5.1 This chapter deals with other issues concerning GST audits raised in submissions during the course of this review, including the Tax Office's approach to margin scheme 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.
Audit cases involving margin scheme valuation issues
5.2 A number of the GST audit cases examined by the Inspector-General during this review involved disputes over the valuation of property as at 1 July 2000 for the purposes of applying the margin scheme. This is a scheme under which 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. In these cases taxpayers are contending that the Tax Office has acted unfairly in at least two major ways. Firstly, the Tax Office has failed to adequately inform them of the requirements that such valuations need to meet to be considered acceptable to the Tax Office. Secondly, the Tax Office has applied the margin scheme on the basis that the appropriate July 2000 value is the original price paid on the purchase of the property — even where this occurred up to 50 years ago.
5.3 During this review the Inspector-General has validated these two major concerns of taxpayers.
5.4 In a number of cases examined by staff of the Inspector-General for the purposes of this review the Tax Office failed to inform taxpayers of what was wrong with their valuations of pre-July 2000 property even though those taxpayers had attempted to provide valuations which met Tax Office requirements.
5.5 Furthermore, the Inspector-General found that the Tax Office has a policy that, where it rejects a valuation obtained by a taxpayer from an independent valuer for a pre-2000 property it does so generally on the basis of a lower valuation amount set out in a 'critique' obtained from the Australian Valuation Office (AVO). These critiques are not full valuations. The Tax Office obtains full valuations from the AVO only once it is clear that the matter will be seriously disputed. This is because full valuations are much more costly than critiques.
5.6 The Tax Office has a policy of not communicating to taxpayers the valuation amounts referred to in AVO critiques. However the Tax Office will disclose an AVO valuation amount to the taxpayer where the AVO has carried out a full valuation and a copy of that valuation is provided to the taxpayer.
5.7 The Tax Office also does not actually use the value set out in any AVO critique when levying an assessment for additional GST in these kinds of cases. Instead, the Tax Office adopts the original price the vendor paid as the relevant value for the property. This is generally much lower than the AVO's amount as it is a price that was paid some time (often years) prior to 1 July 2000. This lower valuation leads to a higher GST assessment, as the figure for the value of the property as at 1 July 2000 is subtracted in the formula which determines the GST payable in this kind of case.
5.8 The Tax Office contends that it is required to set the value of the property in this type of case at the original purchase price, rather than any higher value indicated by the AVO because of the operation of subsection 75-10(2) of the GST Act. However, this approach ignores the existence of the Commissioner's general administrative power and its specific power to determine what valuations are acceptable. These powers would allow him to apply the law so as to narrow the dispute to the difference between what he contends is a reasonable valuation, based on the AVO's view and what the taxpayer believes to be reasonable.
5.9 In the Inspector-General's view, the Tax Office's current approach in this area is unfair as it involves the Commissioner withholding essential information from taxpayers (that is, the valuation amounts which are referred to in AVO critiques) and raising assessments and demands for payment based on valuations he knows to be too low, either because he has obtained his own higher valuation (from the AVO) or because of the known age of the property. The approach essentially amounts to a demand that taxpayers pay an amount of tax which is in excess of what the Commissioner regards as reasonable in the circumstances.
5.10 The Inspector-General also found that a number of GST disputes involving pre-July 2000 property were being settled once they were referred to the Tax Office's litigation area. These settlements were achieved because misunderstandings that had developed between the parties during the audit stage of the dispute were resolved once more senior Tax Office personnel from the Tax Office's Tax Counsel Network became involved in the case. However, this eventual resolution still involved prolonged periods of angst and financial costs to the taxpayers involved.
5.11 These comments lead to the following key recommendation:
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
5.12 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
5.13 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.
Audit cases involving classification issues
5.14 A number of the GST audits on hand examined by the Inspector-General involved 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. The Inspector-General considers that the Tax Office needs to improve its system of making pronouncements on the classification of items for GST purposes so that perceptions that it is applying an agreed GST classification retrospectively do not arise.
