outcomes were as follows:
- Was the taxpayer's action one which met the definition of being a 'voluntary disclosure'?
- Was the disclosure made before or after the taxpayer was notified of an audit?
- Was the disclosure voluntary?
What amounts to a 'voluntary disclosure'?
4.55 In two of these nine cases, the GST audit was generated after the taxpayer made a self amendment request for an additional refund where they fully disclosed the basis for the additional refund claim. Each of the refund claims was queried by the Tax Office under its usual procedures for checking unusual or high refunds. In each case the additional refund claim was disallowed. In one case a 50 per cent penalty was imposed on the basis that the taxpayer had been reckless in making their claim. In the other case a penalty was imposed on the basis that the taxpayer had failed to take reasonable care. In neither case was the penalty reduced to either 80 per cent of the initial penalty (in accordance with the relevant legislative rules) or to nil (in accordance with the administrative rule contained in PSLA 2006/2) to take into account the taxpayer's initial disclosure of the relevant items.
4.56 The Tax Office auditors in each case asserted that there was an internal Tax Office policy that self amendments resulting in an additional refund claim where there was full disclosure of the basis of the amendments were not treated as voluntary disclosures for the purposes of the application of penalties. The Inspector-General has confirmed with the senior management of the GST business line that such a policy exists. However, this policy is not clearly articulated in any document. Furthermore, tax commentators have noted there is a lack of clear Tax Office guidance generally on how taxpayers can made self amendments to GST returns and the legal basis for doing so.29
4.57 During the review the Tax Office asserted that its policy that self amendments do not amount to voluntary disclosures was articulated at page 58 of its 2006 Large business and tax compliance booklet. The words that the Tax Office relies on in support of this contention are as follows:
... taxpayers may choose to disclose a shortfall (or an overpayment) by making a voluntary disclosure (or a request for a self amendment).
4.58 The Inspector-General does not consider that these words clearly indicate to either taxpayers or to Tax Office staff that self amendments resulting in an additional refund claim will not be regarded as voluntary disclosure for penalty purposes. In fact, these words appear in a paragraph which is headed 'Voluntary Disclosures'. This suggests that self amendments will amount to voluntary disclosures.
4.59 The Inspector-General considers that the Tax Office's policy in this area is not supported by the relevant legislative rules for voluntary disclosures. It also appears to be inconsistent with the ruling which deals with voluntary disclosures of income tax adjustments (TR 94/6). Paragraph 49 of this ruling states that a request for a self amendment which fully sets out the basis for the amendment will usually be a voluntary disclosure.
4.60 The Tax Office has indicated that it disagrees with the view that this policy is inconsistent with TR 94/6. It considers that paragraph 49 of this ruling only applies to situations where a taxpayer has made a self amendment to increase rather than decrease the tax that is payable. However, the term 'self amendment' is not usually defined in this way by the Tax Office and is not expressly limited to debit amendment cases in TR 94/6 itself.
4.61 The Inspector-General considers that this systemic issue should be addressed by the Tax Office issuing a statement (either in a practice statement or ruling) which confirms that disclosures made in GST self amendments which involve a full disclosure of the basis of the amendments will amount to voluntary disclosures for the purposes of applying penalties. It should also consider issuing clearer guidance on the general topic of how taxpayers can make self amendments to GST returns and the legal basis for doing so.
Was the disclosure made before or after the taxpayer was notified of an audit?
4.62 In four cases the taxpayer disclosed the matters that were the subject of adjustment a few days after the refund claims involving the items to be adjusted had been stopped for checking by the Tax Office under its usual procedures for querying high or unusual GST refunds. In each case the disclosure was made before the Tax Office issued a formal letter notifying the taxpayer that it was under audit. In one case, the taxpayer's disclosure was treated as arising before an audit and any penalty was reduced to nil. In three cases the taxpayer's disclosure was treated as occurring only after the taxpayer had been notified of an audit and a 20 per cent rather than 80 per cent or 100 per cent reduction in penalty was applied.