5.15 The Inspector-General suggests that a product similar to ATO Interpretative Decisions (ATO IDs) — but binding on the Commissioner in respect of tax, penalties and interest — could be used in the GST context as a basis for issuing classification rulings. This would result in through-the-chain certainty, better compliance and lower costs.
5.16 For many years the Tax Office issued public and/or private rulings on classification issues in administering sales tax. Public rulings included Commissioner's press releases or advertisements by the Tax Office in newspapers or magazines, general information booklets published by the Tax Office, formal sales tax rulings (which included determinations) and sales tax bulletins. Also, under the sales tax regime, if a manufacturer or importer of goods was given a private ruling on the classification of goods they manufactured or imported, any wholesaler of those products was able to rely on that classification of those products unless and until that private ruling was altered by a subsequent public or private ruling. This system eliminated the need for businesses in direct dealings with the same goods to request duplicate private rulings on identical issues.32
5.17 These comments lead to the following key recommendation.
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
5.18 The Tax Office agrees with this recommendation.
Timeliness of audits
5.19 The Tax Office has a number of benchmark times for completion of large taxpayer GST audits. These benchmark times differ according to the type of audit product that is employed — for example whether it involves a simple check of a GST refund or an activity which is more substantial, such as a GST form audit or a GST specific issues audit.
5.20 The two main types of GST audits conducted on large taxpayers which involve fieldwork are GST form audits and GST specific issues audits. The Tax Office conducts a GST form audit when reviewing a GST return with more than two identified risks. It conducts specific issue audits in cases where one or two risks have been identified.
5.21 The Tax Office has advised that the present benchmark time to complete a GST form audit is 230 calendar days, while the benchmark time to complete a specific issue audit is 220 calendar days. Until 1 July 2006 the benchmark time to complete a form audit was 260 calendar days. Where audits go over these benchmark times the Tax Office considers that the case is an 'aged case'.
5.22 There is an initial issue as to whether these benchmark times are appropriate. Anecdotal material obtained from discussions with tax practitioners in other countries indicates that the average time to complete a GST audit in Australia may be significantly higher than for other comparable countries such as Canada, New Zealand and the United Kingdom. A number of submissions to this review also asserted that the Tax Office's benchmark time to complete at least a specific issue audit should be at most 60 days.
5.23 GST audit benchmark times are also set according to the number of calendar days which have elapsed during the audit. They therefore do not exclude delays in the audit that may be due to the taxpayer, for example delays that arise from the time taxpayers take to respond to information requests from the Tax Office.
5.24 The Inspector-General considers that the Tax Office should work towards developing appropriate and meaningful benchmark times to complete an audit. Furthermore, these benchmarks should be developed on a basis which allows them to be compared with GST audit timeframes of other countries and with the timeframes of audits conducted on large taxpayers which involve other taxes.
5.25 The Tax Office also has guidelines for large taxpayer GST audits which require that:
- an audit plan be prepared, approved and provided to the taxpayer at the preliminary audit interview; and
- a written audit notification letter be provided to taxpayers to advise them that an audit has commenced.
5.26 These guidelines have been published in the Tax Office's Large business and tax compliance booklet 2006.
5.27 In submissions made to this review large taxpayers asserted that in some cases there was no evidence of an audit plan. In several cases sampled by staff of the Inspector-General during fieldwork for this review audit plans were either non-existent or were very sketchy.
5.28 Large taxpayers also asserted that in some cases no audit notification letter is provided. In several cases sampled by staff of the Inspector-General during the fieldwork for this review, no audit notification letters were provided. In other cases a letter was provided but it stated that a 'review' rather than an 'audit' was underway.
5.29 Large taxpayers also asserted that major technical issues which affect a taxpayer's industry as a whole can take too long to resolve and can result in unnecessarily protracted audits.