4.63 In the case where the penalty was reduced to nil the Tax Office advised that this reduction had occurred because the taxpayer concerned was formerly a small to medium taxpayer. The Tax Office advised that it has an internal policy for small and medium size businesses that it will treat a taxpayer who makes a voluntary disclosure of an error within a few days of receiving a call from the Tax Office querying any refund as having made a disclosure before a formal audit.
4.64 In the other three cases where the disclosure was made shortly after the relevant refund was stopped the relevant taxpayer had always been treated by the Tax Office as a large taxpayer. The Tax Office auditors on these cases advised that for this type of taxpayer a disclosure made after a refund had been stopped for checking but before any formal notification letter was sent was always treated as being a disclosure that was made after an audit had been notified.
4.65 In another case, the taxpayer alleged that it had disclosed the item that was subject to adjustment to the Tax Office some time after the refund containing the relevant item was stopped for checking by the Tax Office. In this case, the Tax Office only ever formally advised the taxpayer that it was conducting a 'review' of the refund — rather than any audit. The taxpayer alleged that a notice of a review did not amount to notification of an audit and that as a result any penalty imposed on the relevant item should be reduced by a factor of 20 per cent. The Tax Office however did not however give any reduction in penalty.
4.66 The Tax Office has no clear publicly available guideline which covers the issue of what it will regard as amounting to the notification of an audit for the purpose of applying penalties. The Tax Office does however have internal reference material for its GST auditors, which is available on its intranet, which deals with this issue. This material specifically states that when a taxpayer, after being advised of a compliance activity makes a voluntary disclosure before the formal date of commencement of the audit the disclosure will be treated as having been made before the taxpayer was informed of an audit. It appears from the fieldwork conducted by the Inspector-General that this internal policy may be being applied only to small to medium size taxpayers rather than to large taxpayers.
4.67 During the review the Tax Office advised that the reasons for the different policy it has in this area for large taxpayers when compared to small to medium size taxpayers is that audits of large taxpayer refund claims are generally conducted after the relevant refund has been paid, while such audits in the SME area occur before the refund is paid. However, this distinction is not referred to in the Tax Office's internal reference material and is not understood by either its staff or by taxpayers and their advisers. Furthermore, the Tax Office does not actually apply this distinction in practice as its guidelines allow refunds for SME taxpayers to be paid before the period of grace for making any disclosure has ended.
4.68 In the Inspector-General's view, the Tax Office should take steps to ensure that any internal policy in this area is applied to all, not just some, GST audits. One way in which this could be done would be by the Tax Office issuing a publicly available practice statement or ruling which clearly outlines its view on whether a taxpayer, who makes a voluntary disclosure after their refund has been stopped for checking but before being formally notified in writing of an audit, will be treated as having made a voluntary disclosure before or after being notified of an audit.
4.69 The Inspector-General notes that members of the National Tax Liaison Group's ATPF subcommittee have been seeking public clarification of when a taxpayer has been notified of the commencement of an audit for the purposes of the application of the penalty rules from as early as 2005. It was also an issue raised in a previous report of the Inspector-General. However, to date no such public clarification has been made.
Was the disclosure 'voluntary'?
4.70 In two cases after the relevant audit had commenced errors were disclosed by the taxpayer as a direct result of Tax Office queries into the relevant subject matter. These errors affected other tax periods. The Tax Office treated the errors for the other periods as voluntary disclosures occurring before an audit had commenced for those periods and no penalties were applied for these periods.
4.71 This process is inconsistent with the administrative rule which applies in income tax cases as stated in paragraph 35 of TR 94/6. For income tax purposes, such disclosures would not be treated as being made voluntarily.
4.72 The Tax Office states that its policy on what constitutes a disclosure that is voluntary for GST audits is also contained in TR 94/6. However, this document pre-dates and does not address any of the GST–specific issues concerning voluntary disclosure that were examined during this review, nor any other issues concerning the application of this ruling to GST.
4.73 The Inspector-General considers that the systemic issue about the lack of definitive guidance on voluntary disclosure issues of this nature should be addressed by the Tax Office issuing a statement (either in a practice statement or ruling) which clearly outlines its view on when a disclosure made during a GST audit will be considered to be voluntary.