5.30 The Inspector-General's fieldwork for this review found that some cases which were dependent on an industry technical issue were being finalised but then immediately re-opened. This process allowed the relevant audit to escape internal Tax Office scrutiny as an 'aged' case.
5.31 The Inspector-General's fieldwork found that some cases dependent on the resolution of an industry technical issue were resolved in a relatively expeditious manner during an audit by the use of declaratory proceedings.
5.32 The Inspector-General's fieldwork also found that several cases arising from an unprompted voluntary disclosure took a long time (a year or more) to resolve.
5.33 The Tax Office has a case leadership area within its GST business line whose primary purpose is to monitor the length of time of audits. This area was established in September 2005.
5.34 Since this area was established this area has had success in expediting the timely completion of audits.
5.35 The success of the case leadership area in this regard can be gauged from figures which the Tax Office provided to the Inspector-General during this review which showed there had been a significant reduction in the number of aged large branch GST audits over the last three financial years. These figures were as follows:
|Year of income||Number of cases completed||Number of aged cases on hand at year end|
5.36 However, this area has a facilitation function only and cannot itself make decisions relating to the conduct of an audit. During his fieldwork for this review the Inspector-General encountered a number of unresolved audits, some of which involve revenue-neutral transactions, which were several years old where the case leadership area appears to have failed to carry out its primary role effectively.
5.37 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.
5.38 These comments lead to the following key 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
5.39 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
5.40 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
5.41 The Tax Office agrees with this recommendation. However, there will at time be delays in the resolution of technical issues that arise in the large market due to their complex nature.
Dot point 4
5.42 The Tax Office agrees with this recommendation.
Tax Office communication issues
Notification of the start and end of an audit
5.43 As indicated earlier in this chapter, Tax Office policy is to provide a written audit notification letter to taxpayers to advise them that an audit has commenced. However, in a significant number of large cases sampled by the Inspector-General no such letter was provided. In other cases a letter was provided but it stated that a 'review' rather than an 'audit' was underway.
5.44 Tax Office policy is also to provide taxpayers with an audit finalisation letter, and/or a compliance activity report (CAR) to advise them that the audit has ended and of any proposed tax adjustments. This policy is also referred to in the Tax Office's Large business and tax compliance booklet 2006.
5.45 However, in a number of cases sampled by staff of the Inspector-General no finalisation letters and/or CARs were on the relevant audit file.
5.46 The case leadership area does not examine the extent to which auditors comply with internal guidelines on notifying taxpayers about the start and end of an audit and the documentation of the results of an audit. However, a case will fail the Tax Office's internal Technical Quality Review process if an audit finalisation letter or compliance activity report has not issued.
5.47 The comments in this section lead to the following subsidiary recommendation:
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
5.48 The Tax Office agrees with this recommendation.
Taxpayer access to technical decision-makers during an audit
5.49 Taxpayers asserted that they either were unable to access the Tax Office's technical decision maker on an audit case or were only able to do so after a lengthy delay or after a complaint was made which resulted in such access being made available. In at least one case examined by staff of the Inspector-General the taxpayer was told it could not speak to the relevant technical decision-maker.
5.50 This comment leads to the following subsidiary 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
5.51 The Tax Office agrees with this recommendation.
Training of Tax Office auditors
5.52 Large taxpayers and/or their advisers in the finance sector asserted that GST auditors for their industry:
- do not understand their industry and/or the transactions being undertaken in that industry;
- do not understand the GST rules applicable to that industry; and
- were being prevented from properly understanding the industry and the GST rules applicable to that industry because of an in-built bias against companies in the industry.
5.53 Large taxpayers in the property and construction industry and/or their advisers commented that the GST auditors of their industry generally had a good understanding of their industry and of the GST rules applicable to that industry but had adopted unfair stances in relation to particular transactions in the industry. An example of one such set of transactions was margin scheme sales of pre 2000 property where a valuation as at 1 July 2000 was required for the relevant property.