Other issues found in the review concerning the application of penalties in voluntary disclosure cases
4.74 During the review the Inspector-General also found that in a number of cases involving unprompted voluntary disclosures where a penalty was not ultimately applied, auditors led the taxpayer to believe that a penalty would be applied, even though this was generally not at the relevant time Tax Office policy.
4.75 The Inspector-General also found instances where large penalties were applied but were substantially reduced upon further internal review because there was no actual tax shortfall for the relevant period.
4.76 These findings relate to issues that are stated in either the law on penalties or in existing Tax Office policy documents on penalties. They therefore raise an issue concerning the adequacy of the training of large taxpayer GST auditors on the law and current Tax Office policy on penalties.
4.77 The failure of GST auditors to advise taxpayers that current Tax Office policy involves no application of penalties in voluntary disclosure cases also raises the issue as to the nature of communication processes between GST auditors and taxpayers.
4.78 These issues are discussed further later in this report.
Levy of penalties in cases involving external advice
4.79 In three large taxpayer penalty cases penalties were levied in a situation where the taxpayer, prior to submitting the relevant GST return, had obtained external advice from a reputable source which indicated that there was some basis for the position adopted. In each case the Commissioner disagreed with the position adopted in a subsequent audit.
4.80 The imposition of a penalty in these circumstances appears to be contrary to Tax Office policy. For statements made in GST returns lodged after 1 April 2004 this policy is stated in paragraph 35 of PS LA 2006/2. This paragraph confirms that no penalty for failing to take reasonable care will apply in such circumstances. It states that:
Where an entity or their agent adopted a tax treatment that is not consistent with the Commissioner's view, reasonable care will have been exercised where they have made a genuine effort to research the issue and there is some basis for the position adopted.
4.81 The imposition of a penalty in these circumstances is also contrary to the guidance on the meaning of 'reasonable care' contained in the Explanatory Memorandum which introduced the present GST penalty regime in 2000. Paragraphs 1.75 and 1.76 of the Explanatory Memorandum state:
1.75 A taxpayer who prepares his or her own return or BAS would usually be taken to have exercised reasonable care if in doing so the taxpayer relies upon the advice of a registered tax agent, accountant or lawyer or other person whom the taxpayer could reasonably expect to provide competent advice on the relevant matter. On the other hand, where such advice is not followed this would usually mean that the taxpayer did not exercise reasonable care.
1.76 If a taxpayer seeks to rely upon the wrong advice, and the taxpayer's skill and education was such that the taxpayer could reasonably be expected to have known or suspected that the advice was wrong, the taxpayer would risk penalty. A taxpayer would also risk penalty if the taxpayer was careless in presenting all of the relevant facts to the advisor and this had materially affected the advice on which the taxpayer sought to rely.30
4.82 The Inspector-General notes that the income tax penalties regime has a specific provision which applies to tax adjustments over certain thresholds where a taxpayer has developed a 'reasonably arguable position' based on researching the relevant issue. The effect of this provision is that if a taxpayer has a reasonably arguable position in relation to a disputed income tax item no penalty will be applied.
4.83 The GST penalty regime does not have a similar provision. It appears that, in some GST audit cases, the difference between the income tax and GST penalty regimes on this issue may be causing GST auditors to think, incorrectly, that for GST, a reasonably arguable position does not give rise to a valid defence to the application of a GST penalty.
4.84 The Inspector-General considers that the results of this review indicate that the Tax Office needs to take further steps to ensure that its GST audit staff correctly apply the law on penalties for GST adjustments in cases where a taxpayer has obtained and followed credible external advice and/or has a reasonably arguable position.
Tax Office internal review processes for penalties
4.85 Although the Tax Office has no process for recording and assessing the results of all GST audit cases where a penalty has been levied, it does have a number of internal processes designed to ensure that correct audit and penalty results have been achieved.
4.86 These processes are as follows:
- an internal policy which states that any penalty imposed must be subject to a peer review;
- an internal policy which states that all shortfall penalty cases are to be signed off by a member of the Tax Office's internal Penalty and Interest Network. This network was established in August 2006 and comprises about 100 staff who review penalty decisions for the whole of the GST business line;
- an internal policy that all penalty cases which exceed a certain dollar value must be signed off by a member of the Senior Executive Service;
- periodic Technical Quality Reviews (TQRs) of a sample of penalty cases;
- formal internal reviews of a sample of large taxpayer penalty cases;
- informal internal reviews of specific taxpayer cases;
- a formal internal review process which applies where a taxpayer objects to a GST audit assessment;
- periodic training on the application of penalties.
4.87 A Technical Quality Review on GST cases involving penalties conducted in March 2007 indicated that there was a significant increase in the percentages of cases achieving either a pass or 'A' result over the period from September 2004 to January 2007. As at January 2007 the GST business line was meeting corporate quality control benchmarks for these types of cases. In earlier periods it was not meeting these benchmarks.
4.88 During the 2006/07 year the Tax Office conducted a review of the application of penalty policy within the GST's large taxpayer audit area. The review looked at 47 cases in the 2005/06 year although the main focus was on cases completed post February 2006. This review found that 17 of the sampled cases case (36 per cent) involved an incorrect penalty decision. The reasons for the incorrect decision were as follows:
- Auditors had a lack of understanding around penalty remission guidelines, especially for unprompted voluntary disclosures.
- Auditors were listing as reasons for remission of penalties the taxpayer's co-operative behaviour during an audit, whereas the law required them to assess the taxpayer's behaviour as at the time the underpayment of tax was made.
- Auditors were finding that a taxpayer had exercised reasonable care simply on the basis that they had used a tax agent or obtained external advice without analysing whether that advice was specific to the taxpayer's circumstances, whether it had been followed and whether the adviser had been provided with all relevant facts.
4.89 Tax officers who conducted this review advised that it was prompted by concerns that the level of penalties charged to large taxpayers was too low and that penalties were being applied inconsistently. Of the 47 cases that were sampled, there were only six where a penalty was ultimately levied, with the remainder of cases being those where no penalty was levied.
4.90 The Tax Office's internal review principally focused on whether internal processes for levying penalties had been correctly carried out, and not on whether the correct penalty outcome was in fact achieved. A penalty decision was therefore classified in this internal review as being incorrect if internal processes had not been followed, not because an incorrect penalty outcome was in fact achieved.
4.91 One of the conclusions the Tax Office made from this internal review was that penalties in large taxpayer GST audit cases were not, in the main, being set too low. Furthermore, as a result of this internal penalty review the Tax Office resolved to:
- provide further training on penalties to large taxpayer GST auditors. A series of facilitated workshops was rolled out from mid 2007 to the end of August 2007 to address this matter;
- restructure its internal penalty network. This has been completed;
- ensure that all penalty cases are referred to a member of its internal penalty network and have its internal Penalties and Interest Practice oversee and review a sample of those cases; and
- ensure that internal penalty authorisation levels are observed. The Tax Office has advised that this has been reinforced with all approving officers.
4.92 While this internal Tax Office review had a different focus to the review of penalty cases that was conducted by the Inspector-General, its results do lend some support to a conclusion that GST auditors may be levying penalties in a significant percentage (36 per cent according to the Tax Office's report) of all penalty cases inappropriately because of a failure to correctly follow internal Tax Office processes for applying penalties.
4.93 During this review the Inspector-General found that, out of the 21 cases he examined which involved the application of penalties at the audit stage, there were five cases which initially involved substantial recklessness penalties. In three of these five cases the penalty was subsequently reduced to nil as a result of an internal review. Two of these internal reviews involved the Tax Office's Tax Counsel Network. Feedback was not provided to the original auditors on the reasons for penalty reductions in all these cases.
4.94 The Tax Office also provided data which indicates that, of the 16 cases involving penalties in large taxpayer GST audits that proceeded to the objection stage during the three years ended 30 June 2007, and involved valid objection requests, six cases resulted in the penalty objections being allowed in full and three cases involved the penalty objections being allowed in part. One case was settled. In the remaining six cases the penalty objection was disallowed.