5.54 The Inspector-General has also found that GST auditors appear not to be adequately trained on how to identify and audit GST cases which involve a net amount of GST being payable to the Tax Office (that is, sticky tax cases). GST auditors in Perth and Adelaide in particular appear to be inadequately trained on how to conduct GST audits involving sticky tax issues. This finding is supported by a survey conducted in 2006 of in-house GST advisors at large corporates in Australia by Deloitte Touche Tohmatsu which found that 50 per cent of survey respondents were of the view that the Tax Office rarely or never focused on the right areas of the business with regards to GST compliance.33
5.55 The Inspector-General also found that GST auditors who conduct audits in the finance industry are not adequately trained on the nature of that industry and of the GST rules that apply to that industry.
Perception that retrospective ITC claims are indicative of non-compliance or bad practice
5.56 During the review the Inspector-General found that 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.
5.57 During the review the Tax Office advised that prima facie, it does not consider that any retrospective ITC claim is indicative of non-compliance or bad practice. It asserts that at no time has it attempted in any way to thwart a taxpayer from claiming any credit to which they are entitled.
5.58 In relation to the reappraisal of methodologies for apportionment, the Tax Office advised that it undertook a review of the law in relation to this issue as the practical application of the law was unclear.
5.59 The Tax Office advised that, after due consideration to both the legislation and overseas precedent, it agreed that on the proper construction of the law where it is fair and reasonable a new apportionment methodology may be retrospectively applied.
5.60 The Tax Office also advised that it will, where necessary, undertake a review of any claim made by a taxpayer where it considers the law to be unclear in relation to the claim. Such a review is not and should not be seen as thwarting a taxpayer's claim but rather as a process of clarifying the law associated with the claim.
Auditors do not in some cases understand the businesses they are auditing
5.61 The Inspector-General has also concluded that Tax Office 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 'sticky tax' issues.
5.62 During the review the Tax Office advised that it agrees that there is always room for improvement in the auditors' understanding of the business and industries they are involved with. To this end, the Tax Office is in the process of finalising panels of internal and external experts to assist with the progression of technical issues.
5.63 It also advised that in the last 18 months the GST business line has trained 320 auditors in Financial Supplies (FS) in the SME and Large markets.
5.64 During the review the Inspector-General found that 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.
5.65 During the review the Tax Office advised that the GST business line has changed its procedures to ensure that auditors are informed of the outcome of review, objection and litigation cases where they were the case officer. The GST Review & Litigation Manual sets out the policy and procedures regarding communicating outcomes to auditors. An Office Minute was issued on 26 September 2006 to reiterate the consultation process between GST Review & Litigation (R&L) staff and Active Compliance staff.
5.66 The Tax Office states that along with specifically advising the original audit officer, all GST officers are advised of court and tribunal decisions via a technical bulletin which is circulated each week, and all decisions are reported on ATO Law, an internal database available to all tax officers. Decision Impact Statements are published in relation to adverse decisions and decisions in strategic litigation cases.
5.67 The above comments lead to the following subsidiary 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
5.68 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
5.69 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
5.70 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.
GST audits conducted by Customs
5.71 Submissions made to this review asserted that, when conducting GST audits on imported items, the Australian Customs Service does not apply materiality guidelines similar to those contained in the Tax Office's GST mistakes fact sheet.
5.72 The Inspector-General has confirmed that the Australian Customs Service has been obtaining adjustments of often insignificant amounts on values of imported goods which will be fully credited by the importer or are subject to the deferment scheme and that it is not using the same materiality guidelines as the Tax Office in this area.
5.73 These comments lead to the following subsidiary recommendation:
Subsidiary recommendation 5.4
The Inspector-General recommends that tolerance or materiality levels are aligned across both the Australian Customs Service and Tax Office administration of GST.
Tax Office response
5.74 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.
32 SST Ruling No 1 at paragraphs 4.4 to 4.5