4.95 The Tax Office asserts that a number of these overturned penalties cases were the result of the taxpayer presenting more evidence and/or information at the objection stage. While this may be a factor in the eventual penalty result, there remains an issue as to why a correct penalty outcome was not achieved at the audit stage of the relevant dispute. These results therefore suggest that at least in some cases GST auditors may have an approach to the application of penalties which does not lead to the correct result being achieved on a timely basis. A lack of feedback on the ultimate penalty results will also mean that the relevant GST auditors are not aware of any mistakes they have made in this regard.
4.96 In the light of the results of his fieldwork for this review, and the Tax Office's own internal review, the Inspector-General has concerns that the Tax Office's quality review processes for penalties are not fully achieving their desired aim of appropriate quality control over GST audit penalty decisions.
4.97 He also notes that the Tax Office's current policies on the imposition and remission of penalties are contained in a large number of different Tax Office documents, some of which are not GST specific, and that this, of itself, may be causing GST auditors to make errors in penalty decisions.
4.98 The above comments lead to the following key 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 audi;.
- 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
4.99 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
4.100 The Tax Office agrees with this recommendation.
Dot point 3
4.101 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
4.102 The Tax Office agrees with this recommendation as it has already been implemented as a separate initiative unrelated to this review.
Inspector-General review of cases involving GIC
4.103 The work conducted by the Inspector-General for this review on the issue of GIC focused on the following two concerns raised in submissions:
- whether GIC imposition and/or remissions decisions were being made on a timely basis;
- whether these decisions were being made consistently in accordance with existing legislative and/or administrative rules.
Delays in making GIC imposition and/or remission decisions
4.104 Prior to and during the 2006/07 year a number of taxpayers and/or their representatives raised concerns with the Tax Office at the length of time it was taking for GIC remission decisions in connection with GST audit adjustments to be made. During this period GIC remission decisions were the responsibility of an area of the Tax Office (the Operations area) which was separate from the GST audit area. The Inspector-General's fieldwork for this review has confirmed that delays of up to a year in reaching these remission decisions were not uncommon.
4.105 The Tax Office took steps early in the 2006/07 year to address these delays by transferring responsibility for GIC remission decisions in the context of audits to the GST audits area. This change took effect from October 2006. The change was part of a Tax Office-wide process for shifting responsibility for determining GIC remission decisions from the Operations area of the Tax Office to its audit (Compliance) areas.
4.106 From the Inspector-General's fieldwork for this review, it appears that, since this change, delays in making GIC remission decisions have decreased in number and intensity. However, during his fieldwork the Inspector-General found a number of post October 2006 cases where unreasonable delays were still occurring.
4.107 One such group of cases were those which had been finalised prior to October 2006 where responsibility for the GIC remission remained with the Operations area after that date. In a number of these cases, the Tax Office took more than nine months to reach any GIC remission decision.
4.108 Another group of cases in this category were those which were finalised after October 2006 where GST had been paid but by the wrong entity in a group and the only issue in dispute was the GIC. In a number of these cases the GIC remission took more than nine months to make.
4.109 The Inspector-General notes that the Tax Office currently has no published guidelines on the remission of GIC in cases involving the payment of GST by the wrong entity in the group. It does however have a guideline which states that any penalty will generally be fully remitted in this kind of case.
4.110 The Inspector-General considers that the absence of such a guideline has been a significant factor which has led to the remission decision delays which have occurred in these cases. He therefore recommends that a guideline be issued on this topic, in the form of either a Practice Statement or ruling. This guideline should confirm, in line with the policy the Tax Office is in fact applying, that in these kinds of cases GIC will be fully remitted.
Consistency of application of GIC
4.111 Of the 100 large taxpayer GST audit cases reviewed by the Inspector-General, about half (51 cases) involved the imposition of some GIC, while the other half (49 cases) involved no imposition of GIC.
4.112 In 23 cases, GIC was not imposed because there was no shortfall as a result of the audit. In 26 cases GIC was theoretically payable, but was remitted in full.
4.113 Of the 51 cases where some GIC was imposed, GIC was imposed at full rates in 23 cases, was remitted to the base rate in 18 cases and was partially remitted to a rate that was less than the base rate in the remaining 10 cases.
4.114 These numbers at face value appear to indicate that there may be some inconsistency in the way in which the Tax Office is levying GIC in GST audit cases, given that the Tax Office's stated policy on the remission of GIC is that this will occur only where individual circumstances warrant this result.
4.115 The Inspector-General has further analysed the 77 sampled cases where the imposition of GIC was an issue and has concluded that there is a marked lack of consistency in the imposition and/or remission of GIC in the following particular areas:
- cases involving unprompted voluntary disclosures; and
- cases involving wash transactions.
Unprompted voluntary disclosures
4.116 As discussed above, the Tax Office's administrative rules for GIC state that GIC on any adjustments arising from an unprompted voluntary disclosure will generally be remitted to the bank bill rate (called the 'base rate') (that is, the normal GIC rate will be reduced by 7 per cent). This reduced interest rate is subject to the taxpayer meeting a number of conditions such as acting promptly after detecting the error and having a satisfactory compliance history. This current policy is contained in paragraphs 81 to 83 of PS LA 2006/8.
4.117 Given this administrative rule, the Inspector-General expected to find that this base rate GIC would be the GIC levied in almost all of the 35 cases involving unprompted voluntary disclosures that he reviewed for the purposes of this review. However this was not the case.
4.118 Instead, the GIC results for these 35 voluntary disclosure cases that were examined during the review were as follows:
- cases involving full GIC: 9 cases (26 per cent);
- cases involving full GIC remission (that is, no GIC): 9 cases (26 per cent);
- cases involving base rate GIC: 9 cases (26 per cent);
- cases involving GIC, but not at the base or full rate: 1 (3 per cent);
- cases involving no GIC because no GST had in fact been underpaid (for example, because the GST had been paid by another entity in the same group or the taxpayer was owed a refund as a result of the audit): 6 cases (17 per cent).;
- cases where no GIC remission decision had been reached: 1 (2 per cent).
4.119 These results indicate that where a large taxpayer has made an unprompted voluntary disclosure GIC, where properly payable, is just as likely to be either remitted in full or levied at the full rate as it is to be levied at the base rate. The base rate is the rate which is generally set under the Tax Office's current policy provided a number of conditions are met.
4.120 These results indicate that the Tax Office administrative rule for GIC in cases of unprompted voluntary disclosures is not being followed in practice by ATO officers. The Inspector-General considers that the Tax Office should take appropriate corrective action to address this issue.
4.121 In particular, the Inspector-General considers that the Tax Office should review the GIC decisions reached in all cases of unprompted voluntary disclosures where GIC has been charged in full with a view to re-setting the GIC rate in these cases to at least the base rate, being the rate which represents the Tax Office's current policy.
4.122 As also discussed above, the Tax Office's administrative rules for GIC state that GIC on any adjustments arising from a wash transaction will generally be remitted to the bank bill rate (called the 'base rate') (that is, the normal GIC rate will be reduced by 7 per cent).
4.123 Given this administrative rule, the Inspector-General expected to find that this base rate GIC would be the GIC levied in almost all cases selected for review which involved wash transactions. However this was not the case.
4.124 Of the cases examined there were only eight cases which involved a wash transaction alone and no other factor such as the making of an unprompted voluntary disclosure that might operate to reduce the GIC. The GIC results in these 'wash' cases were as follows:
- cases involving full GIC: 1;
- cases involving full GIC remission (that is, no GIC): 4;
- cases involving base rate GIC: 2;
- cases involving GIC remission, but not at the base or full rate: 1.
4.125 Although the number of these types of cases examined by the Inspector-General during his review is small, they do appear to indicate that in practice GST audit cases involving pure wash transactions are more likely to result in the Tax Office fully remitting the GIC rather than remitting to the base rate only. However, the Tax Office's policy in this area is that GIC will generally not be remitted fully but will only be remitted to the base rate. The Inspector-General's review therefore strongly suggests that the current Tax Office administrative rule for the application of GIC in wash transactions is at odds with the GIC remission decisions GST auditors are actually making and is therefore flawed.
4.126 The Inspector-General considers that the Tax Office reached a correct remission decision in the four cases where a full GIC remission was granted.
4.127 The Inspector-General considers that full GIC remission in cases of one-off wash transaction errors should be the norm rather than the exception.
4.128 In wash cases the operation of the GIC rules mean that the GIC amount can become very high relative to the tax that is at issue, especially where multiple transactions which have occurred over a number of years are involved. A high GIC amount in these kinds of cases would appear to be unwarranted, given the overall revenue-neutral result of the error the taxpayer has made.
4.129 Any problem arising from the imposition of such an amount is further compounded if, as noted above, the Tax Office takes too long to remit this amount, as appears to be occurring in some cases. Tax Office delays in these circumstances can mean that the affected taxpayer is required to bring any GIC charge to account for statutory reporting purposes, even though the GIC is eventually fully remitted.
4.130 The levy of any GIC in such cases is also at odds with the underlying rationale for the imposition of the GIC. The Explanatory Memorandum which introduced the present GIC charge states that this rationale is that the GIC provides compensation to the revenue for money it should have received earlier. In wash transactions there is generally no overall amount which the revenue should have received earlier.
4.131 Furthermore, the Tax Office is aware that there will be no overall tax amount that arises from these kinds of cases, because at the time the cases are concluded it is required, under its existing policies, to assess whether there is an overall revenue-neutral effect, at least for the purposes of determining GIC.
4.132 The Inspector-General's view is that any undesirable behaviour on the part of the relevant taxpayer in relation to failing to account for GST on such transactions should be addressed by the levy of a penalty rather than any GIC. The Government could explore the establishment of a specific penalty for this purpose. A separate and specific penalty would help to address the administrative problems which the Tax Office is currently experiencing in arriving at consistent decisions on the level of recompense that should be payable to the revenue in these kinds of cases.
4.133 The Inspector-General also considers that the levy of an existing or possibly newly created administrative penalty, rather than any GIC, should also be considered in other GST adjustment situations which involve no overall loss to the revenue such as:
- cases involving invalid tax invoices or recipient created tax invoices where the relevant invoices are invalid only because of a minor technical defect involving the form of the relevant invoice or any related document; and
- cases where GST has been paid at the correct time but by the wrong entity in a group of related entities.
4.134 The Inspector-General notes that in both these other kinds of revenue-neutral transactions, where they are one-off in nature, the Tax Office will, under its existing stated policies, currently generally remit any GIC in full. For cases involving invalid documentation penalties for failing to keep proper records are also being levied, but in the cases sampled by the Inspector-General this was only occurring in cases which involved repeat offences.
Tax Office response provided during the review
4.135 During the review the Tax Office advised that it was currently considering its policy on GIC in relation to revenue-neutral and documentation issues.
Tax Office internal review of GIC decisions
4.136 Although the Tax Office has no process for recording and assessing the results of all GST audit cases where GIC has been charged and/or remitted it does have a number of internal processes designed to ensure that correct GIC results have been achieved.
4.137 These processes are as follows:
- an internal policy which has applied since October 2006 which states that any GIC remission decision made by a large taxpayer GST auditor must be signed off by a member of the GST business line's internal Penalty and Interest Network;
- periodic technical quality reviews of GIC remission cases. A review of this nature was conducted across all the Tax Office's business lines in respect of audit cases finalised between August and December 2006.
4.138 The Inspector-General has concerns that these processes for GIC may not be fully achieving their quality control aims in the light of the results of his fieldwork on GIC cases for this review.
4.139 In addition, the Inspector-General has the following specific concerns about these internal Tax Office quality control processes for GIC for large taxpayer GST audits.
4.140 Firstly, the internal guidelines on when GIC interest remission decisions for large taxpayers must be referred to the penalties and interest network are poor in detail and are not readily available to GST auditors.
4.141 Secondly, these guidelines are not being followed in a number of cases. During his fieldwork for this review the Inspector-General found instances where GIC remission decisions should have been referred to this network but were not.
4.142 Thirdly, the Tax Office's processes for reviewing GIC remission decisions for large taxpayer audits also do not require either the auditors or any penalty network reviewer to ascertain some relevant important information prior to granting any GIC remission such as, in particular, the actual total amount of GIC that was initially imposed in the relevant case or the amount that would be involved in any remission. This may mean that very sizeable remissions of GIC could be occurring without proper senior management scrutiny.
4.143 These flaws appear to indicate that 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. The Inspector-General considers that this matter should be addressed as soon as possible.
4.144 During the review the Tax Office advised that a corporate wide capability TQR was conducted in relation to GIC remission decisions on a sample of cases finalised between August and December 2006. The GST result from this TQR was a 83.3 per cent pass rate. The Tax Office noted that this was 11.7 per cent below the corporate benchmark, but it also noted that these cases were finalised within the first months of the release of the practice statement (PS LA 2006/8 Remission of shortfall interest charge and general interest charge for shortfall periods), which was introduced on the first day of the TQR period sampled.
4.145 The Tax Office advised that the results showed that there were very few cases where further remission was warranted, although it was clear that not all officers were applying the guidelines. Another capability wide GIC TQR was undertaken in September 2007. The results from this TQR included specific results for GST.
4.146 The Inspector-General notes that the results of the 2006 TQR review confirm a number of findings of his review. He also notes that the Tax Office's current policies on the imposition and remission of GIC in GST audits are contained in a large number of different Tax Office documents, some of which are not GST specific, and that this, of itself, may be causing GST auditors to make errors in GIC remission decisions.
Conclusions on GIC
4.147 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.
4.148 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.
4.149 An alternative to the GIC regime could be penalties imposed under either the existing penalty regime (for example, for failing to keep proper records) or possibly under a new legislative penalty which applies to one-off cases involving no net loss to the revenue. Any such penalty should be applied only in cases that warrant it (such as cases involving wilful and repeated transgressions of the relevant technicality).
4.150 The Tax Office has indicated it is reluctant to impose a penalty under existing penalty provisions 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, 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.31
4.151 In addition, 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.
4.152 These conclusions and the comments earlier in this report lead to the following key recommendations:
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
4.153 The Tax Office does not agree with this recommendation.
Dot point 1
4.154 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.
4.155 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
4.156 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
4.157 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
4.158 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
4.159 The Tax Office disagrees with Recommendation 4.3.
4.160 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.
4.161 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.
4.162 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
4.163 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 paragraph 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
- ensuring that GIC remission decisions for large taxpayer GST audits are subject to adequate internal quality controls.
Tax Office response
Dot point 1
4.164 The Tax Office agrees with this recommendation.
Dot point 2
4.165 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
4.166 The Tax Office agrees and will ensure that GIC remissions are subject to internal quality controls.
11 Subsection 298-20(2) of Schedule 1 to the TAA.
12 PS LA 2000/9.
13 These are known as Business Activity Statements.
14 PS LA 2002/8.
15 PS LA 2006/2.
16 PS LA 2006/2 at paragraph 139.
17 PS LA 2006/2 at paragraph 149. Remission in full does not however apply where the Commissioner has exercised his discretion to treat a prompted disclosure as unprompted: See paragraph 150 of PS LA 2006/2.
18 PS LA 2006/2 at paragraphs 151, 152 and 154.
19 PS LA 2004/11 at paragraph 37 and Attachment A paragraphs 7 and 8.
20 PS LA 2006/2 at paragraph 146.
21 PS LA 2006/2 at paragraph 157.
22 Section 33-3 of the GST Act and section 105-80 of the TAA.
23 Section 8 AAD(1) of the TAA.
24 Section 8AAG of the TAA.
25 The Tax Office does not consider that ATO IDs are published as a form of advice: see PS LA 2006/8 at para 108.
26 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.
27 The Treasury, Report on Aspects of Income Tax Self Assessment, August 2004, Commonwealth of Australia.
28 Note that in one of the 11 cases both these issues were present.
29 See for example, Hill, P R, Carey, A, Davidson, J A, Murray-Jones, I G and Stacey, P A, Australian GST Handbook 2007-8, Thomson, 2007 at para 47-105.
30 Explanatory Memorandum to A New Tax System (Tax Administration) Bill (No. 2) 2000.
31 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 paras 2.27 to 2.29.